MICROCAPITAL BRIEF: Reserve Bank of India (RBI) Grants Preliminary Approval to Microlender Bandhan to Receive Banking License

The Reserve Bank of India (RBI), the country’s central bank, recently granted “in-principle” approval to the Infrastructure Development Finance Company (IDFC), an Indian financial services provider based in the city of Mumbai, and Bandhan Financial Services Private Limited, a microfinance institution (MFI) based in the Indian city of Kolkata, to acquire banking licenses. RBI’s High Level Advisory Committee, in consultation with the Indian government’s Election Commission, selected IDFC and Bandhan from a pool of 25 organizations for said approval. During the next 18 months, IDFC and Bandhan must fulfill licensing requirements and other conditions according to guidelines [2] set by RBI for private banks in India. After the necessary criteria are met, the banks will be considered for a banking license. Until final approval is granted, IDFC and Bandhan are not allowed to offer banking services. This is the first time since 2004 that RBI will grant banking licenses. Among the opportunities that banking licenses include is authorization to accept deposits.

The Infrastructure Development Finance Company (IDFC) is a private company that provides infrastructure financing and project implementation services. It reported total assets of INR 711 billion (USD 12 billion) as of March 2013. Bandhan Financial Services Private Limited provides lending products to women. As of December 2013, Bandhan reported to the US-based nonprofit Microfinance Information Exchange (MIX) total assets of USD 860 million, a gross loan portfolio of USD 826 million and 5 million active borrowers. As of March 2013 it reported return on assets (ROA) of 6.4 percent and return on equity (ROE) of 37.6 percent.

By Juan Blanco, Research Associate

About Infrastructure Development Finance Company (IDFC)

The Infrastructure Development Finance Company (IDFC), based in Mumbai, is a financial services provider that was established in 1997 and finances infrastructure projects in India. It reported total assets of INR 711 billion (USD 12 billion) as of March 2013. No further financial information on the firm is available.

About Bandhan Financial Services

Bandhan Financial Services Private Limited is a microfinance institution (MFI) based in Kolkata, India, that was founded in 2002. As of 2014, it operates approximately 2,000 branches in 22 states and union territories in India. It offers microenterprise loans as well as loans for health emergencies. As of December 2013, Bandhan reported to the US-based nonprofit Microfinance Information Exchange (MIX) total assets of USD 860 million, a gross loan portfolio of USD 826 million and 5 million active borrowers. As of March 2013 it reported return on assets (ROA) of 6.4 percent and return on equity (ROE) of 37.6 percent. As of 2014, Bandhan is in the process of acquiring a banking license that would allow it to accept deposits.

About Reserve Bank of India (RBI)

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 (NBFCs). 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] The Hindu Business Line, “IDFC, Bandhan get RBI approval to start banks” by Beena Parmar, April 2, 2014, http://www.thehindubusinessline.com/economy/policy/idfc-bandhan-get-bank-licences/article5863188.ece

[2] Reserve Bank of India, “RBI Releases Guidelines for Licensing of New Banks in the Private Sector,” February 22, 2013, http://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=28191

MicroCapital Story, March 31, 2014, “Bandhan of India Raises $16m in Nonconvertible Debentures (NCDs) From Unnamed Swiss Investor,” https://www.microcapital.org/microcapital-brief-bandhan-of-india-raises-16m-in-nonconvertible-debentures-ncds-from-unnamed-swiss-investor/

MicroCapital Story, March 2, 2014, “Bandhan of India Borrows $26m From International Finance Corporation (IFC), Seeks $16m From Swiss Investor,” https://www.microcapital.org/microcapital-brief-bandhan-of-india-borrows-26m-from-international-finance-corporation-ifc-seeks-16m-from-swiss-investor/

MicroCapital Story, January 14, 2014, “Standard Chartered Bank Loans $12m to India’s Bandhan Financial Services for Microenterprise Lending,” https://www.microcapital.org/microcapital-brief-standard-chartered-bank-loans-12m-to-indias-bandhan-financial-services-for-microenterprise-lending/

MicroCapital Story, January 3, 2014, “Reserve Bank of India Approves State-Run Savings Scheme for Poor People in West Bengal After Collapse of Saradha Group,” https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-approves-state-run-savings-scheme-for-poor-people-in-west-bengal-after-collapse-of-saradha-group/

MicroCapital Universe Profile: Infrastructure Development Finance Company (IDFC), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Infrastructure+Development+Finance+Company+%28IDFC%29

MicroCapital Universe Profile: Bandhan Financial Services Private Limited, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Bandhan+Financial+Services+Private+Limited

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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