Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the non convertible debentures and certificate of deposits of Bandhan Bank Limited (Bandhan) at 'CRISIL AA/Negative/CRISIL A1+'.

 

CRISIL Ratings has withdrawn Rs 492.5 crore of non-convertible debentures (See Annexure 'Details of Rating Withdrawn' for details) as the same has been repaid/unutilised as on date. CRISIL Ratings has reaffirmed and withdrawn its rating on Fixed Deposit programme at the client’s request. The Withdrawal is in line with CRISIL Ratings' withdrawal policy. (See Annexure 'Details of Rating Withdrawn' for details)

 

The negative outlook factors in continued pressure on the bank’s asset quality in the key geographies for both microfinance and non-microfinance portfolio - primarily comprising mortgages/ housing loans.

 

On March 31, 2022, the bank’s gross and net non-performing assets (GNPA and NNPA) have reduced to 6.5% and 1.7%, respectively from 8.2% and 3.3% on June 30, 2021, respectively. This reduction was a factor of gradual improvement in recoveries with increasing number of paying customers and, advanced provisioning and write offs done by the bank in the second half of fiscal 2022. On March 31, 2022, the bank had a restructured portfolio of Rs 6449 crore. As part of the restructuring scheme, the bank has extended a moratorium of 3-9 months to the restructured accounts and the performance of this portfolio will be visible only over time. CRISIL Ratings notes that while delinquencies have started to decline at a gradual pace, a large proportion of borrowers in EEB portfolio continue to make part payments. The ability to significantly increase the resolution rates across delinquency buckets will remain critical in the medium term.

 

In the microfinance portfolio (called as Emerging Entrepreneur Business loans [EEB]), monthly collection efficiency in West Bengal and Assam (two key geographies contributing to ~57% of EEB portfolio), for March 2022, was 99% and 98%, respectively.

 

CRISIL Ratings also noted that the bank is in the process of availing the credit guarantee schemes (Credit Guarantee fund for Micro Units [CGFMU] and Assam Micro Finance Incentive and Relief Scheme [AMFIRS]). 30 – 35% of the bank’s gross advances are expected to be cumulatively eligible for both these guarantee schemes with some degree of overlap in the Assam portfolio. The timeline for implementation of these schemes and the benefits that accrue to the bank will remain key monitorables.

 

Bandhan’s asset quality metrics in the mortgages book were also modest. Here too, while the 90+dpd is estimated at 3.4% as on March 31, 2022, the bank’s restructured portfolio was Rs 1010 crore (~5% of advances). Hence, the overall stressed assets for mortgages portfolio was high at ~8.5%.

 

While the bank’s operating profitability remains healthy, as a consequence to elevated stressed assets - credit costs for fiscal 2022 spiked to 6.2% after remaining sub 2% for the fiscals prior to 2020. Return on managed assets (RoMA) for the year stood at a low 0.1% as compared to its steady state level of >3.5% pre-Covid.

 

Over the near to medium term, the proportion of stressed assets (GNPA, restructured portfolio and SMA) is expected to remain elevated and the resulting credit cost requirements thereof, would lead to overall profitability remaining constrained.

 

The rating continues to reflect Bandhan's strong market position in the micro loan segment, expected benefits from portfolio diversification driven by amalgamation with Gruh Finance (an erstwhile subsidiary of Housing Development Finance Corporation Ltd), strong pre-provision operating profitability, robust capitalization and a healthy resource profile supported by its retail deposit franchise.

 

These strengths however, are partially offset by geographic concentration in operations and exposure to local socio-political risks inherent in the micro loan business and, modest credit profile of borrowers

Analytical Approach

For arriving at the rating, CRISIL Ratings has evaluated the standalone business and financial risk profiles of Bandhan

Key Rating Drivers & Detailed Description

Strengths:

Strong market position in the micro loan segment; expected benefits from portfolio diversification driven by the amalgamation with Gruh

Over fiscal 2022, Bandhan’s gross advances increased by 14% to reach Rs 99,340 crore as on March 31, 2022. Unlike fiscal 2021 during which the bank extended Rs 3600 crore as top up loans, in fiscal 2022 – the quantum of top up loans was small (~Rs 100 crore). Bandhan has a competitive advantage of reach and local knowledge in the microfinance sector, especially in East and North-East India, which constituted over 40% of its overall loan portfolio and about 55% of its EEB portfolio as of March 31, 2022.  A relatively low credit penetration in the east and north eastern 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 Bandhan's loan portfolio has improved after amalgamation with Gruh, with increased share of Gruh's secured asset classes such as housing loans and loan against portfolio (LAP). This portfolio accounted for about 24% of Bandhan's total loan portfolio as of March 31, 2022. As Gruh primarily extends housing loans to individuals in rural and semi-urban areas and catering 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, once the macro environment restores to normalcy and, maintain healthy growth over the medium term.

