In their case study of Krishna Bhima Samruddhi Local Area Bank (KBSLAB), a microfinance institution, the authors take us through the journey of microfinance in India. After two decades, the industry is still a fledgling − one in whom its parent, the Reserve Bank of India, appears to have lost interest. Operating in an atmosphere of mistrust and indifference, KBSLAB has shown mixed results – considerable initial success, some recent failures and plenty of hope. Looking at the year ahead, the bank faces a quintessential strategy question: How should it stoke its commercial engine with social good being its available fuel?
Outside Managing Director, Manmath Kumar Dalai’s office, the staff of Krishna Bhima Samruddhi Local Area Bank (KBSLAB) waited patiently for their boss to complete his final evaluation of the bank’s performance and call them in. April 7, 2011 in the Mahabubnagar district of Andhra Pradesh was a typical, hot summer day, but as Dalai, with the help of his team, finalised his presentation for the board meeting, the heat seemed to be intensified by a heavy gust of palpable anxiety, and trepidation. With KBSLAB completing a decade of operations in the microfinance business, the bank’s board had called for a meeting on April 9, 2011 to review its performance during the last 10 years.
KBSLAB’s performance had been mixed. On the one hand, the bank’s total assets, deposits and number of customers had increased, while on the other, it had underperformed the industry on major parameters during the period 2005-2011. Future projections hinted at a major shortfall in performance against the set goals. Local area banks such as KBSLAB reeled under the restrictions imposed by the Reserve Bank of India (RBI), the country’s central bank and banking regulator. KBSLAB had to outperform industry standards, grow operationally and financially, and comply with banking procedures to have any impact on the country’s central bank. Moreover, in 2010-11, the microfinance industry was in a state of turmoil and it encountered political opposition, borrower distrust and negative publicity. Dalai realised that confining his bank’s business to microfinance was not advisable. Thus, not only did he have to put together a workable strategy to meet his annual targets, he also had to look ahead to steer his bank out of the morass into which the microfinance industry had plunged.
Need of the Hour – Microfinance in India
India rose to the credit needs of the rural and poor strata after the nationalisation of the banking sector in 1969. The government launched several initiatives in the following years. It attempted to provide the entire spectrum of financing with the establishment of the National Bank for Agriculture and Rural Development (NABARD) and introduced programmes that linked self-help groups (SHGs) to banks in partnership with non-governmental organisations (NGOs). The RBI mandated banks to cover SHG financing as a mainstream activity under their priority sector lending, and the government also allowed private players to provide microfinance products and services. These private microfinance service providers were called microfinance institutions (MFIs), and included NGOs, non-banking financial companies (NBFCs), banks, rural banks, registered companies, cooperative societies and trusts. Microfinance gradually evolved into an industry with diverse market players, low competition, a huge clientele, excellent long-term growth prospects and no regulation. In fact, global companies also started considering India’s microfinance industry an attractive proposition. Yet, despite the existence of several players, microfinance had failed to meet the demands of the teeming millions in India. By 2010, the industry had expanded significantly in India, but it had low penetration rates across the country.
In an effort to bridge the demand-supply gap in financial services and strengthen the institutional credit framework in rural and semi-urban areas, the RBI launched local area banks (LABs). BASIX, an experienced microfinance provider, secured the licence to set up Krishna Bhima Samruddhi Local Area Bank (KBSLAB). Focussing on lending to the weaker segments of society, KBSLAB financed agricultural and allied activities, small scale industries (SSIs), agro-industrial activities, trading activities and the non-farm sector.
A leader in the microfinance sector in India, the state of Andhra Pradesh during 2005-07 witnessed the rapid growth of commercial MFIs, which competed fiercely with and outpaced government-backed programmes in terms of outreach. However, the belief was that MFIs followed coercive practices to achieve high growth. Loan officers were blamed for having overridden borrowers with debt, which was alleged to have contributed to multiple farmer suicides in the region. In its attempt to put a halt to questionable practices, the government imposed strict regulations on private MFIs, following which the microfinance industry virtually came to a halt in Andhra Pradesh.
