Analysts were expecting stress signals on Bandhan Bank’s books in Q4 primarily from the Assam mess. The numbers reported by the bank for the January-March quarter confirm those apprehensions. There was a write-off of Rs 1,930 crore in the fourth quarter, of which a substantial portion is microloans. If not for this write-off, the gross non-performing assets (NPAs) would have been even higher.
As such, the bad loan numbers continue to be high in this quarter at 6.8 per cent (GNPA) compared with 7.1 per cent in the previous quarter (proforma basis). Proforma refers to the actual bad loans including the part of loans impacted by an earlier Supreme Court order. The net non-performing assets have increased to 3.5 percent from 2.4 percent in the previous quarter. The provision coverage ratio (PCR) of the bank has fallen from 66.2 percent in Q3FY21 to 48.5 percent in Q4. None of these numbers looks good for the bank in Q4.
What has caused the large write-offs and higher NPAs? One of the major pain points in the fourth quarter was Assam where a local law on microlending operations is wreaking havoc in some or other form. The law doesn’t really target banks but MFIs. But this legislation was bound to have an impact on banks as well as credit culture and repayment behaviour typically takes a hit during such events and associated political risks.
Bandhan has to be watchful on the asset quality front going ahead, especially till clarity emerges on the Assam law. Bandhan Bank is the biggest lender in the state and collection efficiency there has fallen from 88 percent to 83 percent in the March quarter compared with the December quarter, according to reported numbers. Provisions have nearly doubled in Q4 to Rs 1,594 crore from the year-ago quarter and against Rs 1,068 crore in Q3.
“Well, we all knew Bandhan Bank's asset quality will be hit hard given its presence in West Bengal and Assam. Asset quality stress will remain elevated in the first quarter as well and more provisioning will be needed on the GNPA,” said Jyoti Roy, senior analyst at Angel Broking. “PCR dropped from 66.2 percent in Q3 of FY21 to 48.5 percent in Q4. So the bank will need to shore up the PCR,” Roy said.
The five-year-old bank derives its strength from microcredit customers where it has a loyal customer base.
The bank doesn’t call it a microcredit portfolio but Emerging Entrepreneurs Business (EEB). Besides pure microcredit, this chunk also includes micro home loans and other micro-business loans. At the end of the December quarter, the EEB loans constitute 60 percent of the bank, largely the same as in the previous quarter. The other two large chunks include mortgage loans and commercial banking loans.
At the end of the Q4, over 59 percent of the Bandhan's book is microloans or EEB loans. This portfolio needs to be watched closely. There is healthy growth in advances and deposits. Total advances grew by 21.2 percent YOY and 8.5 percent QoQ. Total deposits increased by 36.6 percent YOY and 9.5 percent QoQ. These numbers are good compared with other mid-sized banks.
“Their growth has been higher than industry; MFI being an unsecured product, there is always a risk, especially from COVID. I expect stress on asset quality going ahead. Some mid-sized banks are more at risk compared with larger banks,” said Siddharth Purohit, an analyst at SMC Global Securities.
For Bandhan, Assam remains a major issue. But that alone won't be the bigger worry for CEO Chandra Shekhar Ghosh and his team. The COVID second wave can be disastrous for the banking sector and Bandhan is not an exception. Bandhan has provided well for the COVID shock but the unpredictable nature of the pandemic in this round is a major risk factor. The consensus among analysts is that Bandhan could see stress at an elevated level at least in the next two quarters.