MICROCAPITAL STORY: Indian Microfinance Institution Bandhan Sells Agricultural Loans Worth USD 35.4 Million to Punjab National Bank and Other Commercial Banks

Bandhan, an Indian microfinance institution, has sold Rs 180 crore (USD 35.4 million) worth of farm loans to several Indian commercial banks including Punjab National Bank (PNB), IndusInd Bank, Development Credit Bank (DCB), and Kotak Mahindra Bank, according to a report in the Economic Times.

Bandhan chairman and managing director, Chandra Sekhar Ghosh, stated “This move will free up capital and help us grow (our) lending business without raising resources. This will also improve our capital adequacy ratio to 15 percent from 12 percent.” In response to the global credit crunch, new regulations from the Reserve Bank of India (RBI) require that, by April 2010, all non-bank financial companies such as Bandhan maintain a capital to risk weighted assets ratio (CRAR) at a minimum of 15 percent. To read more on the RBI’s new capital adequacy requirements see this MicroCapital story.

By accessing funds from local Indian banks Bandhan avoids going to the international capital markets where the global credit crunch has impacted most MFIs’ ability to procure funding. As reported in another recent MicroCapital story, Indian microfinance institutions’ profitability has been pressured by the decline in available funding, rising interest rates, and the recent tightening of government regulations, all of which in turn have led MFIs to raise their own interest rates. As a result, as reported in a MicroCapital news wire, some MFIs have chosen to sell portions of their portfolios to willing banks.

Deals such as this one by Bandhan help the banks by boosting their agricultural lending ratios. Government regulations require commercial banks to maintain a minimum of 18 percent of their overall loan portfolio in agricultural loans. As a consequence, as further described in a recent MicroCapital news wire, deals like this have been very popular. Indian banks typically buy loans such as these towards the end of their fiscal year in order to meet lending targets. According to the report in the Economic Times, Bandhan has sold Rs 60 crore (USD 11.8 million) worth of agri loans to PNB, Rs 75 crore (USD 14.8 million) to IndusInd Bank, Rs 25 crore (USD 4.9 million) to Development Credit Bank (DCB) and Rs 20 crore (USD 3.9 million) to Kotak Mahindra Bank.

As reported on MIX Market, the microfinance information clearinghouse, Bandhan was established in 2002. As of March 2008 the company had almost 900,000 borrowers, a gross loan portfolio of USD 82.4 million, total assets of USD 102.4 million, debt-to-equity of 11.16, an ROE of 62.44 percent and an ROA of 5.06 percent.

According to the PNB’s website, the bank was established in 1895, operates 4,589 branches and serves over 37 million customers. As of 2008 PNB had total assets worth USD 39.2 billion. Kotak Mahindra Bank operates 1300 branches servicing approximately 5.9 million customers. As of December 2008 Kotak reported total assets of USD 5.7 billion. IndusInd Bank was established in 1994, and as of March 2008, has 180 branches, and total assets of USD 4.6 billion. Development Credit Bank of India has 80 branches and approximately USD 1.3 billion in total assets.

By Laura Anderson, Research Associate

Additional Resources:

The Economic Times: MFI Bandhan Unlocks Capital by Selling Rs 180-cr Farm Loans

Bandhan: Home

Punjab National Bank: Profile

Kotak Mahindra Bank: Home

Bloomberg.com: Kotak Mahindra Bank Ltd.

IndusInd Bank: Home

Development Credit Bank of India: Home

Reserve Bank of India: Home

MicroCapital Story August 2008: Change in Indian Capital Adequacy Standards Affects Microfinance Institutions

MicroCapital Story September 2008: Rising Interest Rates and New Reserve Bank of India Capital Adequacy Requirements Put Pressure on Indian MFIs