Krishna Bhima Samruddhi Local Area Bank (KBSLAB)
KBSLAB was promoted by BASIX − the collective or brand name used to address the companies held by Bhartiya Samruddhi Investments and Consulting Services (BASICS Ltd). BASICS, an NBFC, was the first “new generation livelihood promotion institution” in India, and it had envisioned setting up a bank from the early years of its establishment. Born out of BASIX’s experience and approved by the RBI, KBSLAB was registered as a limited company in February 2001, with its headquarters in the Mahabubnagar district of Andhra Pradesh. KBSLAB’s clientele included the rural poor and women – people who had never been considered “creditworthy” by the conventional banking system in India. Its goals included giving priority to those who fell outside the access range of formal financial institutions and providing doorstep services for agriculture and business development. Its operations spanned across three of the least developed, illiterate districts of Andhra Pradesh and Karnataka, where apart from agriculture, the main sources of livelihood were handloom and agro-based small industries. The bank offered a number of products and services, including microsavings, microcredit, microinsurance and agri-business development services. It was a fully computerised bank with branches in all the three districts. The bank made its local presence felt through its business correspondent (BC) model, under which it could hire and pay third-party agents (BCs), such as NGOs, civil society organisations, post offices and individuals, to provide banking services. Through this model, it could receive real-time customer data. The BC model increased the bank’s outreach to remote areas and rapidly increased its customer base. Client reach was further enhanced by the bank’s mobile branch, “Bank on Wheels” (BOW). Moreover, KBSLAB had tied up with ICICI Bank to facilitate money transfer at cheaper rates, a feature that was unique in this sector. The bank had also sought to expand its network of branches; yet as of 2011, the RBI was yet to approve KBSLAB’s 2009 request to add new branches.
Microfi nance gradually evolved into an industry with diverse market players, low competition, a huge clientele, excellent long-term growth prospects and no regulation. In fact, global companies also started considering India’s microfinance industry an attractive proposition. Yet, despite the existence of several players, microfi nance had failed to meet the demands of the teeming millions in India. By 2010, the industry had expanded signifi cantly in India, but it had low penetration rates across the country.
Curtains Down or a New Show?
Despite its endeavour to serve the weaker sections of society, KBSLAB was, at the end of the day, a commercial bank that had to meet its operational and financial targets − a tall order, given the high transaction costs of issuing small loans and accepting minuscule deposits per account. Undaunted by these factors, in 2011, KBSLAB boasted of having more than doubled its loan portfolio since its inception and was the only commercial bank in India focussing on the microfinance business. Yet, much of the ground had been gained in its initial years, and KBSLAB showed stunted growth post-2009. Below par performance was apparent in the decline in deposits and the bank’s customer base. The bank was unable to innovate and leverage technology to prevent third-party vendors from adopting dishonest methods. Further, having formal meetings with villagers of the newly approved villages was laudable, but unfeasible and costly. The rot that had set in the microfinance industry due to various malpractices could also be blamed for the stagnation in the bank’s performance in 2010. The bank, however, launched a number of initiatives to improve efficiency.
The bank made its local presence felt through its business correspondent (BC) model, under which it could hire and pay thirdparty agents (BCs), such as NGOs, civil society organisations, post offices and individuals, to provide banking services. Through this model, it could receive real-time customer data.
With the RBI adopting a “poor cousin” approach towards LABs and rural banks, KBSLAB had to traverse the uncertain paths of India’s rural economy on its own. The inconsequence of its performance to the central bank was obvious in the fact that even if the bank faltered, no real impact would be felt and the RBI would most likely term it a well attempted, but failed experiment. However, success in its endeavours, though nowhere in the offing yet, would ensure that KBSLAB would be the harbinger of a social banking revolution in India. The big question was how to meet commercial targets without nullifying its social mission. As he mulled over the options, Dalai knew that KBSLAB was precariously positioned for the year ahead.
Arohini Narain, co-founder and consultant, Writer’s World, wrote this summary for ISBInsight.
Author Note: Rajesh Chakrabarti is a Clinical Associate Professor of Public Policy and the Executive Director of the Bharti Institute of Public Policy at the Indian School of Business (ISB). Nupur Pavan Bang is a senior researcher of the Centre of Investment, and Puran Singh a research associate at ISB. Kaushik Bhattacharjee is Associate Professor at the Institute of Management Technology, Hyderabad.