Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA/Negative/CRISIL A1+' ratings on the debt instruments of Bandhan Bank Limited (Bandhan).

 

The continuation of negative outlook reflects longer-than-anticipated recovery time in the bank’s asset quality and profitability to restore to pre-Covid levels. While both these parameters have improved over the past 2-4 quarters, the traction is slower than expected.

 

The rating remains driven by Bandhan's strong market position in the micro loan segment with gradual diversification into secured asset classes, robust capitalisation and healthy resource profile supported by its retail deposit franchise. These strengths, however, are partially offset by slower than anticipated traction in asset quality, geographical concentration in operations and exposure to local socio-political risks inherent to the micro loan business along with modest credit profile of borrowers.

 

The bank’s gross and net non-performing assets (GNPA and NNPA) reduced to 4.9% and 1.2%, respectively, as on March 31, 2023, from 6.5% and 1.7%, respectively, a year earlier. This reduction was a factor of gradual improvement in recoveries with increasing number of paying customers and, advanced provisioning and write offs by the bank. While this marks an improvement over last fiscal, the asset quality is still not at par with the bank’s pre-Covid level of GNPAs of sub 3%. Correspondingly, return on managed assets (RoMA) corrected from 0.1% for fiscal 2022 to 1.5% for fiscal 2023 driven by reduction in credit costs. However, in comparison to the bank’s pre-Covid profitability of >3%, there is further scope of improvement. Over the near to medium term, the bank’s ability to restore its asset quality and earnings to pre-pandemic levels remains a monitorable.

 

In the microfinance portfolio (called as Emerging Entrepreneur Business loans [EEB]), monthly collection efficiency in West Bengal and Assam (key geographies accounting for ~60% of the EEB portfolio), for March 2023, was 99% and 97%, respectively.

 

CRISIL Ratings has also taken note of the announcement made by Bandhan dated July 3, 2023 regarding the resignation of its officiating Chief Financial Officer.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of Bandhan.

Key Rating Drivers & Detailed Description

Strengths:

* Strong market position in the micro loan segment with gradual diversification into secured asset classes

Over fiscal 2023, Bandhan’s gross advances increased by 11% to reach Rs 1,09,122 crore as on March 31, 2023. The bank has a competitive advantage of reach and local knowledge in the microfinance sector, especially in East and North-East India, which accounted for ~35% of the overall loan portfolio and 67% of the EEB portfolio as on March 31, 2023. Low credit penetration in the east and northeastern belt offers a huge untapped market potential and the bank’s long-term association with its customers has strengthened its standing in the region.

 

In terms of product suite, diversity in the loan portfolio has improved after amalgamation with Gruh, with increased share of Gruh's secured asset classes such as housing loans and loans against property (LAP). This portfolio accounted for about 24% of Bandhan's total loan portfolio as of March 31, 2023. As Gruh primarily extends housing loans to individuals in rural and semi-urban areas and belonging to the low-income group, Bandhan shall continue to benefit from strong long-term growth potential in the affordable housing segment driven by incentives offered by the Government of India - to promote faster development of the affordable housing segment. CRISIL Ratings believes Bandhan will continue to benefit from the expected growth potential in both, microfinance and affordable housing finance segments and maintain healthy growth over the medium term. The bank’s ability to sustainably scale its secured loan portfolio remains a key monitorable.

 

* Strong financial risk profile supported by robust capital position; recovery in internal accruals to pre-pandemic levels remains a monitorable

The bank has strengthened its networth along with scale of operations, maintaining adequate capitalisation over time. Reported networth of Rs 19,584 crore and tier I capital adequacy ratio (CAR) of 18.7% as on March 31, 2023, are a result of timely capital raising and healthy internal accrual. The tier I CAR fell to less than 20% in the second half of fiscal 2022 owing to loss in the second quarter of the fiscal. Over the years, the bank has raised capital of over Rs 5,000 crore through various routes such as preferential allotment and rights issue from mutual funds, foreign investors and domestic corporates. Reported overall CAR stood at 19.8% as on March 31, 2023. Accumulated networth was 16 times the bank's reported NNPAs as on the same date.

 

Bandhan's pre-provision profitability remained comfortable, albeit moderated to 4.8% in fiscal 2023 from 6.3% in fiscal 2022 because of compression owing to interest reversals. Moreover, after absorbing credit cost of 2.8% in fiscal 2023 and 6.2% in fiscal 2022, RoMA stood at 1.5% and 0.1%, respectively, as against more than 3% on average in the previous fiscals. While the bank has provided for most of its stressed assets and provisioning requirement is unlikely to be high, any significant deviation in earnings could be a rating trigger.

