Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the debt instruments of Bandhan Bank Limited (Bandhan) at ‘CRISIL AA-/Stable/CRISIL A1+’

 

The rating remains driven by Bandhan's established market position in the micro loan segment with potential benefits accruing from gradual diversification across secured asset classes, robust capitalisation and healthy resource profile supported by its retail deposit franchise. These strengths, however, are partially offset by moderate asset quality, which remains susceptible to inherent risks of the microfinance sector and geographical concentration in operations.

 

Gross advances were Rs 1,30,650 crore as on September 30, 2024, which marks a half year uptick of 4.8% (as compared to a 1.4% negative growth in corresponding period of previous fiscal). For full fiscals 2024 and 2023, overall advances grew by 14.3% and 9.8%, respectively. Corresponding to this growth, the asset mix has started to diversify with a reduction in share of microfinance portfolio to 45% as of September 30, 2024, from 63% as on March 31, 2022. Adjacently, the bank has been gradually expanding its presence across secured segments – which constitute 55% of the overall loan book. Within secured segments as well, the bank is present across mortgage (Housing +Loan against property (LAP)+Construction), commercial banking (small and medium enterprises and non-banking finance companies) ,vehicle, personal and gold segment. Apart from reduction in segmental concentration, geographical diversity is also on an improving trajectory. As on September 30, 2024, the share of portfolio housed in the eastern and north-eastern states was ~41% vis-à-vis ~53% on March 31, 2022.

 

On the liability side, the deposit growth has remained healthy and capitalisation has been maintained at comfortable levels. On September 30, 2024, total deposits stood at Rs 1,42,510 crore, of which the share of current and savings accounts (CASA) was 33.2%. Capitalization metrics - tier I and overall capital adequacy ratio (CAR) of 13.6% and 14.3% (15.6% including profits for H1 2025) as of September 30, 2024 - though declined after revision in risk weights applicable for the unsecured portfolio, remain adequate. Further, capitalisation has also benefitted from increased profit accretions during the period with return on assets (RoA) increasing to 2.2% for H1 2025 from 1.3% for full fiscal 2024.

 

Overall asset quality has remained moderate with gradual recovery witnessed over fiscal 2024. Over the first half of fiscal 2025, due to issues like overleveraging and other operational disturbances plaguing the microfinance segment, the bank’s gross and net non-performing assets (GNPA and NNPA) rose to 4.7% and 1.3% respectively, as on September 30, 2024, from 3.8% and 1.1%, respectively as on March 31, 2024 (4.9% and 1.2% as on March 31, 2023). In the past, the bank has strengthened its underwriting policies and risk monitoring mechanisms with the objective not only insulating its balance sheet from unforeseen challenges inherent to the microfinance segment but also support the transition to a higher share of secured book. Apart from measures like tightening the eligibility criteria for refinancing, adhering to stricter credit scores, etc. investments in technology have been made for higher efficiency and oversight. These corrective measures are expected to benefit the bank’s operations in the long run. In the near to medium term, however, external challenges plaguing the unsecured asset classes, particularly microfinance segment, remain a monitorable.

 

CRISIL Ratings has also taken note of the appointment of Mr Partha Pratim Sengupta as Managing Director & Chief Executive Office (MD & CEO) of the bank with effect from November 1, 2024 following Mr Chandra Shekhar Ghosh’s retirement from this position. Mr. Sengupta is an experienced banker with nearly four decades of experience. Additionally, other top management positions have also been taken up by professionals of high pedigree. Mr Ratan Kumar Kesh has joined as Executive Director and Chief Operating Officer and comes with an experience of over twenty nine years across verticals like finance, banking, manufacturing and services industry. Mr Rajinder Kumar Babbar has joined as Executive Director and Chief Business Officer and comes with over thirty six years of experience in the banking sector. Mr Rajeev Mantri, who has joined as Chief Financial Officer, has over twenty six years of experience in the financial services space of India, Singapore, and the UAE. Mr Gopal Krishnan Santosh, who has joined as head of consumer lending and mortgages, comes with thirty two plus years of experience in the industry.  Mr Satish Kumar, who has joined as head of wholesale banking, comes with twenty-five plus years of experience in the industry.

Analytical Approach

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

Key Rating Drivers & Detailed Description

Strengths:

• Healthy capital position; restoration in internal accruals to pre-pandemic levels remains a monitorable

The bank’s networth remains comfortable in relation to its scale of operations, which aids its overall financial risk profile. Reported networth of Rs 23,715 crore and tier I and overall capital adequacy ratio (CAR) of 13.6% and 15.6%(including profits), respectively as on September 30, 2024, are a result steady internal accrual. After revision of risk weights on the Emerging enterprise banking (EEB) book from 75% to 125% in November 2023, overall CAR of the bank as March 31, 2024 was recomputed to 14.7% (from 18.3% reported earlier).

 

Networth coverage of NNPAs was 14.6 times as on September 30, 2024, compared with 16.0 times as on March 31, 2024.

