Microfinance Institutions in India: Bandhan Bank

Introduction to microfinance institutions

Microfinance institution initially had a narrow definition - the provision of microloans to the poor entrepreneurs and small businesses which lacked access to banking and related services. The two primary instruments for the commitment of financial services to such clients or persons were: (1) relationship-based banking for the individual entrepreneurs as well as the small businesses; (2) group-based models, where several other entrepreneurs together come to apply for loans and other services as a group.

Over time, microfinance has emerged as a broader movement whose objective is to have a world in which the poor and socially marginalized people and households have access to a broader range of affordable, high quality of financial products and services, including not just credit but also savings, insurance, payment services, and fund transfers.

Mr. Chandra Shekhar Ghosh founded Bandhan Financial Services Limited (BFSL) in the year 2001. This microfinance institution is involved in providing loans to small customers, those who have no or less way into official banking services. In June 2015, the banking regulator gave its final permission. MFIs are the financial institutions working towards the upliftment of the needy and underprivileged section of the society by providing short-term loans for setting up their own business or venture. They take a minimum risk and then fund the interested borrowers to help them get trained, set up and run a small-scale business or venture. Microfinance institutions or MFIs apart from giving the financial help they also educate people about the current market trends of an economy and help them compete in the present market and to survive. These institutions usually do not take any guarantee or do not ask for any collateral from the borrower before lending the money. This is where these institutions create a difference from the traditional banking organizations. While the banks are quite measurable before lending money to the sparse, unemployed crowd considering them as high-risk components, MFIs are primarily dedicated to providing all the necessary financial help to this section of the society. These organizations not only take the risk of funding them but also work with them to ensure that the offered money gets utilized appropriately. These institutions contribute in every possible manner to uplift the weaker section and make them financially independent. MFIs operate in many forms and shapes in India. Though each of them have different formation and work nature, they all provide financial help to the needy section of the society in the form of loans and other financial products.

The various types of MFIs in India:

1. JLG or Joint Liability Group
2. SHG or Self Help Group
3. The Grameen Bank Model
4. Rural Cooperatives.

Microfinance institutions serve as a bank and in some sense a superior because along with providing credit they offer other financial services like savings, insurance and non-financial services like personal counseling provide guidance and support to start the small business, etc.

In the past few decades, it has provided money to the unnoticed communities and thereby helped to get rid of poverty. The Financial Holdings of Bandhan are owned by Bandhan Financial Services Limited (BFSL), the largest microfinance organization in India. The bank focuses on Eastern India as banking penetration is still weak in the region but at the same time want to expand their loan portfolio by increasing lending funds to retail business and Micro and Small Medium Enterprises.

Introduction to Bandhan Bank

Bandhan bank became the first micro finance company in India to start the operations being a full-fledged commercial bank. Bandhan bank became the first microfinance institution which transforms into a bank. Bandhan bank began the operations after receiving an in-principle approval which is given by the Reserve Bank of India. Bandhan bank was initially started in 2001 by Chandra Shekhar Ghosh as a not-for-profit-micro-finance institution with the primary aim of empowering women. After some years it transformed into a non-banking finance company (NBFC). Bandhan means togetherness and the mission and vision is reflected by its name. The main aim of Bandhan is the social upliftment of women who are exploited by the society. To achieve the objective, Bandhan engages in the delivery of microfinance services to poor women living in rural areas as well as urban areas across the country. Bandhan has been involved in the distribution of micro finance service for the last 13 years.

Achieving its vision and mission

Bandhan takes the opportunity to thank everyone who has been associated with Bandhan and have supported them in every possible manner. Bandhan Bank has been started with a desire to serve better. Bandhan Bank began with 501 branches, 50 ATMs, and 2, 022 Doorstep Service Centres (DSCs) on day one. Presently, Bandhan Bank has 3, 550 touch points pan India consisting of 832 bank branches, 2, 437 Doorstep Service Centres (DSCs) and 281 ATMs, serving more than 10 million customers. The bank has mobilized deposits more than Rs. 22, 000 crore and its outstanding loan book are Rs. 22, 900 crore. Bandhan Bank has a team of nearly 23, 750 employees on the roll. The headquartered bank which is in Kolkata has two divisions- general banking and micro banking, offering a suite of retail financial solutions, including a variety of savings and loan products. Currently, the savings bank account interest rate is 6% for balance above Rs. 1 lakh and 4. 25% for balance up to Rs. 1 lakh.