 

* Healthy resource profile supported by a large retail deposit franchise

Bandhan has a granular deposit profile with a large share of retail deposits (current account and savings account [CASA] + retail term deposits), which stood at 71% of the total deposit base as on March 31, 2023. While microfinance borrowers are the largest constituents of the bank's customer base, they accounted for a small share of the deposit base as of March 31, 2023. The bank's CASA deposits have grown steadily over the years driven by increase in the share of savings accounts with ticket size above Rs 1 lakh. The share of CASA deposits stood at 39% of total deposits as on March 31, 2023, compared with 41% a year earlier. The bank was erstwhile offering a higher rate of interest than many other large private banks for both savings account balance of more than Rs 1 lakh as well as retail term deposits of more than six months, leading to higher cost of funds.

 

Weaknesses

* Slower than anticipated recovery in asset quality

While most of the stressed portfolio has been provided for, with provision coverage ratio (PCR) on NPA remaining above 70%, GNPAs remain higher than pre-Covid levels. The bank’s asset quality has remained vulnerable ever since the pandemic. Apart from the lockdown, ground-level challenges in Assam and West Bengal resulted in NPAs rising to 7.12% as on December 31,2020 and remaining elevated at 6.8% as on March 31, 2021.  As on March 31, 2020, and March 31, 2021, 43% and 45%, respectively, of the bank’s gross portfolio was housed in Assam and West Bengal cumulatively. In fiscal 2021, these territories faced multiple socio-political issues including political parties promising microfinance loan waivers to borrowers. Additionally, elections in West Bengal further aggravated the issue. Thereafter, owing to increased resolution and write-off of Rs 6,071 crore in fiscal 2023, GNPAs and NNPAs fell to 4.9% and 1.2%, respectively, as on March 31, 2023, from 6.5% and 1.7%, respectively, a year earlier. Over this period, collection efficiency also stabilised.

 

Within the EEB portfolio, the bank's total stressed asset portfolio was reported to be Rs 5,500 crore which was either NPA, restructured or in SMA and this formed ~14% of the total EEB book. The bank has decided to avail credit guarantee scheme for microunits (CGSFMU) provided by the central government, wherein the first 3% loss will be borne by the lender and for any loss beyond that, only 25% is to be borne by the lender and the balance by the government. The bank received Rs 917 crore as part of CGFMU in December 2022 and is expected to receive another Rs 1,700 crore as recovery in the near term (Rs 1,100 crore in the first half of fiscal 2024 and Rs 600 crore in fiscal 2025).

 

Over the medium term, Bandhan’s asset quality is expected to remain monitorable owing to uncertainties in the market and the swiftness with which credit discipline is reinstated and maintained in the regions to which Bandhan caters. Incrementally, the pace and magnitude of revival in collection and the impact of the Assam loan relief measure on other politically sensitive states remains of essence.

 

* Regional concentration and exposure to local socio-political risks inherent in the micro loan business

Bandhan has strong presence in East and North-East India, in the micro loans business, which housed around 67% of its portfolio as on March 31, 2023. The bank's significant presence in these regions exposes it to geographical concentration risk inherent to the segment. As of March 31, 2023, around 36% of its microfinance loan exposure, which is the largest loan portfolio, was in West Bengal alone. The top three states (including UP and Bihar) constitute nearly 60% of its micro loan book whereas concentration within the top three states (West Bengal, Maharashtra and Bihar) in the overall portfolio was over 47%.

 

The microfinance sector has witnessed three major disruptive events in the past decade. The first was the Andhra crisis in 2010, second was demonetisation in 2016 and most recently, the pandemic in March 2020. In addition, the sector has faced issues of varying intensity in several geographies. Promulgation of the ordinance on microfinance institutions (MFIs) by the government of Andhra Pradesh in 2010 demonstrated their vulnerability to regulatory and legislative risks. The ordinance triggered a chain of events that adversely affected the business models of MFIs by impairing their growth, asset quality, profitability and solvency. Similarly, the sector witnessed high level of delinquencies post demonetisation and subsequent socio-political events. November 2019 onwards, the sector has been facing challenges in Assam, largely owing to borrower conflicts fanned by political influences. Outbreak of the pandemic followed by natural calamities such as Amphan, protests against the Citizenship bill, and introduction of microfinance loan waiver under the Assam Budget further stalled the recovery.

 

While Bandhan remained largely immune to most sector-level disruptions in the past, continued unrest in one of its core territories of Assam over the past 10-14 quarters has impacted the bank’s asset quality. As a result, the bank has made write-offs in fiscals 2021, 2022 and 2023. The situation in the state, though stable, remains vulnerable and continues to have a bearing on the overall asset quality and profitability. While the bank has made attempts to reduce its exposure to these regions, this geographical belt accounts for more than 50% of its asset base. Ability to diversify and de-risk operations from such regional disturbances and increasing competition will be a key monitorable.

