Analysis| Bandhan Bank Q1: With 64% book in micro loans, lender walks a cautious path; Collections pick up but COVID holds the key

Management commentary from Bandhan Bank post the first quarter results pointed to two key aspects—heightened caution on the still uncertain COVID-19 scenario and a notable improvement in collection figures with respect to microcredit borrowers.

The bank has beefed up COVID caution making an additional provision of Rs 750 crore on standard assets in the first quarter. Together with the amount it has set aside in the past, the bank has a total COVID provision of Rs 1769 crore, mainly to cover the risks in the Micro banking portfolio.

The message here is clear: Ghosh and his team expect some pain on the asset quality going ahead and doesn’t want to lower the guard. This is a prudent stance largely in line with what the Reserve Bank of India's communication to banks to prepare for bad times.

According to Chandrashekhar Ghosh, managing director and CEO of Bandhan Bank, collections have picked up significantly in the first quarter. While 73 per cent of the microcredit customers are now paying back, about 76 per cent of the overall borrowers have resumed their repayments as against mere 29 per cent in April.

This also means that the number of borrowers who have opted for the moratorium facility in the second round (June-August) is far less compared to the first round (March-May). Bandhan’s collections had slowed to a trickle at one point during the lockdown as lockdown impacted all activities.

According to the bank, around 95 per cent of Bandhan’s microloans book comprises borrowers engaged in essential livelihood activities such as agriculture and allied activities, manufacturing, food processing and small retail, rural transportation, and manufacturing. These segments are relatively less impacted by Covid-19 related disruptions and that is positive for Bandhan Bank’s asset quality.

The high provisions impacted the bottom line, which is logical. In fact, most private banks have stepped up advance provisions to cushion the COVID shock beginning the fourth quarter. Axis Bank provided Rs 3,000 crore for COVID while Kotak Mahindra set aside Rs 650 crore in Q4 and ICICI Bank provided Rs2725 crore in the fourth quarter.

Bandhan’s approach is in line with the general industry. During a call with the management post the announcement of the results, Ghosh said he expects things to normalize by September-October. But, at this stage, that is, at best, a hope. There is no certainty on how the COVID situation will pan out. The spread of the virus infection is yet to peak in India according to experts.

The bank said it has already undertaken an assessment of the Covid-19 impact on the books and decided on the provision amount according to the findings of the exercise. According to Ghosh, the bank may see about 3-5 per cent of the loans turning bad on account of the COVID crisis. Currently, the gross NPAs of the bank stands at 1.43 per cent, a tad less compared to the March number.

Going ahead, what needs to watch out is whether Ghosh’s assumptions on asset quality proves right amid COVID uncertainty. Bandhan’s big bet is microcredit business. Out of its total customer base of 20.31 million, 15.46 million are micro banking customers. Out of the total loan book of Rs 74,300 crores, Rs 47,500 crore or around 64 per cent is microloans. This includes individual loan portfolio amounting to Rs 2200 crore.

In other words, microcredit continues to dominate the overall loan book. Needless to say, the performance of this segment is key going ahead.