Bandhan Bank, the microfinance institution-turned-commercial bank set up by Chandra Shekhar Ghosh, reported a largely good set of numbers in its quarterly business update on Monday. The bank has reported a healthy mix of deposits and advance growth.
Total deposits grew 37 per cent on a Y-O-Y basis and advances rose 21 percent. On a quarter-on-quarter basis (Q-O-Q) also, business has grown well -- loans were up 8 per cent, while deposits rose 10 per cent. The ratio of CASA, the cheaper deposits, to overall deposits grew to 43 per cent from 37 per cent. There is an improvement in ratio of retail deposits to total deposits as well.
Yet, investors need to watch out for Bandhan's asset quality.
The hit on credit culture in Assam following a controversial State law is likely to reflect on Bandhan’s books eventually, although collection efficiency looks good as of now. Collection Efficiency improved to 95 per cent in the micro credit vertical for March 2021 from 92 per cent in December 2020, going by the bank's update.
In a note, brokerage firm Macquarie have raised questions on the improved collection efficiency numbers in the Q4 business update, hinting that it could be due to large write offs during the quarter. Investors should look at provisioning and write off figures when the bank reports detailed Q4 numbers, the brokerage said.
“The situation in Assam (with both major political parties continuing to promise loan waivers) have not suddenly and dramatically improved,” said Macquarie.
“In our view, if the bank has taken large write-offs from the balance sheet in Jan-Feb 2021, then CE for the month of March will look optically better, automatically. Hence we need to look at the nuances of write-offs and absolute value of collections when the bank reports the detailed Q4 results,” Macquarie said.
Pressure in the East
There is lot of uncertainty for lenders in Assam, which could spill over to the neighbouring markets as well. A recent law enacted by the Assam government also threatens the MFI industry in the State. The Assam Microfinance Institutions (Regulation of Moneylending) Bill, 2020, has put MFIs operating in the State in a tough spot. The provisions in the law include mandatory registration of MFIs within 30 days and collection of dues only at gram panchayat offices or at designated public places. The impact will be visible on commercial banks with a high concentration of microcredit in the state.
According to P Satish, Executive Director of Sa-Dhan, a lobby for microlenders, banks rather than MFIs have a bigger share of the market in Assam. “Of the Rs 12,000 crore outstanding, just about Rs 2,000 crore is with pure MFIs. Banks such as Bandhan Bank, HDFC Bank and small finance banks together had around Rs 7,000 crore in loan exposure at the end of September 2020. Bandhan Bank has the biggest share,” Satish said this January. These numbers may have changed since then.
“Amid concerns around the asset quality due to waiver announcements in Assam and elections in Assam/WB, the bank has reported slightly better overall collections... We seek more clarity on collection efficiency specifically in Assam/WB,” said Emkay Global in a note on Tuesday.
Local politicians are adding to the worsening business situation with promises of loan waivers. Recently, a minister in Assam has promised to waive loans given by Bandhan Bank and microfinance lenders in the State saying the government would return the money to lenders.
“Bandhan Bank & Micro Finance loans to people will be returned by Govt (Sic),” said Himanta Biswa Sarma, a Minister in the Assam government, in a Tweet on March 29. Bandhan Bank has around 55-60 percent share in Assam’s microfinance market.
Assam is a major market for microfinance institutions (MFIs) in the North East. Other companies with exposure in Assam include Arohan Financial Services, Ujjivan Financial Services and Satin Creditcare.
Earlier, in its poll manifesto, the Bharatiya Janata Party (BJP) had said that if it comes to power in the State, it would help poor women repay their microfinance loans besides bringing in stringent laws to prevent public humiliation of MFI borrowers during loan recoveries. But now, the minister has promised the waiver will be applicable to all borrowers.
Analysts have lauded Bandhan's efforts to diversify its book from the core microfinance business. Microcredit continues to be over 60 per cent of the total loan book going by the latest numbers available. But, the bank has been trying to diversify to cut the risk from over-concentration on tiny loans. "We like Bandhan's strategy to diversify the asset portfolio away from MFI (product as well as geography-wise) in the wake of rising adverse asset quality events while creating strong provisioning/capital buffers," said the Emkay note.
But, it's not just local factors that are weighing on Bandhan Bank. A resurgence in Covid cases, too, continues to threaten the asset quality of banks. There has been a significant rise in fresh Covid cases across major States, which could result in yet another NPA (non-performing asset) spike. Bandhan, too, needs to watch out for the fresh risks on the asset quality front.