 

Strong financial risk profile supported by robust capital position and strong operating profitability

Bandhan has strengthened its networth along with scale of operations, thereby maintaining adequate capitalisation over time. The bank’s reported networth of Rs 17,381 crore and tier I capital adequacy ratio (CAR) of 18.9% as on March 31, 2022, are a result of timely capital raising and healthy internal accrual. This metric remained over 20% over the last many years now and has declined to <20% only in the second half of fiscal 2022 due to losses reported in Q2 2022. Over the years, Bandhan has raised over Rs 5,000 crore of capital through various routes such as preferential allotment and rights issue from mutual funds, foreign investors, and domestic corporates. The reported overall CAR of 20.1% as of March 31, 2022. The accumulated networth was 11 times the bank's reported net NPAs on the same date.

 

Bandhan's pre-provision profitability, despite some compression due to interest reversals during fiscal 2021 and 2022, remained comfortable at 6.6% and 6.3% for the respective periods. And because of this, even after absorbing an increased credit cost of 3.8% for fiscal 2021 and 6.2% in fiscal 2022, the bank’s RoMA stood at 2.1% and 0.1, for the respective periods. For fiscal 2023, considering an annual credit cost of 1-2%, the bank’s RoMA is expected to range within 1.5-3.0%. Any significant deviation in these metrics could be a rating trigger. Apart from its stable net interest margins of 6.0 – 8.0%, the bank has sustained its non-interest income at above 1.5% over the last few years. As majority of the bank's portfolio is priority sector lending (PSL), it has the opportunity and ability to generate income through PSL and inter-bank participation certificates (IBPCs).

 

Healthy resource profile supported by a large retail deposit franchise

Bandhan has a granular deposit profile, with a large share of retail deposits (CASA + retail term deposits) which stood at 77.6% of the total deposit base at the end of March 31, 2022. While microfinance borrowers are the largest constituent of the bank's customer base, they accounted for a fairly small share of the deposit base as of March 31, 2022. The bank's CASA deposits have grown steadily over the years. The share of CASA deposits stood at 41.6% of total deposits as on March 31, 2022, as compared to 43.4%, a year ago. Over the last few years, this growth was driven by a gradual increase in the share of savings accounts with ticket size of > Rs 1 lakh. 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 6 months tenure. However, currently the higher interest rate is being offered only for Savings accounts where balance is more than Rs 10 lakh.

 

Weakness:

Moderation in asset quality due to successive challenges in core operational territories

Following a marginal improvement in Q4 2021, the bank’s asset quality remained modest due to the pandemic second wave, lagged post elections revival in West Bengal and political developments in the state of Assam. From 7.1% on December 31, 2020 and 6.8% on March 31, 2021, the bank’s GNPA rose to 10.8% as of September 2021 end. Apart from increased slippages in West Bengal and Assam, Maharashtra also contributed to the elevated GNPAs owing to high casualties and strict lockdown in the state.  While there was weakening across states, major part of this deterioration stemmed from high dpds in the EEB book in West Bengal and Assam. In the mortgages portfolio as well, GNPAs have remained elevated at ~4%.

 

Thereafter, owing to increased resolution and write off of Rs 2029 crore in Q4 2022, GNPA and NNPA for the bank declined to 6.5% and 1.7% as of March 31, 2022.

 

Total restructured portfolio stood at Rs 6944 crore on March 31, 2022 which forms 6.9% of the total AUM as on that date and over 80% of this portfolio pertained to microfinance/EEB loans. Collection efficiency of the EEB book for Dec 2021 stood at 160% (including ODs) increased from 129% for September 2021. For March 2022, this metric further improved to 176%.

 

In Q4 2021, the bank also wrote off Rs 1923 crore and made provisioning of over Rs 1500 crore. In fiscal 2022, another Rs 3200 crore were written off and provisions of over Rs 4000 crore were made.

 

Considering a 70% PCR on NPAs, 10% on restructured portfolio, balance provisioning on standard assets and the benefits of guarantee scheme coverage, the bank’s credit costs for fiscal 2023 are expected to range between 1-3% basis the premise of continued improvement in recoveries hereafter. The bank’s pre-provisioning profitability has remained healthy, with adequate loss absorption capacity. However, a further, higher than anticipated, surge in NPAs would mean strained the operating profitability for relatively prolonged period. And the same would remain a key rating sensitivity factor.

