“The competition is intense. A customer, who could not get a ₹20,000 loan a year or two ago due to repayment concerns, can now get a credit of ₹70,000,” said Amar (name changed), a microfinance executive from the Bardhaman district of West Bengal.

After the chit-fund boom, it is the golden era of microfinance in West Bengal, with loans being showered on the underprivileged like never before. According to a Macquarie Research advisory issued in September, the market is “overheated”, with West Bengal ranking first in the country in terms of microfinance portfolio.

However, there is slight difference of opinion when it comes to the ranking. According to Microfinance Institutions Network (MFIN), the State is ranked second with a portfolio of nearly ₹29,000 crore, slightly below Tamil Nadu.

ButMacquarie says the State’s Asset Under Management (AUM) has already crossed ₹30,000 crore, overtaking peers and growing at a compound annual growth rate (CAGR) of 40 per cent over the last four years.

This is “driven in part from new customer additions and in part from higher ticket sizes. Nine (North and South 24-arganas, Murshidabad, Coochbehar, Nadia, Bardhaman, Howrah, Hooghly, Jalpaiguri), out of the 10 large districts for microfinance in the country, are in West Bengal”, the report says.

That loans are available freely is evident from the average ticket size. According to Macquarie, against the national average of ₹30,000, the average ticket size in West Bengal and Assam is as high as ₹41,000. MFIN puts West Bengal at the top with ₹47,000 per borrower, followed by ₹46,000 in Assam.

Assam is currently reeling under a microfinance crisis. Will it be repeated in West Bengal? Macquarie is concerned that in such an overheated situation “it takes only one aggressive more player to spark a crisis” of over-leveraging. The implications are significant for the industry as West Bengal is heading for a highly-contested election.

Bandhan Bank

Similar to Assam, Bandhan Bank is finding itself if the eye of a potential storm. Macquarie describes the bank as a “hyper-aggressive player”, who is following the footsteps of a telecom giant to crowd out competition.

“We think Bandhan Bank is trying to replicate the ‘crowd-out-the-competition’ strategy in microfinance, especially in the eastern geography. It does so by being the world’s lowest cost microfinance lender, but more importantly, by giving significantly higher loans than the competition,” the report said.

Amar echoes the sentients. “Bandhan created a situationwhere either we give in to the customer’s demand for higher ticket size loan or perish.” The fear is that they might perish either way.

As a bank, Bandhan is legally eligible to give loans of higher ticket sizes than MFIs. It did not sign the self-regulatory code to limit industry exposure per borrower either.

The net result is that Bandhan is rising regarded by customers as an ever-ready lender. In a situation where microfinance customers are indebted to multiple lenders (as is confirmed from the study), this can cause serious trouble. Borrowers may take others for granted.

MS Sriram, visiting faculty, IIM-Bangalore, confirmed this trend in Assam, where lenders kept 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.

MFI model in threat

As in Assam, Bandhan is not the sole cause for this situation. But as the largest, they are making significant difference in the market place.

According to Macquarie, 52 per cent of Bandhan’s total loans (₹64,186 crore as on September 2019) and 46 per cent of AUM are concentrated in West Bengal. Quoting State government data, Macquarie says Bandhan’s exposure in West Bengal has gone up significantly (10 percentage points of total loans) in the first half of 2019-20.

While responses were not available from the bank, Professor Milindo Chakrabarti of OP Jindal Global University, felt the outcome is the result of letting lose a giant among lilliputs.

“Unlike other scheduled commercial banks that struggle to meet priority lending quota, Bandhan’s business model is set on priority lending. It mobilises deposits at attractive rate and offers cheapest cost loans to rural customers. The only problem is it has no competition,” the professor said.

According to him, the arrival of Bandhan raises question marks over the prevailing business model of MFIs, who can neither raise deposits nor has the advantage of scale. Consolidation in the MFI sector, coupled with conversion to bank or at least to small finance bank, may help everyone including Bandhan Bank.