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How a bank from the Indian city of Varanasi is getting the local economy moving – and making the hearts of investors beat faster.

Ulli Janett
Jerry Riley

For devout Hindus, Varanasi is the best place on earth to die. They believe that if their life ends in this holy city on the banks of the Ganges they will escape the cycle of rebirth. When the Norwegian Knut Nordenhaug travels to this city of 4 million inhabitants, he is not in search of a good death, however: He wants to see how Utkarsh Small Finance Bank is improving the lives and the economic situ­ation of people in the Indian state of Uttar Pradesh. Knut Nordenhaug is CFO and Deputy CEO of the Gjensidige Foundation. As Norway’s largest foundation and the principal owner of the insurance company of the same name, it is an important player in the Norwegian financial centre. Knut and his team manage around 10 billion US dollars of assets and he is always on the lookout for compelling investment opportunities – in other words: investments that are clearly focused on returns and are, at the same time, sustainable. Since 2015, the foundation has held shares in an investment company with a portfolio of micro- and SME banks in developing countries. Utkarsh Small Finance Bank is one such institution. 

‍‍Harhua, 15 kilometres from Varanasi: Clients of Utkarsh Small Finance Bank are paying back instalments of their loans and exchanging ideas regarding their businesses.

Spotlight on growth

Utkarsh, which is headquartered in Varanasi, was founded in 2009 by CEO Govind Singh, an experienced Mumbai-based banker. Its name is derived from the Sanskrit word for “advancement” or “progress” and spells out what the bank wants to achieve: Ever since it was established, its focus has been on fostering financial inclusion. Microfinance is still a major driver of financial inclusion in India. Although the country has made significant progress in recent years, just over half of its population of 1.3 billion people had a bank account in 2014 – and only 7 per cent had their wages or other payments transferred to a bank account. As in most developing economies, the informal sector accounts for a large proportion of value creation. Even if people make a living from this sector, they are not regarded as suitable retail customers by banks.

‍‍Visiting Utkarsh’s heartland of eastern Uttar Pradesh: Sanjay Singh (left) and investor  Knut Nordenhaug from Oslo (centre).

Microfinance serves the needs of this section of the population by providing special credit mechanisms. “We organise customers into groups of five women,” explains Sanjay Singh, Zonal Head Microbanking at Utkarsh in Varanasi. “To begin with, they receive a loan of up to 380 US dollars, which has to be repaid within 14 months. The groups meet every two weeks to pay back instalments of their loans and they use this as an opportunity to exchange views and ideas with each other and with bank representatives. With each credit cycle, they are entitled to a larger loan and become part of the ‘official’ financial sector,” adds Sanjay.

Murta from Harhua also has a group loan. Located 15 kilometres from Varanasi, Harhua is home to the very first branch of Utkarsh. Today, Murta is attending a “centre meeting” that brings together six lending groups. Using her loan, her son Vishal, aged 22, runs a mobile phone business and sells prepaid cards, phone chargers, headphones and other accessories. Although the shop is fairly quiet on the Friday morning when we visit, it generates enough sales, especially in the evenings. “I can repay the loan, and my son can feed his family and put some money aside,” Murta explains proudly. The fact that the son runs the business using his mother’s loan is not seen as a problem by Utkarsh. The family is sacred in India. The son can’t afford not to give his mother the money for the loan repayments – how would she look in front of all the neighbours? “This system means that the bank has extremely low default rates,” Sanjay Singh explains.

‍‍Vishal (left) runs a shop selling mobile phone accessories in rural Harhua,  financed through his mother’s microloan. 

Away from the centres

Murta is typical of the around 1.3 million customers of Utkarsh Small Finance Bank – and of the population in the area surrounding Varanasi. The western part of Uttar Pradesh, as well as the neighbouring state of Bihar, belong to the most densely populated and also the most underdeveloped regions of India. “When I decided to set up Utkarsh here in 2009, I knew very little about Varanasi,” Govind Singh explains. “But I realised that a microfinance institution would have the greatest impact in this area.” Starting with a handful of like-minded colleagues and building an experienced team of bankers, Govind Singh has made Utkarsh one of the top ten microfinance institutions in India in the space of just a few years. In early 2017, it successfully completed the transition to “Small Finance Bank”.

At the end of 2016, 94 per cent of Utkarsh’s clients were lending groups benefiting from microloans averaging 198 US dollars. Now, the team led by Govind Singh is working at full speed to exploit the opportunities arising from Utkarsh’s change of legal status. The bank can now offer savings accounts, issue bank cards and install ATMs. In addition, Utkarsh wants to diversify its offering more in the direction of SME and housing loans and to increasingly offer insurance policies via its impressive branch network. Utkarsh is expanding: It achieved growth of 54 per cent in 2016, despite the shock waves created by the demonitisation initiative introduced by Prime Minister Modi virtually overnight, which turned the Indian economy upside down. In the bank’s HR department, dozens of young people are waiting for interviews: Two hundred new employees are recruited each month – obtaining skilled jobs in banking in a region where only one financial institution, Utkarsh, is headquartered.

‍‍Qualified banking jobs and attractive employment opportunities for young graduates in Varanasi: the new Utkarsh central operations centre.

IPO by 2022

A visit to the new administration centre shows that professional bankers are systematically building structures here. The bank aims to achieve growth of 150 per cent by March 2020 and wants to obtain a stock market listing by 2022 at the latest. The growth forecasts are not exaggerated, says Govind Singh. “Of the 300 million people in our core region alone, we currently serve just 1.3 million – and most of them simply take out a loan. There is vast potential.” After two days at Utkarsh, experienced investor Knut Nordenhaug is visibly impressed by this portfolio company. “Utkarsh has an experienced management team in place and operates like any bank back home. The biggest difference is its growth potential – which is massive because basic needs are being met here and that is leading to better incomes – and better lives.”

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