Bandhan Bank’s Shares Rise On Assam’s Microfinance Loan Waiver Proposal
Shares of Bandhan Bank Ltd. rose the most in 11 months on the Assam government’s proposal to implement microfinance loan waivers. While analysts expect this to lower credit costs for the lender, concerns over a deterioration in credit culture in the state, and high slippages due to the second Covid-19 wave persist.
The Assam government plans to grant up to Rs 8,500 crore to bail out stressed microfinance institution borrowers in the state, the research firms said citing several media reports. That’s 70% of the state MFI loans.
The state proposes providing support to 90% of the 26 lakh MFI borrowers through a cash grant of up to Rs 25,000. The waiver will be available where total borrowing is up to Rs 1.25 lakh and borrowers were standard up to December 2020. A borrower should have also not engaged with more than three lenders at once.
Assam is second-largest state for Bandhan Bank. Its MFI portfolio in the region, according to Jefferies, is about Rs 7,000 crore, accounting for 12% of MFI loans and 8% of total loans for the bank.
The analysts are awaiting finer details of the proposed package.
Shares of Bandhan Bank rallied as much as 6.96% at Rs 338.7 apiece, the most since July 7, 2020, in early trade on Monday. Of the 29 analysts tracking the lender, 19 have a ‘buy’ rating, four suggest a ‘hold’ and six recommend a ‘sell’, according to Bloomberg data. The average of 12-month consensus price targets implies a upside of 9.8%.
Here’s what analysts have to say...
Maintains ‘underperform’ rating with a target price of Rs 300 apiece, implying a downside potential of 5%.
There is need for more clarity on borrowers with overdue amounts pre-waiver announcement.
The package of Rs 8,000-8,500 crore versus the Rs 12,000 crore MFI book in the state is large and should provide significant relief for Bandhan Bank in Assam.
The package will be credit positive for Bandhan Bank’s Assam portfolio but the impact of the second wave of Covid-19 could be large, and Bengal faced collection challenges even before the second wave
“What’s not clear is for long overdue borrowers (overdue pre-waiver), whether a full waiver will be funded by the state or lenders and also risk from borrowers with exposure of over Rs 1.25 lakh, which have not been included in the package. We await more detail of the package before we revisit our earnings estimates.”
The package will lead to a large drop in loan books due to repayments, and long term it raises questions on the over-leveraging of MFI borrowers.
Maintains ‘neutral’ rating at a target price of Rs 310 apiece.
As things stand, the quantum and structure of the waiver is unclear. Hence, any comments on how positive this announcement is would be premature. If the income/year or other bottlenecks/conditions are not restrictive and the waiver is larger than expected, it could significantly reduce near-term credit costs, albeit coming at the cost of credit culture in the region.
While the government has attempted to present this as “income support” rather than a “waiver”, a negative precedent has been set for the microfinance industry. Moral hazard tends to creep in after such waivers and in the future, there may be similar waivers by other large MFI-states ahead of elections.
Remains negative on microfinance in the near term as the second Covid wave will keep provisions high and disbursements low.
“It is pure luck that the current Assam waiver has turned out to not be as disruptive as earlier thought. This could have gone either way, beyond the control of listed lenders.”
Upgrades to ‘outperform’ from ‘neutral’, raises target price to Rs 390 from Rs 330.
While potential stress from the second wave will keep slippages elevated and potential restructuring on the back of expected recoveries, the research firm expects credit costs to moderate to 3% in FY22 versus around 6% in FY21.
The bank, unlike the first wave, is also likely to resort to restructuring. Assam has been stressed for over a year and accounts for 12% of Bandhan’s MFI loans, with over 25% of loans recognised as NPA or written off.
While there is a potential risk to deterioration in credit culture for the industry, the government has tried to push customers to make repayments rather than announcing a blanket waiver.
With the easing of multiple overhangs, limited impact from the RBI guidelines on harmonisation of regulations across MFI players, re-appointment of Managing Director Chandra Shekhar Ghosh for three years and Assam loan waiver containing potential profit/loss impact, we upgrade the bank’s rating.
Maintains ‘buy’ rating with a target price of Rs 400 apiece.
The plan will be positive for lenders as it clears dues and overhang on collections. Bandhan will benefit as state forms 12% of MFI loan and faces higher stress.
“Scheme is large for state to absorb and we hope other states/politicians desist in future from making such proposals during elections.”
The scheme will be made part of a budget planned for July and should get approval as government has majority in house, and even opposition had proposed a similar waiver.
With the government discharging 70% of loans in the state, the research firm sees asset quality concerns receding for the bank. A swifter rollout will be key as back-and-forth on this had already impacted collections in the state
Sees a negative, temporary and manageable impact of about Rs 300 crore (7% of FY22 profit before tax) as repayment of loans by state will only be partly rebuilt over time and the bank will lose spread on the same.
Maintains ‘overweight’ stance with a price target of Rs 400 apiece.
The waiver proposal is limited in nature and talks about an incentive support to standard portfolio and loans that became overdue after waivers were announced in December 2020.
The regulation makes it difficult to really quantify the loss impact as customer behavior will likely change given the waiver contours seem to be limited. At this point, “we estimate a 20% loss rate in Assam, higher than impact seen in cases when historical waivers have been given”.
The government’s intent of having a limited waiver in Assam is better than expectations of a blanket waiver.
Maintains ‘buy’ rating at a target price of Rs 360 apiece.
Assam had seen a large build-up in stress over the past one-two years with multiple disruptions (CAA protests, floods, Covid-19 and elections) leading to an increase in bad loans. This would have further deteriorated with the crisis of the second wave in April.
The package is a meaningful development particularly for MFI large lenders in Assam, particularly for Bandhan Bank, as this would arrest the large blow-out expected in Assam.
While some proportion of Bandhan’s book would not qualify given higher ticket size, still Bandhan will remain the largest beneficiary of this development.
“While we are still skeptical if this agreement would lead to a reversal of the first wave’s impact, this would certainly aid in absorbing all impact of the second wave in Assam and some election related stress build up.”
“Over the past month, we have seen multiple positive developments for Bandhan with new MFI regulations being least disruptive for Bandhan and the recent agreement implying meaningful resolution of stress in Assam.”