Money & Banking

Will Bandhan Bank’s aggressive lending to the marginalised sections of society end?

Pratim Ranjan Bose Guwahati | Updated on January 08, 2020 Published on January 08, 2020

File photo   -  REUTERS

If the Assam government has its way, Bandhan Bank’s resistance to join microfinance institutions (MFI) and non-banking financial institutions (NBFC) in signing a self-regulatory code for responsible lending (CRL) for microfinance may end soon.

Sources say the Assam government is on course to set rules to avoid aggressive lending to the marginalised sections of the society. These rules may apply to all providers of micro-credit, including banks, NBFC-MFIs, NBFC, and credit societies.

“The Assam government appreciates the role of microcredit providers in helping the poor access finance. However, we cannot accept laissez-faire,” a source close to the State government told BusinessLine.

After Kolar (2009) and Andhra Pradesh (2010), a microfinance crisis surfaced in the tea country of upper Assam districts, leading to a series of tragedies.

Significant omission

Bandhan is not the only bank that did not sign up for the CRL, framed in November by the Microfinance Institutions Network (MFIN), the Association of Community Development Finance Institutions (Sa-Dhan), and Finance Industry Development Council (FIDC).

The code underlies that only three microcredit entities can lend to a client at the same time. Only two NBFC-MFIs can lend to the same microcredit borrower at the same time.

According to the MFIN, Axis Bank, ICICI bank, Kotak Mahindra and Indus Ind Bank have agreed to the common code, leaving out many big players. However, Bandhan’s absence is significant, because it is arguably the largest player in the sector in the east and North-East.

Queries to the bank were went unanswered. A spokesperson said the bank was in “silent period”. Media reports in the past quoted Bandhan Bank MD and CEO saying that restrictions on loan sizes cannot be applicable to banks as they follow RBI guidelines.

According to reports quoting Macquarie Capital Securities India Pvt, 18 per cent of the bank’s assets under management comes from Assam. As of September 2019, Bandhan had a loan portfolio of ₹64,186 crore. Macquarie refused to answer additional queries on the topic.

MS Sriram, visiting faculty, IIM-Bangalore, confirms that the differences in guiding principles between banks and MFIs is a problem area. In the past, banks used to offer microcredit through MFIs. Now that they offer credit directly, there appears to be a gap in governance.

MFI lending is based on self-assessment by the borrower, with providers merely taking stock of her existing asset base. Calculations can go wrong if the customer over estimates his/her repayment capacity, or if multiple lenders target the same customer.

Sriram indicated that the current crisis may have emanated from a situation where lenders went on giving credit as long as their own returns were assured, without much regard to the overall indebtedness of the customer and/or default opportunity to other lenders.

Typical to the industry norm, the anomaly came to the light only when there was a cascading impact. While the crisis in Assam is still restricted to a limited geography, the State government is adamant that the problems in governance must be mitigated.

Common code

At a meeting last month with the MFIN and Sa-Dhan, in the presence of senior RBI officials, Assam’s Finance Minister Himanta Bswa Sarma expressed anguish at the aggressive lending to the poor. “How could you give large loans to a tea worker earning ₹167 a day?” the anguished Minister reportedly asked the industry.

The State government formed a committee, including MFIN and Sa-Dhan, to work out binding rules.

Published on January 08, 2020
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