> Posted by Tamal Bandyopadhyay

I began closely tracking Chandra Shekhar Ghosh, the founder of Bandhan Bank Ltd, sometime in 2010 while conducting a series of panel discussions for Mint, India’s second-largest business paper, on financial inclusion. He was passionate about microfinance, but not necessarily the most articulate person in the room.

But this is what fascinated me: Bandhan was operating successfully in West Bengal, a state not too well known for its work culture. Entrepreneurship in the state was confined largely to running chowmein and momo stalls and driving autorickshaws. But Bandhan was a highly efficient microfinance company, based in Kolkata, employing 12,000 people. In 2010, in the aftermath of the Andhra Pradesh law which wounded or killed many microfinance companies operating in the southern part of India, Bandhan thrived in the east.

In 2014, Bandhan got a banking license, one of just two handed out that year by the Reserve Bank of India (RBI). A banking license is a big deal in Asia’s third-largest economy—in the past 68 years since Independence, only 15 new banks have been set up, including Bandhan. This is the first instance of a bank being born in eastern India after Independence. In my new book, Bandhan: The Making of A Bank, I share the fascinating story of the bank’s transformation – a transformation that I watched from a ringside seat.

Bandhan was not on the radar of many as a possible recipient of a bank license, some of the large business houses in India and established non-banking finance companies were more likely sustpects. Obviously then, this was a big news story, and an evolving one. How would Ghosh turn the microlender into a bank? I was tempted to take a close look at the transformation and watch the birth of a bank from ground zero, having followed the banking and finance sector in India for about two decades, as both reporter and commentator.

A few years ago, when Ghosh asked me to join Bandhan, I couldn’t resist and signed up as adviser.

While I have been a part of the Bandhan group since August 2014, this book is an independent project. It is not sponsored by Bandhan. Also, this book is not so much about the new institution but about how Ghosh set up the microfinance business, and how he and his team implemented the changes that were needed to turn it into a universal bank.

What is the key to Bandhan’s success? Former RBI Deputy Governor Usha Thorat, who is passionate about financial inclusion and has tracked Ghosh’s journey as a regulator, says the Bandhan founder knows the language of the poor.

This could be said of many of his employees too, particularly those who joined him in the early days. In fact, the first 10 employees at Bandhan were recruited from backgrounds very similar to those of Bandhan’s borrowers, which is perhaps why they felt empathy towards them. Like their borrowers, these staff members have grown with the organization and are doing well today. But in 2002 and 2003, when Bandhan started with just two branches at Bagnan in Howrah and Konnagar in Hooghly, they could not have known that one day, they would be called bankers, earn a decent salary, and even drive their own cars. They were all very simple folk.

For instance, take Partha Samanta, Bandhan’s very first employee, who joined on 1 July 2002. He comes from a family which owned land and dabbled in business in a village called Uttar Harishpur in Howrah. His father owned a rice mill and ran a decorator’s business, putting up pandals for weddings and local festivals in the neighbourhood. However, the business did not do well and his father turned into an alcoholic. In his schooldays, Samanta, the eldest of three brothers, often had to intervene to stop his father from beating his mother.

To earn money, Samanta resorted to selling eggs during his college days. Selling one egg fetched him 20 paise, so, by selling around 200 eggs, he could make Rs 40 (US$ 0.60) a day. But selling 200 eggs a day was hard work. By the time he joined the Purash-Kanpur Haridas Nandi Mahavidyalaya, a college in Howrah, to study commerce, Samanta grew ashamed of his inebriated father who often needed to be picked up from the road and carried home. It was only natural that Samanta would try his luck when Village Welfare was looking for people for its ‘training rural youth for self-employment’ (TRYSEM) program. He applied for the nine-month course which, in 1991, promised Rs 300 (US$ 4.50) as stipend every month through the local panchayat (government) body.

Next year, Village Welfare offered him a job with Rs 500 (US$ 7.50) as salary. The project, funded by Germany’s Karl Kübel Stiftung (KKS), was to distribute ducklings among the poor. Samanta’s job was to clean duckling excreta from the cages, and distribute the young ones. Later, he got a promotion and a salary of Rs 700 (US$ 10.50) per month, and became the second in command in the project. In 1994, Village Welfare decided to start a microfinance business. Samanta was selected as one of the four managers to run the show. His salary went up to Rs 900 (US$13.50) a month. After Ghosh joined Village Welfare as head of operations in 1999, they struck up a relationship which has lasted a lifetime. Once, at Samanta’s house, Ghosh told his mother, “I will make your son’s future,” even though at that time, he could not think of leaving Village Welfare.

