Bandhan Bank has reported a muted quarterly business update for the April-June period. Its loan book grew at a slower pace compared to the previous year and shrunk against the March quarter. Deposits, too, have shrunk marginally on a quarter-on-quarter basis. The numbers are provisional though.
Let's look at the numbers. Total loans and advances shrunk by eight percent in June quarter to Rs 80,128 crore compared with Rs 87,043 crore in the March quarter. Total deposits contracted by a percent on a QoQ basis to Rs 77,336 crore from Rs 77,972 crore. On a year-on-year (YoY) basis, however, loans and deposits grew by eight percent and 28 percent, respectively.
Within deposits, current, savings account deposits (CASA) shrunk by two percent on a QoQ basis but showed a growth of 48 percent year-on-year.
Why was the performance under pressure in the June quarter? One explanation to which analysts agree is Covid would have had an impact on fresh business acquisition and collection efficiency in the small borrower segment. This is the segment that still forms a substantial chunk of Bandhan's business under the emerging entrepreneur business category.
Bandhan transformed into a bank from a microlending institution founded by Chandrashekhar Ghosh. It knows the microlending business well but Covid has been a major challenge.
The second Covid wave has hit livelihood across the country. For Bandhan Bank, apart from Covid, local factors, too, have added to its set of woes. The microfinance bill promulgated by the Assam government and calls for loan waiver from local politicians considerably impacted the collection efficiency of the lender in the state.
Bandhan is the largest lender in Assam and commands a major share in the business of the region. It was logical that the regional woes will take a toll on the lender.
The question is how long the troubles will continue?
In the June quarter, too, Assam issues would have contributed to Bandhan's problem list. The collection efficiency of the bank for June 2021 was around 80 percent, the update shows. Within that, the collection efficiency of emerging entrepreneurs business (EEB), which included microloans, stood at 72 percent and non-micro loans around 96 percent, the bank said.
For Bandhan, this is a significant customer base. At the end of March 2021, the share of EEB loans stood at 59.4 percent of the total loans followed by mortgages (23.2 percent). But, the announcement of a relief scheme for borrowers by the Assam government can help lenders, including Bandhan Bank, analysts said.
The Assam government will give up to Rs 8,500 crore —70 percent of state MFI loans—to bail out borrowers. The government proposes to provide support to 90 percent of the 2.6 million MFI borrowers in the state through a cash grant of up to Rs 25,000. The grant will be available to borrowers where (1) total borrowing is up to Rs 1,25,000, (2) there are not more than three lenders and (3) the borrower was standard up to December 2020, the government said.
"In our view, the announcement of loan relief scheme for MFI borrowers in Assam which incentivises credit discipline/repayment rather than a blanket waiver should be largely positive for Bandhan, followed by Ujjivan, once it is cleared in the upcoming budget session this month," said Anand Dama, an analyst at Emkay Global.
"That said, we believe asset-quality risk still persists given the pandemic-led disruptions (SMA pool at 8.6 percent of loans in Q4) and a lower contingent provision buffer (0.5 percent of AUM), which would call for a higher LLP/depressed earnings in H1," Dama said.
The likelihood of Covid restrictions easing in the Northeast, too, may help prospects of banks, analysts said. "Lockdowns are expected to ease in the NE within a month or so, which coupled with clarity on the Assam loan relief scheme, should gradually lead to better collection efficiency. Overall, non-EEB portfolio collection efficiency remains healthy at 96 percent," Dama said.
Asset quality trends need to be watched closely.
In Q4, there was a write-off of Rs 1,930 crore, of which a substantial portion was microloans. If not for this write-off, the gross non-performing assets (NPAs) would have been even higher.
As such, bad loan numbers continued to be high for Bandhan in the fourth quarter at 6.8 percent (GNPA) compared with 7.1 percent in the previous quarter (pro forma 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 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 looked good for the bank in Q4.
In Q1, FY22, the final numbers will give us a clearer picture of asset quality.
Other pain points
While loans are one part, pressure is also seen on deposit side as well, especially on cheaper CASA deposits. Within deposits, CASA shrunk by two percent on a QoQ basis but showed a growth of 48 percent on a YoY basis.
Retail deposits, however, showed strong growth in the quarter, growing by 4 percent on a QoQ basis and 36 percent on a YoY basis. Bulk deposits (larger deposits), however, shrunk by 19 percent sequentially and by one percent on YoY basis.
Ratio of retail to total deposits improved to 83 percent in the June quarter compared with 79 percent in the preceding quarter. A jump in share of retail deposits is seen as a healthy sign for a bank. CASA ratio, however, declined to 42.9 percent from 43.4 percent sequentially.
On a YoY basis, the CASA ratio improved from 37.1 percent in the year-ago period. But, according to Dama, deposits are now 96 percent of AUM against 82 percent in Q1FY21, leading to a lower cost of funds and thus structurally should be a long-term positive for the net interest margin.
The Covid trajectory will prove to be decisive for Bandhan. A third wave would be bad for the banking sector as a whole. The tapering of the second wave, coupled with an aggressive vaccination push, has brightened near-term prospects for the Indian economy, the Reserve Bank of India bulletin for the month said on July 15. One needs to wait and see how the Covid scenario unfolds.