De-risking loan portfolio likely a top priority for new Bandhan CEO

Partha Pratim Sengupta, who will be taking charge as the MD & CEO of Bandhan Bank in early November, has his task cut out.

The Kolkata-based lender, which converted itself from a microfinance institution to a universal bank, is in its 10th year of operation. The bank was able to cut down the share of the micro loan book over these years. However, micro loans still account for around 50 per cent of its loan book. At Rs 61,910 crore, Bandhan’s micro loan book is one of the largest among Indian banks.

One of the key priorities for Sengupta will be to engineer a business transformation while taking all stakeholders into confidence. The most important of these is, of course, the regulator. According to bankers, the Reserve Bank of India’s discomfort with banks doing micro loans was evident from last November's circular on risk weights.

While increasing risk weights on consumer loans, RBI exempted non-banking financial companies (NBFCs) from higher risk weights for loans to microfinance customers. Banks, however, were asked to increase the risk weight for their micro loans.

“Bandhan has to lower the share of the micro loans and increase the share of secured loans. While doing so, it needs to maintain healthy margins and return on assets,” said a senior banker.

The bank has been maintaining a net interest margin of 7.6 per cent in both quarters of FY25 and Q4 of FY24. It reported a return on assets of 2.5 per cent in Q1 of FY25 compared to 0.1 per cent in the preceding quarter and 1.9 per cent in the year-ago period.

“Clarity on leadership should get the focus back on the bank’s fundamentals and strategic direction going forward,” JM Financial said in a note.

“While microfinance as a space remains under asset quality pressure, we believe that Bandhan Bank has grown meaningfully slower than the rest of the industry in this cycle, which should mitigate incremental stress,” it said.

The top post at Bandhan fell vacant after a surprise retirement announcement by its founder, Chandra Shekhar Ghosh. Sengupta was a deputy managing director and chief credit officer at State Bank of India and also MD & CEO at Indian Overseas Bank. A banker with nearly four decades of experience, Sengupta served as chief general manager, SBI Kolkata Circle, from 2016 to 2018, covering West Bengal, Sikkim, and the Union Territory of Andaman and Nicobar Islands.

“Sengupta’s experience during his tenure at SBI Kolkata Circle will prove beneficial for Bandhan. However, we need to get visibility of future strategy for the bank and further changes in senior leadership, if any,” Axis Capital said in a report.

Bandhan Bank had appointed two executive directors – Ratan Kumar Kesh in March 2023 and Rajinder Kumar Babbar in January 2024.

As the bank lowers its share of the micro loan business, a related challenge could emerge around human resources. At present, Bandhan has over 77,500 employees, of whom around 45,000 cater to the microfinance business. Microfinance business does not require a highly skilled workforce. As the share of that business declines, re-skilling and up-skilling those staff for other lines of business could be crucial.

At the same time, Sengupta inherits a bank in much better shape than it was a few years ago, in the aftermath of the Covid-19 pandemic, which adversely impacted the microfinance sector.

“Bandhan Bank had seen high NPL formation over the past two years, following which it had tightened its credit screens. We feel that the asset quality of the bank is likely to perform much better than other microfinance institution (MFI) lenders, notwithstanding some uptick in stress in coming quarters arising from broader issues in the microfinance environment,” Jefferies said in a note.

Last week, another major overhang was cleared with the Credit Guarantee Fund for Micro Units (CGFMU) settlement claim showing no negative implications for the bank. The National Credit Guarantee Trustee Company will pay Rs 314.68 crore more to the bank, in addition to the Rs 916 crore it had paid in the first tranche last year. Separately, the bank had also recovered Rs 228 crore from the written-off accounts that were part of this claim, and it will get to keep this recovered amount in addition to the claim pay-out from the NCGTC. Thus, the bank will recognise a total amount of Rs 543 crore as part of other income in its profit and loss statement.

Some other parameters of Bandhan Bank are also healthy. The bank’s capital adequacy ratio was 15 per cent as of the end of June. Deposit mobilisation, which recorded 22.8 per cent year-on-year growth, was higher than credit growth. The bank also has 6,297 banking outlets, of which 4,597 are banking units – which could be converted into branches in the future.

Given some of these solid fundamentals, there are opportunities for Bandhan to leap into the next stage of growth. Maintaining a balance between growth and stability, with strong governance standards, could be the top priority for the new CEO.