Bandhan Bank: Problem of portfolio concentration tightens grip on lender

Dependence on microfinance loans for growth is steadily increasing, which poses a risk in present environment

Bandhan Bank's dominance in eastern India is helping it ring in retail deposits (80 per cent of total deposits) and augment the share of its low-cost current account – savings account (CASA) deposits to 43 per cent in December quarter (Q3).  However, the lender's stock has been hammered by over 11 per cent in two days post results, because the growing dependence on MFI loans is doing more harm than good at this juncture.
 

Proforma gross non-performing assets (NPA) ratio or NPA unadjusted for the Supreme Court’s stay on bad loan recognition rose to 7.1 per cent in Q3FY21. which was the highest since its listing in 2018. Provisioning cost ballooned from Rs 295 crore last year to Rs 1,069 crore in Q3FY21 (Rs 395 crore in Q2). From every angle, this points to a stark deterioration in asset quality.
 

According to the bank, 76 per cent of its loan book falls within less than 30 days past due (DPD); 5 per cent within 30 – 60 DPD and 10 per cent in the 60 – 90 DPD bulge. Analysts at Kotak Institutional Equities note that about 24 per cent of its MFI book falls in the overdue category. With the MFI issue taking a political colour in Assam, it’s not just hurting the bank’s collection efficiency, but also denting its financials. Net profit in Q3FY21 declined by 13.5 per cent year-on-year owing to Assam related stress.
 

Lack of encouraging trends on collection efficiencies is another worry. While collection efficiency improved from 89 per cent in September to 92 per cent in December, it fell to 90 per cent in January for MFI loans. Even in Bandhan’s critical market, West Bengal, analysts at Motilal Oswal Financial Services note that as consumer demand has not yet revived fully, collection efficiency has not normalised in the state.
 

Under these circumstances, the bank’s continued focus on MFI space isn’t comforting. In Q3FY21, advances grew by 22.6 per cent, while MFI advances grew faster by 32 per cent. Other segments, predominantly the mortgage book through Gruh Finance’s acquisition grew by only 7 per cent. Share of MFI loans have risen to 66 per cent in Q3 from 61 per cent a year-ago. The mortgage book has been a laggard.
 

By 2025 the bank is planning to reduce the dependence on MFI loans to 30 per cent and increase focus on mortgage loans to 30 per cent, though the present trend isn’t reflecting its long-term objective. After Q3 results, analysts have sharply cut their earnings estimates by 7 – 11 per cent due to near-term stress in MFI loans. Therefore, to win back Street’s confidence, it's important to grow beyond the comfort zone.