 

Bandhan's pre-provision profitability remained comfortable at 4.2%  for the first half of fiscal 2025 as against 4.1% for the corresponding half of the previous fiscal. For fiscal 2024, this metric was 4.0%, down from 4.8% in fiscal 2023 and 6.3% in fiscal 2022. After absorbing credit costs of 2.2% in fiscal 2024 and 2.8% in fiscal 2023, RoA stood at 1.3% and 1.5%, respectively, as against an average of >1.7% for the previous five fiscals. For the first half of fiscal 2025, as the credit cost was relatively lower at 1.3% (annualized) which yielded a higher RoA of 2.2% (annualized). Moreover, higher net interest margins (NIM) also supported profitability. It was reported at 6.7% (annualized) as against 6.4% reported in the corresponding period of the previous fiscal.

 

Considering the ground level challenges being witnessed by the microfinance segment, the degree of its impact on asset quality and overall profitability, will remain a key monitorable.

 

• 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 68% of the total deposit base as on September 30, 2024 (69% as on March 31,2024). 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 September 30, 2024. The share of CASA deposits stood at 33.2% of total deposits as on September 30, 2024, compared with 37.1% as on March 31, 2024. This six month trend in aligned with that witnessed by the overall banking sector.

 

The bank has been offering 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. For H1 2025, cost of funds was 6.7% (annualized) as compared to 6.0% for full fiscal 2024.

 

• Market position supported by established track record in the micro-loan segment alongside increasing diversification towards secured asset classes

As on September 30, 2024, Bandhan’s gross advances stood at Rs 1,30,650 crore having risen by 4.8% in the first half of fiscal 2025.

 

The Emerging Entrepreneurs Business (EEB) portfolio comprised 45% of the overall advances as on September 30, 2024 and remains one of the bank’s core competencies. The bank maintains its competitive edge in the microfinance sector through strong reach and local knowledge, especially in east and north-east India, which accounted for ~41% of the overall loan portfolio (44% as on March 31, 2024). While the 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 of this region gives it an advantage, Bandhan’s prudence in shortlisting regional pockets of growth within this geographical belt remain crucial.

 

In terms of product suite, EEB group loans comprise 29% of the bank’s advances while EEB individual loans make up 16% of it. Over the years, the bank has endeavored to diversify into secured assets classes as well. The same is showcased through the increase in share of commercial banking  and mortgages portfolio increasing to 25% and 24% (including IBPC), respectively as on September 30, 2024 as against 12% and 23% as on March 31, 2022. Meanwhile, the share of the EEB portfolio has declined from 63% to 45% during the same period. This transition to garnering a higher share of secured assets, is expected to impart higher diversity to the bank’s business profile and, higher stability to the overall asset quality on a steady state basis.

 

Weaknesses:

• Moderate asset quality metrics; susceptibility to risks inherent to the microfinance segment

The bank’s asset quality, though stabilizing, has remained vulnerable ever since the outbreak of the pandemic. As on March 31, 2020, 43%, of the bank’s gross portfolio was cumulatively housed in Assam and West Bengal. In fiscal 2021, these territories faced multiple socio-political issues including political parties promising microfinance loan waivers to borrowers residing in Assam. Additionally, elections in West Bengal and natural calamities like the cyclone Amphan further aggravated the issue, causing the reported NPAs of the bank to remain volatile between fiscals 2020 and fiscal 2023. Thereafter, owing to increased resolution, cumulative write-offs of Rs 9925 crore and sale of NPAs worth Rs 3036 crore to ARCs - over fiscals 2023 and 2024, the GNPA and NNPA declined from 6.5% and 1.7% on March 31, 2022, to 3.8% and 1.1%, two years later.

 

Over the first six months of fiscal 2025, GNPA and NNPA rose to 4.7% and 1.3% (inclusive of write off of Rs 9 crore) on account of stress emerging in the microfinance and unsecured segments. During Q2 2025, slippages increased to Rs 1115 crore from Rs 891 crore in Q1 FY25 and Rs 1017 crore in Q4 FY24. Within the EEB portfolio, the bank's total stressed asset portfolio was Rs 5361 crore which was either NPA, or in SMA (including 1 and 2) and this formed ~9% of the total EEB book as on September 30, 2024 (Rs 4087 crore and 7% as on March 31, 2024 and Rs 5470 crore and 10% as on March 31, 2023). Recently, the detailed audit pertaining to CGFMU scheme has been concluded. The bank is expected to incrementally receive Rs 315 crore (Rs 917 received in December 2022) as claim settlement in this regard. Further Rs 228 crore of recoveries are yet to be accounted as other income.