Recent developments undergone by Bandhan Bank

Bandhan Bank has altered the depositing rates downward up to 50 points. Bandhan Bank is planning to hire about more people to meet the growing human resource need at branches and doorstep service centers. Bandhan bank will be focusing more on retail loans than corporate loans. Bandhan bank to expand the level by adding 1000 chapters. Bandhan bank achieves the successful induction of five lakh customers since its inception.

Bandhan’s transformation from NGO to bank

Bandhan initially started as an NGO and then got its position as an NBFC. Further, it continued in getting a banking license. However, why does it need a banking license, while it does the primary activity of banking, i. e. , lending? Even though NBFCs perform functions similar to banks, there are few dissimilarities. One of the dissimilarity is that an NBFC is not allowed to accept the demand deposits (DD), it is not a part of the payment system, and settlement system and also an NBFC cannot issue cheques which are drawn on itself. In the past years, the banking sector of India has displayed a high level of elasticity in the face of high domestic inflation. With deregulation of savings bank rate and bleak global economy, the banks are focusing on alternative sources of revenue, like fee income, trade and vendor financing, geographic expansion etc all to maximize their revenues. The Banking sector in India has adopted and embraced the technology to keep pace with the development internationally in the banking industry and offer quality products to its clients. Technology has enabled banks to conceive and deliver products that are more in line with the requirements of its clients on the one hand and also more cost-efficient on the other.

Need for Bandhan Banks

India is a county where still a large population is very poor; financial inclusion is of great importance to them. It is a significant challenge for the poor to access secured and organized finance options. Ensuring the optimum utilization of the resources they possess is also tricky. Economic and societal uncertainties mean volatility in their income can have an adverse reaction on the financial stability. Many a time exposing them to unorganized financial help like money lenders and small-time lending institutions. The hope of financial inclusion now lies with banks, both private and public. As a bank, Bandhan will be having access to low-cost Savings deposits which will help in reducing lending rates soon. With its conversion into a bank, the existing borrowers who do not have bank accounts till now will come into banking fold automatically.

Important role played by Bandhan Bank

Bandhan can play a significant role in financial inclusion in India by taking up the following.

• Providing financial literacy & awareness for financial empowerment.
• Providing loans only for productive purposes.
• Providing loans for the education of their children” and the loan range is `1000 to 10000. For books & fees etc, & also provide health loan, emergency health requirement & sanitation purposes.
• For real financial inclusion, they need to target families and work for their upliftment.
• Increased emphasis on grassroots level banking for maximum reach and financial inclusion.
• Keeping up to its primary objective of poverty alleviation & women empowerment by introducing related banking services and products for women.

Conclusion

As we have seen how effective this banking system has been in this country, we can foresee how microfinance can improve the living standards of more impoverished and help them achieve their aim. Keeping the standards of living and the parameters simple and using the cost-effective techniques to reach the lower level can make all the difference which a society like India requires. Banking is a very treacherous business because you do not realize it is risky until it is too late. It is like calm waters that deliver huge storms”. We want to believe that it would not be so risky for Bandhan to operate as a bank. With an experience of 13 years as a successful MFI, it will not be challenging to start its operations. Their financial status is functional, and many organizations have started funding their project by now. The bank is determined to stick to their primary objective that is to provide financial products& services in the unbanked rural area and to achieve the financial inclusion through women empowerment & provide employment for the alleviation of poverty in the rural area. Currently, Bandhan's main asset is their existing customers, and their trust in their services becomes a significant step in setting up of a bank. Their unique ways of working would lead Bandhan as one of the thriving banks in the banking sector.