Bandhan Bank Accelerates Shift Away From Group Micro-Lending
Bandhan Bank Ltd. has been moving a larger share of joint liability group loans to individual loans, as it looks to become the “sole lender” to its micro-borrowers. The strategy, however, comes with its own risks at a time when income stress, particularly for self-employed borrowers, may persist.
"We saw that our sole lending percentage which used to be 70% three years ago came down to 50%, so we decided to convert all the existing relationship of our vintage borrowers (4 years or more) and become their sole lender again," Chandra Shekhar Ghosh, managing director and chief executive at the bank told BloombergQuint in a telephonic interview.
As of March 2021, the micro-lender turned banker said it had moved close to 11% of its existing microfinance group loans to personal loans, leading to a three-fold year-on-year jump in individual loans to Rs 6,650 crore. Compared to that, its group micro-lending book rose 18% to Rs 51,700 crore.
This is part of a calibrated strategy that has been playing out over the last four-five quarters. As on December 31, 2020, around 9.7% was the share of EEB (Emerging Entrepreneurs Business)-Individual within the total EEB bucket. That has become 11% as on March 31, 2021.Bandhan Bank Spokesperson
Of the total group loans converted, nearly 14% were to its borrowers in West Bengal, while nearly 11% were converted in Assam, said Ghosh.
"For us, the longest serving geography is West Bengal and Assam. Clearly, between two states we have close to 60% of our total book, so those will make the larger portion of group loan conversion," he said.
The strategy, said Ghosh, will help the bank consolidate loans of its existing customers and become their sole lender. "What it does is that it not only gives us the entire wallet share of the customer’s business, but it helps us manage their risk better."
Typically, our high vintage borrowers who have been with us for multiple loan cycles and have a good repayment record and history become eligible for being converted to EEB – Individual.Bandhan Bank Spokesperson
The strategy, however, could be a risky gamble because of its timing.
"By shifting loans from groups to individual loans, it would appear the bank is adopting a high-risk strategy at a time of acute economic distress when jobs and individual incomes are being slashed," said Hemindra Hazari, an independent banking analyst.
Besides, there is also a risk of over-leveraging a low-income and self-employed customer at a time when their incomes are among the worst-affected, said P. Satish, executive director at Sa-Dhan, an industry body comprising 225 microfinance institutions across India. "Therefore, increasing the lending limit for such borrowers holds a high risk of over-leveraging them," he said.
As of March, the average loan ticket size for a Bandhan Bank borrower stood at Rs 63,159, already higher than the industry average of Rs 33,000, as per Sa-Dhan data.
Bandhan, however, says that shifting borrowers from group lending to individual lending is not being done with a view to increase credit limit. It is being done with the view to become the sole lender to clients.
"The idea of becoming a sole lender to a borrower may sound good in theory but, in practice, it is fraught with higher risks," said Alok Prasad, an industry veteran.
A key issue in the microfinance industry, he said, has been that a borrower takes multiple loans from different lenders, and there is no way to determine how much of it goes towards income generation and how much goes towards consumption or even repaying other loans. "Even if the loan amount is increased by one lender, there is no certainty that more loans will not be taken. The circle of refinancing existing loans with fresh ones is also not guaranteed to stop," he said.
Further, shifting a client from a group, increasing the amount, and labeling the borrowing as an individual loan does change its underlying risk characteristics.
"Credit assessment of a higher order is necessary and end use monitoring needs to be properly done. Up-skilling of the field staff and revamping the processes is critical for successfully making this shift. An increase in operating expenses and even credit costs is almost inevitable. This may impact the lender's profitability, at least in the short-term," said Prasad.
Brokerage View: Price Targets Reduced On Weak Q4 Show
For the fourth quarter of FY21, Bandhan Bank reported an 80% decline in profit as provisions against elevated bad loans rose.
Brokerages have reduced their price targets and earnings estimates as the bank reported higher than expected slippages in its core geographies, West Bengal and Assam. Many, however, still retain buy/add calls on the stock.
Here’s what they had to say about the bank’s quarterly earnings:
- The brokerage said it was "disappointed by higher slippages that left Bandhan Bank with limited scope to improve NPL (non-performing loan) coverage that fell to 50%." The low provision coverage, it said, was partly due to higher write-off, but the lender "will need to lift coverage and has little buffer left."
- While collection level of 98% on standard loans would have implied limited risk in future, it faces credit risk from lockdowns, driving cuts of 13% in FY22 and 11% for FY23 in estimated profit.
- The brokerage lowered its price target to Rs 400, but maintained 'Buy' on the stock, as valuation remained reasonable at 2.7 times of its estimated FY22 price-to-book.
- With 37% and 31% of Assam and West Bengal customers receiving top-up loans, we risk drawing ‘false positive’ inferences from high collection efficiency numbers of 95-98%.
- Despite large write-offs (2.4%), standard stress pool (15.6%) is large and inadequately provided for (50% provision coverage ratio; nil overlay provisions).
- The brokerage cut FY22-23 estimated earnings per share as it built in higher provisions and lower AUM growth. “We estimate Bandhan still needs Rs 2,200 crore of provisions for old stress, not including new stress from Covid second wave.”
- Macquarie has turned ‘Neutral’ on the stock post a 30% year-to-date correction. Target price cut to Rs 310.
- Despite healthy business growth, Bandhan reported lower net profit, mainly due to lower net interest margin. NIM was affected by higher interest reversals and higher loan loss provisions due to higher NPAs in Assam MFI portfolio post announcement of waiver.
- The impact of elections on Assam/West Bengal portfolios should wean off gradually, but the second wave of Covid-19 may delay recovery and may elevate fresh delinquencies.
- The brokerage reduced its earnings estimates for FY22 and FY23 by 21% and 13%, respectively. It cut its target price by 22% to Rs 390, while maintaining a 'Buy' rating on the stock.
Kotak Institutional Equities
- The brokerage said it was less confident on near-term earnings forecasts as the Covid situation was still developing in states where the bank has a high microfinance exposure.
- "We expect the second wave to have a lower impact on earnings as much of the weaker borrowers may have been recognised already."
- Kotak ascribed an 'Add' rating to the stock, while revising its target price to Rs 350 from Rs 375.
- RoEs likely to move to 20% levels. “We lower FV (future value) to build in slower recovery in earnings and growth. Re-rating to a higher multiple would need a more normalized business environment," it said.