Amid Covid, diversification remains even more elusive for Bandhan Bank

While most commercial banks reported impressive numbers for the second quarter of the current financial year, Bandhan Bank’s Rs 3,009 crore loss came as a surprise to the investors.

The record loss was due to a jump in provisioning to Rs 5,578 crore during the quarter, compared to Rs 380 crore during the same quarter of the previous year. Of the Rs 5,580 crore, provisioning for the existing non-performing assets was around Rs 1,500 crore, additional standard asset provisioning of Rs 2,100 crore and Rs 1,030 for restructured assets.

The bank was confident when the pandemic hit the country in March 2020. While announcing the Q4FY20 earnings in May 2020, the bank had said in its analyst presentation that “microfinance portfolio has historically shown higher resilience vis–a–vis industry during times of crisis,” citing how the bank sailed comfortably through the demonetisation and GST implementation period.

18 months into the Covid pandemic, the erstwhile micro lender is feeling the pinch. During the July-September quarter, its total slippages were Rs 2,934 crore. The bank’s management said they have provided in full for the possible stress from the pandemic.

One way to interpret the accelerated provision for existing NPAs is that the bank does not expect much of loss-making assets to become standard again.

“Bandhan delivered a disappointing performance in Q2FY22 due to elevated provisions, as the bank accelerated provisions for its existing NPA accounts, restructured advances, and shored up its contingent provisioning buffer which resulted in heavy losses,” Motilal Oswal Securities said in a note to its clients.

“Overall, we still remain cautious and uncertain about Bandhan’s asset quality, and hence, estimate its credit cost to remain elevated at 11% of loans for FY22 and at 3.5% of loans for FY23E,” the note said.
 

Bandhan’s gross NPA was at 10.8% of the loan book as of September 30, a jump from 8.2% a quarter ago. And then there are the restructured loans, which constitute 11% of the book.

Micro loans

The stress in the loan portfolio is coming from one particular kind of category, which the bank had named Emerging Entrepreneur Business (EEB) last year. This category is mostly microloans to groups (EEB group) and also to those customers (EEB individual) with whom the lender has had a relationship for long – since its micro finance institutions days – and those individuals have graduated to start their own ventures.

56.6% of the bank’s total loan is to the EEB Group segment. Another 9.5% was to the EEB individual segment, as at the end of September. More than two-third of its loans are to the EEB segment.

Bandhan Bank, which started operations as a commercial bank in August 2015, was converted from a micro finance institution.

Of the Rs 8,760 crore NPA, EEB’s contribution was Rs 7,330 crore – almost 84%.

A report from ICICI Securities said Bandhan Bank has underperformed in the past year as challenges pertaining to asset quality have emerged with the micro loan segment being impacted the most.

The Covid-19 pandemic has hit those who are at the bottom of the pyramid – like the EEB segment of Bandhan. Hence, higher stress from such a segment is not surprising.

Analysts are hopeful of a faster recovery from its micro loans portfolio as the economic activity is gaining momentum. However, there is a word of caution.

“…borrowers’ ability to restart payment once economic activity is back to normalcy is quite high, which results in a faster recovery in this portfolio related to other lending products,” Kotak Securities said in a note.

“However, the impact of Covid has been quite severe for the bank… There is likely to be improvement from here but it is likely to be a lot more gradual and we don’t see provisions reversing in the near term as the stress levels are still high in the MFI portfolio,” Kotak Securities said while observing 20% of the MFI book is under special mention accounts (SMA), meaning, payments are not regular.

Of total NPA customers, 66% are part paying while 65% of restructured customers are paying in partial instalments. The management expects recovery of Rs 4,500-Rs 6,000 crore by March 2022.

Concentration

Even after seven years of operations, Bandhan’s concentration on micro loans remains high. The micro loan portfolio was 86% of the total book at the end of March 2018, which has come down to 56%, and 66% if EEB Group is considered.

The decline in the share of micro loans is mainly due to the acquisition of Gruh Finance – a mortgage lender – in Oct-Dec, 2019. The acquisition, which added 25% of its loan book, resulted in the micro loan share of the total book coming down to 64.3%, from 86%. The home loan portfolio has not grown over the last one year.

Analysts said the lender is looking to diversify the loan book but the process has been slow. Non-micro loans are less margin accretive.

“The bank is looking to diversify its loan book but the progress has been quite slow and we are mindful of the fact that diversification is not an easy exercise given the higher credit costs and operating expenses that it entails,” the Kotak Securities' note said.

There is geographical concentration also. Around 80% of its micro-banking exposures are in eastern and north eastern part of the country.

Six years since its inception as a universal bank – the licensing of such entities is few and far between – Bandhan Bank still looks to diversify – both on who to give loans and where to.