A Sabji Wala Paid 720% Interest on His Loan! Here's What Happened Next... - The 5 Minute WrapUp by Equitymaster
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A Sabji Wala Paid 720% Interest on His Loan! Here's What Happened Next...

Mar 13, 2018

Kunal Thanvi, Research analyst

Can you imagine paying 720% interest on a loan?

It's shocking but true.

Last week, I met someone who told me a very interesting story.

He's an entrepreneur. A successful, first-generation Indian entrepreneur, no less.

He told me a story of a sabji wala (vegetable vendor) who was paying sky-high interest rates every day.

But the sabji wala was happy to pay it! In fact, he thought the man who was changing him this interest rate, was 'a very good human being'.

The man was so shocked to hear the sabji wala say this, he decided to do something to correct the situation.

He succeeded.

In fact, he created a solid business around it.

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His name is Chandra Babu Ghosh...and this is the story in his own words.

  • In early 2001, one fine day I went to the sabji mandi (vegetable market) in the eastern part of the country.

    While buying vegetables I saw one sabji wala receiving Rs 500 from a gentleman.

    I went to the sabji wala and asked him why did the gentleman pay him Rs 500 without purchasing any vegetables.

    The sabji wala replied - 'Well, he is a very kind man. He has been helping me for two years now'.

    I asked him how.

    Sabji wala replied - 'Every day in morning, he lends me Rs 500 to buy vegetables. And I pay him Rs 5 upfront and repay him Rs 505 in the end of the day. So, in total, I pay him just Rs 10 i.e. 2% interest for his principal.

    This has helped me establish my small business.'

    The sabji wala thought he was paying only 2% interest on the principal. But he paid 2% every day.

    So, for one month it translated to 60% (2% * 30 days) and for the year it translated to 720% (60% * 12 months).

    When I tried to explain this to him, he just refused to listen to anything I had to say about the money lender.

    He said - 'It is very convenient for me as I am not required to fill any form. In fact, he comes to lend me money and collect it. He is a very good human being.'
India's Unique Sabji Mandi

This event rattled Mr. Ghosh. It changed his life.

It proved to be a trigger for the creation of a major micro finance company. You may have heard about it. It's been in the news recently.

In fact, it's ready to hit Dalal Street with its IPO - Bandhan Bank.

Chandra Babu Gosh, the first-generation entrepreneur, has indeed created a strong business trying to end the exploitation of small businesses by unscrupulous money lenders.

He saw the exploitation first-hand and decided to help.

This seems to be a feel-good socialist story...and it kind of is.

After all, he did start as a socialist providing small loans to help small businessmen like sabji walas.

Eventually, he created one of the biggest and most profitable microfinance institutions of India.

But he didn't stop there.

In 2014, Mr. Gosh got a banking license from the RBI. Bandhan now operates as a private bank.

While it still provides micro finance loans, it now has access to low cost funds as a bank i.e. deposits from retail customers.

The aam investor will get an opportunity to participate in this story soon enough. The IPO opens on Thursday.

But should you invest just because you liked the story?

Many will do so.

But how will the IPO be priced? Will it be a 'safe stock'?

I hope you'll ask these questions before putting up your money.

Remember, Bandhan is now a bank and will be treated as one by the market. It will find it tough to maintain its high margins and return on equity.

Some of our dear readers may know that Tanushree Banerjee, Research Analyst and our safe stock specialist, has a good track record when it comes to recommending banking stocks.

She started highlighting the NPA crisis way back in early 2016. She scaled down her banking recommendations. As a result, she hasn't closed any of those banking recommendations at a loss.

What does she think of Bandhan? Does she think it's okay to pay five times book value for this bank?

Find out here... (Subscription Required)

Chart of the Day

The biggest beneficiary of government's financial inclusion and the fall of public sector banks has been private sector banks, NBFCs and now small finance banks.

With tighter control over NPAs, these new age financial institutions have outpaced the public sector banks both in terms of business growth and market valuations.

Today's chart shows their price to book ratios on a trailing twelve-month basis.

Private Sector Banks & NBFCs Get Premium Valuations

As mentioned above, a primary reason for such steep valuations is a combination of high growth (gaining market share from public sector banks and lending to priority sector) and low Non-Performing Assets (NPAs).

They can command such high valuations only as long as they're able to maintain this combination.

Kunal Thanvi
Kunal Thanvi (Research Analyst)

PS: Sensex 100,000 will have lots of winning stocks. You may already own some of them. Some may be on your watchlist. Tanushree will help you figure out the rest. Read on to find out all about it...

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2 Responses to "A Sabji Wala Paid 720% Interest on His Loan! Here's What Happened Next..."

Srividhya Srinivasan

Mar 15, 2018

It is actually 737.37 %

Lender invests only 495 (500-5).
Gets 10 daily. So annual income is 3650 (36510).
Return = 3650100/495 = 737.37%



Mar 13, 2018

The sabji wala paid only 2 percent as interest ... even if we calculate it for a month ,year or decade...etc
for example in a year
he recieves 500 X 365 and pays 10 X 365
interest rate 10X365/500X365 = 0.02

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