 

* Modest credit risk profiles of borrowers

A significant portion of the portfolio comprises microfinance loans to clients with modest credit risk profiles and limited access to formal credit. For instance, in the individual loan and micro and small enterprise loans, typical borrowers are vegetable vendors, small machine and lathe owners, tea shops, provision stores, small fabrication units, wastepaper recycling units, tailors and power looms.

 

Owing to low competition and longstanding presence in East and North-East India, the bank captured a large chunk of the market early on and most of the borrowers have been associated with it for over a decade. Many borrowers have graduated across cycles and credit profiles and are now eligible for bigger ticket loans. This is reflected in the fact that majority of the existing customers are in higher loan cycles (4-19 years) having an average disbursement of over Rs ~70,000. Besides, certain customers (erstwhile microfinance borrowers) are availing micro business loans with ticket size of Rs 1-2 lakh and are covered under the microbanking vertical. Consequently, the average ticket size is high as per MFI lending standards.

Nevertheless, these borrowers belong to semi-skilled, self-employed category and their income streams are volatile and dependent on the local economy.

Liquidity: Strong

Bandhan's liquidity coverage ratio (LCR) was healthy at 134.6% (average) in fiscal 2023, as against a regulatory stipulation of 100%. On the overall deposits front, the average ticket size for savings accounts has increased over the past 2-4 quarters and the same remains a monitorable. However, in the overall deposit base, the share of retail deposits (< Rs 2 crore) remains high above 65%. In addition to having excess statutory liquidity ratio (SLR), the bank has tied up refinance limits and has access to the inter-bank participation certificate (IBPC) market owing to its high priority sector eligible microfinance portfolio.

 

Environment, social and governance (ESG) profile

CRISIL Ratings believes Bandhan’s ESG profile supports its already strong credit risk profile.

 

The ESG profile of financial institutions factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on environment and other sustainability-related factors.

 

Bandhan Bank has demonstrated an ongoing focus on strengthening various aspects of its ESG profile.

 

Key ESG highlights:

 

• As part of its ESG strategy, the bank focuses on reducing its energy consumption and carbon footprint. To achieve this, it has installed energy-efficient technologies and promotes use of renewable energy.
• Its head office is in a gold standard green building, and it has potential to harvest 120,000 kilolitres of rainwater. The bank has planted 67,540 saplings of mangroves and done sequestration of 4,400 tonne of carbon.
• In fiscal 2021, 49 community-level reverse osmosis water treatment plants were set up, which provided 14,752 kilolitres of purified safe drinking water to 33,749 households.
• In terms of social impact, the bank has uplifted 27,444 ultra-poor women from poverty through its Targeting the Hardcore Poor (THP) programme and covered 137,854 women under a preventive health programme. It has also provided education support to 69,812 children and has skilled 8,100 youths for jobs in the organised sector.
• The bank allocates 2-2.5% of its profit for corporate social responsibility (CSR).
• In terms of gender diversity, the proportion of females in the total employee base is lower than peers.
• In terms of governance, majority of the Board comprises independent directors and the position of the Chairman and the Chief Executive Officer are separate. The bank has an investor grievance redressal cell as well.

 

There is growing importance of ESG among investors and lenders. Bandhan’s commitment to ESG will play a key role in enhancing stakeholder confidence, given high share of foreign investors as well as access to both domestic and foreign capital markets.

Outlook: Negative

CRISIL Ratings believes recovery in Bandhan’s asset quality and profitability to pre-Covid levels will be slower than anticipated.

Rating Sensitivity Factors

Upward Factors

• Significant and sustained improvement in asset quality reflected in total stressed assets (GNPAs + restructured portfolio) reducing significantly by the second half of fiscal 2024 and remaining below 3% on a steady state basis
• Revival in overall profitability evidenced by RoMA improving back to and remaining above 3% on a steady state basis

 

Downward Factors

• Prolonged recovery in asset quality and profitability to pre-covid levels
• Deterioration in overall profitability resulting in a loss and/or tier I capital adequacy ratio declining to below 15%

About the Company

Bandhan was set up in 2006 as Bandhan Financial Services Pvt Ltd (BFSL). The company was the largest NBFC-MFI in India until 2014 after which, it became the first entity to receive an in-principle universal banking license from the Reserve Bank of India.

 
Bandhan was incorporated in December 2014 as a subsidiary of Bandhan Financial Holdings Limited (BFHL), which is 100% held by BFSL. After it commenced operations in August 2015, BFSL's entire microfinance portfolio was transferred to Bandhan. The bank is headquartered in Kolkata and offers group-based individual lending services in the microfinance segment. In 2019, the bank acquired Gruh with the objective to diversify operations geographically and across asset classes. This facilitated the reduction in promoter shareholding to the stipulated level. It operates through a network of 5,999 branches, doorstep service centres (DSCs), and GRUH centres, spread across 34 states and union territories.

Any other information: Not applicable