Bandhan Bank's Chandra Shekhar Ghosh: The Incidental Banker

On Friday evening, Bandhan Bank Ltd. announced that its founder MD and CEO Chandra Shekhar Ghosh would retire from his leadership role on July 9, after his current tenure ends. Ghosh will pursue a more “strategic role at Bandhan group level”, he said in his letter to the board.

The exit came as a surprise to most, as the board had approved for Ghosh to continue in the corner office at least till 2027, subject to the banking regulator’s approval.

Ghosh, 63, was little known in the Indian financial landscape before becoming a surprise recipient of an initial nod to open a universal bank nearly a decade ago. He was one of the two licensees in 2014, along with IDFC Ltd., and there have not been any since. Both went on to start operations in 2015.

The initial expectation was that IDFC, then led by financial sector heavyweight Rajiv Lall, would be able to quickly build a strong universal banking franchise owing to years of experience in infrastructure lending. Ghosh’s Bandhan was in comparison a smaller microfinance franchise headquartered in Kolkata, lending largely to rural women.

But this soon changed, as India’s financial sector itself was going through a renaissance of sorts, with small-value loans becoming the bedrock of future growth. Lall had to exit IDFC Bank, merging the lender with retail and small business loan specialist, V Vaidyanthan’s Capital First Ltd. in 2018. The bank was then renamed IDFC First Bank Ltd., with Vaidyanathan as its chief.

In this period, Ghosh’s Bandhan Bank story caught the market’s fancy. For FY16, the year when the bank commenced operations, it reported a net profit of Rs 275 crore. Its advances were at Rs 12,437 crore, while deposits were at Rs 12,089 crore. In the quarter ended December 2023, net profit stood at Rs 730 crore, with advances at Rs 1.16 lakh crore and deposits at Rs 1.17 lakh crore.

Hailing from a small village in the north-eastern state of Tripura, Ghosh had a tough childhood. In interviews he has given over the years, he often recalls his struggles growing up in poverty. His father ran a sweet shop and could not afford to send his son to a college in India. Ghosh made the trip to his uncle’s place in Bangladesh to enroll in Dhaka University.

Ghosh’s first job out of college was in a large Bangladesh-based non-government organisation called BRAC, which was also his first exposure to financing the bottom of the pyramid. Often known as the birthplace of microfinance, Bangladesh offered Ghosh a direct view of the way institutional financing can be used to empower the poorest in a country.

Nearly 13 years on the job, he was forced to quit that job and take up a role at his family’s knitting factory, owing to extenuating circumstances back home. But in a few years, he got another knock at the NGO life, when he landed a role at Village Welfare Society in West Bengal at a meagre salary of Rs 5,000 a month.

Ghosh often cites the story of how he decided to become an entrepreneur after witnessing the plight of vegetable vendors in West Bengal. These small businessmen would borrow loans worth Rs 500 from a moneylender in the morning and pay them Rs 5 as interest every evening. The money would be used to buy vegetables from the wholesaler, which would then be resold to customers coming to the market. But the cost of financing was too high at over 700% a year.

He went on to establish Bandhan-Konnagar, a not-for-profit, in 2001. Bandhan’s core activities were centered around microfinance and development services. The business soon became extremely successful, with Bandhan occupying a spot in the world’s most successful microfinance businesses by 2007.

By 2009, the microfinance business had reached a threshold, necessitating a non-bank finance licence. And nearly six years later, a bank was born.

Things have never been smooth sailing for Bandhan Bank in its 10-year history. While the story of a profitable business built on top of what was essentially financial empowerment of the most excluded business owners in the country sounded great on paper, the worries continued to mount.

The lender has had to brave demonetisation, the effects of the Goods and Services Tax implementation and even sudden exits of senior management. But it was the Covid-19 pandemic, which led to “the worst years” of his life, Ghosh told analysts on Monday.

Considering that the bank largely serves bottom-of-the-pyramid customers, its business is highly susceptible to any shock, however mild. Moreover, events like the lockdown impact the ability to reach out to its customers regularly, affecting recovery of loans.

In the middle of the second wave of the pandemic, in September 2021, as bank employees were not able to reach customers, the lender’s gross non-performing asset ratio hit its worst-ever level at 10.82%.

Another example is the severe floods in Assam in April-June 2022, which led to a decline in recovery of microfinance loans. From 94% in January-March 2022, the collection efficiency dropped to 78% in the first quarter of FY23.

According to provisional figures reported for the quarter ended March 31, the bank’s deposits were at Rs 1.35 lakh crore and it had advances worth Rs 1.28 lakh crore.

Bandhan Bank is also not new to regulatory strictures. In September 2018, Reserve Bank of India put restrictions on branch opening and put a freeze on further salary increments for Ghosh. The restrictions were placed because Bandhan Bank was unable to bring its promoter stake below 40% within the stipulated time frame.

The strictures were completely removed only about two years later, as Bandhan Financial Holding Ltd., the promoter firm, diluted its holdings in the bank through secondary sale in August 2020.

The lender, under Ghosh’s leadership, has also faced questions on the quality of its credit guarantee portfolio. Using a window allowed to lenders during the Covid-19 pandemic, Bandhan Bank extended loans to micro businesses under the Credit Guarantee Fund for Micro Units. The fund allowed the lender to extend collateral-free loans to micro units where the government would guarantee up to 75% of the loan amount.

The National Credit Guarantee Corp. has called for an audit of loans worth over Rs 23,000 crore, as it raised concerns on the quality of the loans under the scheme.

During the analyst call on Monday, Ghosh said that the bank may appoint an interim CEO, if a due successor is not finalised before July 9. The decision for this would be taken in the first week of July.

Having said that, there is due fear on what will likely happen to the bank after Ghosh leaves. The bank’s stock closed 6.3% lower on the bourses, reflecting the market’s nervousness.

The bank’s senior management is still relatively new, which may force the bank to look outside for a decent successor. But time is very short. Typically, finding a credible replacement could take up to three months. Then, there is the question of RBI’s approval.

History of such succession plans have not always been great. In the case of RBL Bank Ltd., after Vishwavir Ahuja’s sudden exit, the board chose to appoint veteran banker R Subramaniakumar. That transition has played out reasonably well.

But in the case of Ujjivan Small Finance Bank Ltd., successor Nitin Chugh had to step down after two years, with a committee of directors taking over. The bank had to eventually go back to insider Ittira Davis as MD and CEO. Similarly, in case of Equitas Small Finance Bank Ltd., founder CEO PN Vasudevan had to rescind his resignation in 2022 and still continues in his role.

“I feel happy to leave behind a strong franchise in the hands of a capable leadership team, many of whom have partnered me in building the organization, brick by brick, sharing the same vision and values,” Ghosh wrote in his note to the board.

Whether shareholders will hold the same amount of trust that Ghosh shows toward his team is the million-dollar question.