The movement of bad loans in Bandhan Bank’s book during the third quarter has come as a surprise. If one reads between the lines, there is stress developing due to COVID and local factors. Going by the reported numbers, the Gross NPAs (non-performing assets) have declined in the December quarter to 1.1 percent from 1.18 percent in the September quarter and net NPAs declined to 0.26 percent from 0.36 percent.
But these figures don’t tell us the whole story. If one excludes the impact of a Supreme Court order which barred banks from tagging accounts that are standard as on August 31 as NPAs, the proforma gross NPA ratio would have been 7. 12 percent. In other words, there is a huge gap between proforma GNPAs and reported GNPAs.
The bank’s chief financial officer Sunil Samdani has clarified that post-COVID many customers are making part payments. “That doesn’t mean it’s a loss given default situation. It might take around three months more for these accounts to be regularised (Sic),” the CFO has said.
But, for now, the GNPA levels have shot up and that could be a point of worry for Bandhan’s investors. Despite the guidance from the bank that collections will improve going ahead, one needs to closely watch the asset quality risks emanating from multiple factors.
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.
Bandhan Bank has witnessed a dip in its collection efficiency in Assam where a law has been promulgated to control the operations of microlenders. 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. COVID isn’t the only challenge for the microlender-turned-commercial bank.
On the positive side, the bank has beefed up provisions and has taken extra caution against the asset quality risk. In addition to the provision of Rs 1,740 crore made up to September 30, 2020, during the current quarter the bank has made further provision of Rs 1,000 crore against the potential impact of COVID-19. With this, the aggregate additional provisions held by the bank amounts to Rs2,74,0 crore, it has said.
Higher provisions have hurt the profits in December quarter. Profits declined by 13.5 percent on a year-on-year basis to Rs 632 crore on a year-on-year basis. But, as mentioned above, the higher provisions make sense considering the risks on the asset quality front not only on account of COVID but also local factors.