About New Banks IDFC And Bandhan

IDFC's banking foray to hit its return on assets, equity: India Ratings-Business Standard

IDFC Bank Ltd,which received an in-principle licence to start a bank, will see a big hit on its profitability in the medium term due to obligations to meet priority sector lending and cash reserve ratio (CRR) norms, according to India Ratings.

Meanwhile global rating agency Standard & Poor's said that its rating on IDFC Ltd (BBB-/Negative/A-3) was not immediately affected by th financing company getting an "in-principle" bank license.

The move will improve IDFC group's asset diversity and funding profile in the long run. However, the group's expansion outside its traditional expertise in the competitive Indian banking sector has significant short-term challenges. IDFC's execution of its conversion strategy, including the final corporate structure and capital, will influence its credit profile.

IDFC's profitability metrics (return on assets and equity) will drop sharply due to the regulatory requirements of maintaining a statutory liquidity ratio of 23 per cent and CRR of four per cent and priority sector lending of 40 per cent. Its return on assets (RoA) was 2.7 per cent and return on equity (RoE) was 14.2 per cent for FY13. At present, IDFC enjoys AAA stable status. The ratings agency said IDFC's operating costs will increase significantly from a build-up of branch network and employee talent pool. The banking licence will be beneficial to its credit profile in the long term, provided the transition is managed appropriately. However, the successful conversion from an infrastructure non-banking finance company into a commercial bank with a strong retail deposit franchise and a diversified loan book will be a major challenge.

Maintaining credit costs at low levels will be important as it starts lending to non-infrastructure sectors, while the infrastructure sector is likely to continue to face a harsh operating environment, the ratings agency said.

The company is expected to maintain a robust capital buffer, as its loan portfolio will be diversified to include new borrowers/loan products in which it has little experience.

While the loan book will become more granular than before, the efficiency of risk management systems for the new business lines will be tested, India Ratings said.

Access to retail funding through low-cost current and savings accounts and retail term deposits could help in diversifying its funding profile and reduce funding costs in the long term, it added.

Location, governance gave Bandhan edge over others

Bandhan has a strong presence in India's under-banked eastern and northeastern regions

Somasroy Chakraborty & Manojit Saha  

That Bandhan has become the country’s first micro lender to win a banking licence might have surprised some, who could be wondering what gave the Kolkata-based entity an edge over others in contention. A look at the regions where the microfinance institution is present gives a hint.

Bandhan Financial Services has a strong presence in the under-banked eastern and northeastern regions of India. Besides, its balance sheet strength to serve the rural population could have been a clincher and given the Reserve Bank of India (RBI) a valid reason to prefer the micro lender to large industrial houses.

Bandhan, one of the two companies to get RBI’s ‘in-principle’ approval for banking licences, was not only picked ahead of Anil Ambani’s Reliance Group, Kumar Mangalam Birla-controlled Aditya Birla Group and the Bajaj group, but chosen over Bangalore-based microfinance rival Janalakshmi Financial Services. 

Geographical presence
Bankers and industry analysts are almost certain that Bandhan’s presence at rural centres of eastern and northeastern states influenced RBI’s decision of giving it a banking licence.

“I would think geographical location was a key factor. Bandhan is located in East India, most of which is financially excluded. While economic growth in certain eastern states like Bihar has picked up in recent years, there still are a lot of unbanked villages in this part of India. To my mind that could be one of the main reasons,” said Shinjini Kumar, leader (banking and capital markets), PwC India.

Bandhan has 2,016 branches across 22 states and Union Territories — a majority of these in eastern India. West Bengal, with as many as 802 branches, accounts for nearly half its network. Bandhan also has around 400 branches in the eastern states of Bihar, Chhattisgarh, Jharkhand and Odisha.

The micro lender also has a sizeable presence in the Northeast, with 286 branches in Assam and another 100 branches in Tripura, Meghalaya, Sikkim, Manipur and Mizoram.

In December 2013, RBI Executive Director P Vijaya Bhaskar had said in a speech on financial inclusion that the penetration of financial services in central, eastern and northeastern regions was lower than that in other parts of the country. “All three regions together account for 64 per cent of all financially-excluded farmer households in the country. But the overall indebtedness of these three regions to formal sources of finance account for only 19.66 per cent,” he had said.

According to a banker, Bandhan was probably picked ahead of Janalakshmi because the latter focused more on serving the urban poor. “Also, as many as seven banks are headquartered in Karnataka, compared with three in West Bengal,” the banker said.

Janalakshmi, the other micro lender to apply for a licence, did not hide its disappointment. “We are obviously disappointed — we gave it our best shot but fell short. However, we continue to push ahead, we have terrific plans for our current business as an NBFC, and will continue to execute that with gusto. We will be keen to reapply as and when the RBI bank licence window opens again,” said Ramesh Ramanathan, chairman of the Janalakshmi group.

Balance sheet strength
Industry analysts believe that Bandhan’s strong financials also helped it secure a banking licence. In addition, the fact that International Finance Corporation (IFC) and Small Industries Development Bank of India (Sidbi) are its investors gives the regulator the confidence on the corporate governance front.

Bandhan emerged the country’s largest micro lender after Hyderabad-based SKS Microfinance’s business suffered due to a crisis started in October 2010 in the sector in Andhra Pradesh.

As at the end of February this year, Bandhan had Rs 5,704 crore worth of loans outstanding. It disbursed Rs 963 crore in loans during the month and counted 5.2 million borrowers as its clients. The microfinancier has reserves of Rs 1,100 crore, against RBI’s mandate of a minimum of Rs 500 crore as capital for new banks.

“Bandhan’s presence in the eastern markets has certainly helped. But it also has a strong balance sheet and has been doing community banking efficiently for more than a decade. The company is well managed and there has been no instance of governance-related issues. All these factors played a role in Bandhan getting a new banking licence,” said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services LLP and senior expert advisor (financial services) at Ernst & Young India.

While Deloitte advised Bandhan in its preparation to apply for a banking licence, the presence of senior bankers on its board also helped. Bandhan has V K Chopra (former chairman & managing director of Corporation Bank), S K Chakrabarti (former deputy managing director of Axis Bank) and Ranodeb Roy (former managing director & head of fixed income for Asia Pacific at Morgan Stanley) among its board members.

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