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Indian Bank lending pays dividends

Monday, February 25 08:39:30

Starting three years ago with a business remodelling plan, India's Ratnakar Bank has ventured where few deposit-taking lenders have gone before.

The private equity backed company, whose top ranks are now filled with pros from Wall Street banks, has expanded its business into India's poor, rural areas, a tough market long neglected by the country's financial groups.

That market is showing promise. Ratnakar reported a fivefold increase in net profit to nearly 657 million Indian rupees ($12.15 million) in its last fiscal year. It aims to nearly double its branches to 200 and to list shares in 2014 or 2015, in what would be the first Indian bank IPO in eight or nine years.

Ratnakar, with roots in rural parts of Maharashtra state, makes about one-third of its loans to farmers, small businesses and low-income consumers - a target base that normally operates outside India's banking system.

"It is interesting that now, finally, they are doing what a bank should be doing: bring surplus money from urban centres and deploy it where it is needed," said Vijay Mahajan, founder of BASIX Group, an Indian microfinance institution.

Mahajan estimates the market opportunity at about $50 billion in revenues for lenders in a country where about half of Indian households do not have bank accounts.

Ratnakar is emerging as an outlier with a profitable model for India's 500 million low-income borrowers. In India, more than two-thirds of bank loans are to companies, and retail banking is largely focussed on families with disposable incomes.

The bank is using the deposits it takes from urban customers and extending loans to rural borrowers, with an eye toward small businesses such as tea stall owners, cobblers and people who typically do not have access to banking services.

In 2010, the 70-year-old bank took a strategic decision to modernise itself and hired professionals, including its CEO, from global banks. A year later, it raised about $130 million from investors including HDFC Ltd, Norwest Venture and Beacon Private Equity.

It is in the process of raising another $55 million and expects to close the deal within a few days, said Rajeev Ahuja, a Citigroup veteran who is now Ratnakar's head of strategy. ( C) Reuters