MICROCAPITAL BRIEF: Commercial Banks in India Seek to Expand Microlending: Housing Development Finance Corporation, IndusInd Bank, Industrial Development Bank of India (IDBI)

Commercial banks in India reportedly are gaining interest in offering microfinance services to low-income individuals. The Housing Development Finance Corporation Limited (HDFC Bank), a government-owned commercial bank, Indus Industrial Bank Limited (IndusInd Bank) and the Industrial Development Bank of India Limited (IDBI), both private commercial banks based in the country, are among those that have experienced growth in their microfinance portfolios and reportedly are seeking to increase their microlending activities. IndusInd Bank has increased its microlending book from INR 1 billion (USD 16.6 million) to INR 5 billion (USD 83.1 million) over the last three years, IDBI has doubled its microlending portfolio to an unspecified amount during this same period, and HDFC “too has become active in the microloan segment” [1].

Banks are employing business correspondents or agents to reach customers in remote areas of the country, and they are offering interest rates that range between 20 and 24 percent, lower than the 26 to 27 percent interest rates charged by traditional microfinance institutions. Commercial institutions often offer loans between INR 15,000 (USD 249) and INR 25,000 (USD 415) [1] with tenures between 1 and 3 years. Offering these microloans can help commercial banks achieve “priority sector targets” set by the Reserve Bank of India (RBI), the country’s central bank. RBI mandates banks to direct 40% of their loans to priority sectors such as agriculture, micro-credit, exports and economically weaker sections.

HDFC Bank reported total assets of INR 4 trillion (USD 66.5 billion) as of March 31, 2013. IndusInd Bank reported total assets of INR 733 billion (USD 12.1 billion) as of December 31, 2013. IDBI reported total assets of INR 3.2 trillion (USD 53.6 billion) as of December 31, 2013.

By Juan Blanco, Research Associate

About HDFC Bank Ltd

HDFC Bank Limited was incorporated by Housing Development Finance Corporation Limited (HDFC), a private-sector Indian housing finance company, when the Indian government began allowing the establishment of private sector banks in 1994. HDFC Bank offers a range of services to retail and wholesale banking customers, as well as specialized services for non-resident Indians. Headquartered in the city of Mumbai, the bank has a network of 2,150 branches in 1,140 cities across India. The bank reported total assets of INR 4 trillion (USD 66.5 billion) as of March 31, 2013.

About IndusInd Bank Ltd

IndusInd Bank, founded in 1994, caters to the needs of both consumer and corporate customers. Headquartered in the Indian city of Mumbai, IndusInd Bank has 573 branches and 1050 automated teller machines (ATMs) spread across 392 municipalities in India. The Bank also has representative offices in London, England, and Dubai, United Arab Emirates. The bank reported total assets of INR 733 billion (USD 12.1 billion) and return on assets (ROA) of 1.63 percent as of December 31, 2013.

About Industrial Development Bank of India Ltd (IDBI Ltd)

The Industrial Development Bank of India Limited (IDBI Ltd) was founded in 1964 and offers banking and financial solutions to its clients in the retail and corporate banking arenas. Headquartered in the Indian city of Mumbai, it reported total assets of INR 3.2 trillion (USD 53.6 billion) and return on equity (ROE) of 10.39 percent as of December 31, 2013.

About the Reserve Bank of India

Established in 1935, the Reserve Bank of India (RBI) undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies (NFBCs). The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in cases of banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. In 1979, the National Bank for Agriculture and Rural Development (NABARD) was formed at the behest of RBI to provide regulatory oversight to regional rural banks (RRBs) and to promote the development of agricultural lenders: tasks that had been the responsibility of RBI. While non-banking financial companies such as for-profit microfinance institutions operate under RBI regulations, the responsibility for inspecting agricultural lenders, RRBs, state cooperative banks, district central cooperative banks and state cooperative agricultural and rural development banks was transferred to NABARD. RBI maintains these responsibilities for for-profit MFIs. Although RBI was originally the parent organization of NABARD and until October 2010 held a 72.5-percent stake in the outfit, RBI owns a 0.5-percent stake in NABARD as of March 31, 2013. RBI reported total reserves of USD 263 billion as of February 14, 2014.

Sources and Additional Resources

[1] Live Mint and The Wall Street Journal: “Banks Develop a Liking For Microlending,” by Dinesh Unnikrishnan, March 2014, http://www.livemint.com/Industry/9LJdPunKohk4fjn2lhnJLK/Banks-develop-a-liking-for-microlending.html

MicroCapital Story, March 18, 2014, “Grama Vidiyal Microfinance of India Borrows from World Business Capital,” https://www.microcapital.org/microcapital-brief-grama-vidiyal-microfinance-of-india-borrows-from-world-business-capital/

MicroCapital Story, March 7, 2014, “Reserve Bank of India (RBI) Unfixes Microloan Interest Rate Cap to Vary Based on Cost of Funding,” https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-unfixes-microloan-interest-rate-cap-to-vary-based-on-cost-of-funding/

MicroCapital Story, February 22, 2014, “SKS Microfinance of India Completes $36m Securitization,” https://www.microcapital.org/microcapital-brief-sks-microfinance-of-india-completes-36m-securitization/

MicroCapital Story, December 7, 2011, “HDFC Bank, Vodafone Launch Mobile Banking Service in India,” https://www.microcapital.org/microcapital-brief-hdfc-bank-vodafone-launch-mobile-banking-service-in-india/

MicroCapital Story, August 22, 2008, “IndusInd Bank, Grameen Capital and SKS partner in $28.9m Microfinance Transaction,” https://www.microcapital.org/press-release-indusind-bank-grameen-capital-and-sks-partner-in-289m-microfinance-transaction/

MicroCapital Story, January 8, 2009, “India’s IDBI Bank Ltd. Increases Credit to MFIs While Orissa State Government Calls for Banks and MFIs to Meet Lending Targets,” https://www.microcapital.org/microcapital-story-indias-idbi-bank-ltd-increases-credit-to-mfis-while-orissa-state-government-calls-for-banks-and-mfis-to-meet-lending-targets/

MicroCapital Universe Profile: HDFC Bank Ltd, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=HDFC+Bank

MicroCapital Universe Profile: IndusInd Bank Ltd, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=IndusInd+Bank

MicroCapital Universe Profile: Industrial Development Bank of India Ltd (IDBD Ltd), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=IDBI+Bank

MicroCapital Universe Profile: Reserve Bank of India (RBI), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29

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