When Bandhan expanded to Tripura, Samanta led the team that set up branches in the north-eastern state. They took a flight from Kolkata in June 2006—the first flight taken by any Bandhan employee for official work. The entire office came to see them off at the airplane door. Samanta bought a new wheeled suitcase for this.

One of its first functioning offices, set up in 2002, was a four-by-six-feet cubicle at the home of a Sheikh Nazrul in Khirishtala, Howrah, a space rented for Rs 300 per month. Ghosh drew his inspiration from the sight of poor vegetable vendors in Kolkata’s Shobhabazar who were taking loans of Rs 500 from the moneylender while paying him an interest of Rs 5 every day. The poor borrowers were quite unaware that this amounted to a compound interest rate of more than 700 percent per annum.

Ghosh, familiar as he was with Bangladesh’s success with Grameen Bank and BRAC, was determined to make his venture a success. In the early days of Bandhan, standing at a ramshackle train station, Ghosh predicted he would one day have a Bandhan branch office at each of the stations between Sealdah and Bangaon. There were 22 stations on that stretch. His forecast was way off the mark. Over the next decade, Bandhan would set up 2,022 branches, spread over 22 Indian states. At the time Bandhan received the in-principle approval for a banking license, it had more than 14,000 employees and 6.7 million borrowers.

By nature, Ghosh is impatient. He climbs stairs two at a time. Is this to burn more calories? Once he was asked this question at an offsite of Bandhan. His answer was, given a choice he would have liked to climb four or even five at a time just to keep pace with the scorching growth of the MFI.

Enamul Haque of ASA International told me that Ghosh did not pay attention to one of ASA’s key suggestions. “We wanted him to go slow on expansion but he was going ahead at breakneck speed; he is a risk-taker but has performed very well, beyond our assumption.”

Brij Mohan of SIDBI (Small Industries Development Bank Of India) has the same impression of Ghosh. Once at the SIDBI guest house at Lake Town, Kolkata, when Brij Mohan emphasized the chances of tripping if he ran very fast, Ghosh did not defend himself. He accepted the well-meant advice, but put forward his arguments to address Brij Mohan’s concerns in terms of investment in manpower, systems, and quality control.

On the spot, he explained the steps he had taken to address these concerns, including very strong internal audits. “I was convinced that he was aware of the pitfalls and had taken adequate steps,” Brij Mohan said.

Ghosh knows that the business of microfinance is all about scaling up and doing it profitably.I have met Bandhan borrowers who started with Rs 2,000-3,000 (US$ 30 – 45.00) in 2002-03 and now are borrowing as much as Rs 100,000-200,000 (US$ 1,500 – 3,000). It’s all about doing business profitably and continuously upping the scale while understanding the need of the borrowers.

When SKS Microfinance was flourishing and everybody else in the industry thought the competition would wipe out all other Indian MFIs, Ghosh kept his calm. After watching closely, he introduced a new product in 2007: an education loan at an interest rate of 12 percent—10 percentage points less than the cost of other loans at that time.

Why did he do that? There were a couple of reasons.

First, to gain social equity, as nobody else was giving education loans. Second, he was running the risk of losing some customers who had been paying 22 percent. He thought it would be better to offer a subsidized loan on top of their existing loans, than to risk losing an income of 22 percent and then needing to acquire new customers. Education loans were offered only to the existing customers.

As it transitions from MFI to bank, Bandhan will continue to succeed if it sticks to its core competence. It will be wise not to opt for the excitement of corporate banking, for then it would fail to compete with the existing banking players. Bandhan Bank’s biggest advantage is probably the fact that Ghosh is not a banker. He sees things from a different perspective. Nobody in India knows better the psyche of a small borrower and the alchemy of doing business with the poor, profitably. But can he compete with the likes of Uday Kotak (managing director of Kotak Mahindra Bank) and Rana Kapoor (founder of Yes Bank), or should he remain an entrepreneur and let others do the banking job?

Bandhan will be a success story if it does not deviate from the chosen path—a bank for the unbanked, a ‘universal small bank’.

For more, read my new book Bandhan: The Making of a Bank.

Have you read?

Indian Microfinance Gets Serious about Grievance Redressal

Country of the Year: India

In the Case of India’s PMJDY, Considerations for Avoiding Account Dormancy