 

Over the near to medium term, Bandhan’s asset quality is expected to remain vulnerable to the Covid-19 and lockdown situation and, the swiftness with which credit discipline is reinstated and maintained in Assam. Incrementally, the pace and magnitude of revival in collections 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 a strong presence in East and North-East India, in the micro loan business, which houses over 52.8% of its overall loan portfolio and 70.3% of its microfinance portfolio as of March 31, 2022. The bank's significant presence in these regions exposes it to geographical concentration risk, inherent to the segment. As of March 31, 2022, about 40.5% of Bandhan's microfinance loan exposure, which is the largest loan portfolio, was in West Bengal alone. The top three states (including Assam and Bihar) constitute nearly 61.0% of its micro loan book whereas concentration within top 3 states (West Bengal, Assam and Maharshtra) in the overall portfolio was over 47.8%.

 

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, Covid-19 outbreak 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 due to borrower conflicts fanned by political influences. Outbreak of the pandemic followed by natural calamities like Amphan, protests against Citizenship bill, introduction of microfinance loan waiver under the Assam Budget; have further stalled the recovery process.

 

While Bandhan had remained largely immune to most of the sector level disruptions in the past, continued unrest in one of its core territories of Assam over the last 8-10 quarters has impacted the bank’s asset quality. Resultantly, for the first time in many years, the bank has made write offs in fiscal 2021 and 2022. The situation in the state remains vulnerable – impacting the bank’s overall asset quality and profitability. While the bank has made attempts to reduce its exposure to these challenged regions, this geographical belt still accounts for >60% of the bank’s asset base. Bandhan’s ability to diversify and de-risk operations from such regional disturbances and increasing competition, will be a key monitorable.

 

Modest credit risk profile 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, waste paper recycling units, tailors, and power looms.

 

Owing to relatively lower competition and Bandhan's long standing presence in the East and North-East India, the bank captured a fairly 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 by the bank. This is reflected from the fact that majority of the existing customers are in higher loan cycles (4-19 years) having an average disbursement of over Rs 65,000. Besides, certain customers (erstwhile microfinance borrowers) are availing micro business loans with ticket size of Rs 1-2 lakh and are covered under the micro banking vertical. Consequently, the average ticket size is high as per MFI lending standards.

Nevertheless, as these borrowers belong to the semi-skilled self-employed category and their income streams are volatile and dependent on the local economy. With the slowdown in economic activity after break out of covid-19, there has been pressure on such borrowers’ cash flows at a household level thereby restricting their repayment capability. Even after the lock down is lifted pan India, the revival in collections is expected to be phased and Bandhan’s ability to reinstate repayment discipline among its customers will be a monitorable

Liquidity: Strong

Bandhan's Liquidity Coverage Ratio (LCR) was healthy at 114.8% (average) for Q4 2022 as against a regulatory stipulation of 100%. On the overall deposits front, CRISIL has noted that the average ticket size for Savings accounts has increased over the last 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 at above 65%. In addition to having excess statutory liquidity ratio (SLR), the Bank has tied up refinance limits and also has access to the inter-bank participation certificate (IBPC) market due to its high priority sector eligible microfinance portfolio

Outlook: Negative

CRISIL Ratings believes Bandhan’s asset quality and profitability will remain under pressure over the near term to medium term

Rating Sensitivity Factors

Upward factors

• Significant and sustained improvement in asset quality reflected in total stressed assets (GNPAs + restructured portfolio) reducing significantly by June 2022 and remaining below 3% on a steady state basis and, no material increase in restructured portfolio.
• Revival in overall profitability evidenced by RoMA improving back to and remaining above 3% on a steady state basis

 

Downward factors

• Continued asset quality / collection challenges in West Bengal and other key geographies – resulting in delayed/ low recoveries.
• Lack of significant reduction in overall stressed assets from current levels.
• Deterioration in overall profitability resulting in a loss and/or tier I capital adequacy ratio declining to below 15%.

About the Company

Set up as Bandhan Financial Services Pvt. Ltd (BFSL) in 2006, BFSL 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 BFHL - which is 100% held by BFSL. After it commenced operations in August 2015, BFSL's entire microfinance portfolio was transferred to Bandhan's book. The bank is headquartered in Kolkata and offers group-based individual lending services for the microfinance business. In 2019, the bank acquired Gruh with the objective to diversify operations both geographically and across asset classes. This also facilitated the reduction in promoter shareholding to the stipulated level. It operates through a network 5590 branches, doorstep service centres (DSCs), and GRUH centres, spread across 36 states and Union Territories

Any other information: Not applicable