 

While the bank has been implementing various qualitative measures to strengthen underwriting and collection practices within vulnerable borrower groups, its effectiveness is yet to be determined. A significant portion of bank’s portfolio comprises loans to clients with modest credit risk profiles and limited access to formal credit with sensitive cash inflows. This risk is partly offset by the bank’s strong competitive edge and its longstanding presence, in East and North-East India, and its exclusive lending relation with most of its borrowers. Many borrowers have been associated with the bank for over a decade and, have graduated across cycles with their credit profiles now being eligible for bigger ticket loans. Besides, certain customers (erstwhile microfinance borrowers) are availing micro business loans wherein 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. As on September 30, 2024, 60% of the bank’s borrowers were unique to Bandhan wherein it is the sole lender and close to 10% -had 4 or more loans (including that from Bandhan)

Over the medium term, Bandhan’s asset quality will remain a monitorable owing to sector level issues like overleveraging, elevated pricing, operational disturbances – plaguing its key market.

 

• 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 comprised around 65% of its portfolio as on September 30, 2024 (64% as on March 31, 2024). The bank is exposed to geographical concentration risk inherent to the segment. As of September 30, 2024,  36% of its microfinance loan exposure, which is the largest loan portfolio, was in West Bengal alone. The concentration of the overall portfolio within top five states namely West Bengal, Maharashtra, Bihar, Gujarat and Madhya Pradesh was 59% of gross advances.

 

Recently, due to borrower overleveraging and ground-level operational challenges across the industry following elections and intense heat wave coupled with ‘Karza mukt bharat abhiyan’ campaign, there has been a spillover effect of the stress in certain geographies, thereby putting pressure on collections. This segment of borrowers continues to be subjected to idiosyncratic risks on account of socio-political factors. Historically, the microfinance sector has witnessed major disruptive events the Andhra crisis in 2010, demonetisation in 2016 and most recently, the pandemic in March 2020. In addition, the sector has faced issues of varying intensity in several geographies. These events revealed the vulnerability of the borrower segment to regulatory and legislative risks. These events triggered a chain of events that adversely affected the business models of MFIs by impairing their growth, asset quality, profitability and solvency.

 

While Bandhan had remained largely immune to most sector-level disruptions in the past, continued unrest in one of its core territories of Assam since 2019, followed by ground level challenges in West Bengal and Manipur, has structurally impacted the bank’s asset quality. As a result, the bank has cumulatively written off Rs 15,207 crore between fiscals 2021 and 2024. The situation in Assam, though stabilizing, remains vulnerable in CRISIL Ratings’ opinion. The bank’s cumulative exposure to Assam and West Bengal stands reduced at 27% as on September 30, 2024 vis a vis 36% as on March 31, 2022. Furthermore, for H1 2025, collection efficiency for the EEB portfolio housed in Assam and West Bengal, was at 99.2% and 99% respectively, which is better than peers.

Liquidity: Strong

Bandhan's liquidity coverage ratio (LCR) was healthy at 150.6% (average) as on September 30, 2024, 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 (CASA plus retail term deposits (< Rs 3 crore)) remains high above 68%. In addition to having excess statutory liquidity ratio (SLR), interbank lines, line of credit facilities, the bank also has access to refinance facilities.

 

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:

• The Bank’s outstanding loan exposure to coal and oil industries is only 0.006%, whereas, it's lending it solar projects is 3.44% of the outstanding loans.
• The Bank has aligned its ESG strategy with the principles of the United Nations Sustainable Development Goals and has taken measures to drive energy-efficient equipment across all operations and IT infrastructure.
• Bank’s head office is in a gold-standard green building with rainwater harvesting and STP. The Bank’s upcoming new Head office is also certified as a gold-standard green building.
• The Bank through its CSR projects has created 50 water harvesting structures with a storage capacity of 1.33,500 Kiloliters of rainwater providing critical irrigation and drinking water to the moisture-stressed regions of the country.
• As a part of its Climate Action Programme under its CSR initiatives, the bank has planted more than 4.17 lakh saplings across the high climate risk zones including the mangrove coastal region of Gujarat and West Bengal sequestering 2,248 MT of CO2.
• In terms of gender diversity, the proportion of females in the total number of employees is 11.14%.
• In terms of social impact ,the Bank has uplifted  50,932 ultra-poor women head households from extreme poverty through its Targeting Hardcore Poor Programme; provided health services to 13,44,558 women under its health programme; financial literacy to 5,19,746 women; free supplementary education to 1,14,391 children; employability skills to 18,521 youths and covering 1,958 farmers under climate-smart agriculture practices.
• The bank allocates a minimum of 2% of its profit towards corporate social responsibility (CSR) initiatives.
• In terms of governance, the majority of the board comprises independent directors and the positions of the chairman and the chief executive officer are separate. 14.29% of the Board members are females. 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 the high share of foreign investors as well as access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believe Bandhan Bank will continue to maintain its established market position in micro- loan segment, strong capitalization and healthy resource profile over the medium term.

Rating Sensitivity Factors

Upward Factors

• Significant and sustained improvement in asset quality reflected in total stressed assets (GNPAs + restructured portfolio) reducing significantly to, and remaining below, 3% on a steady state basis.
• Revival in overall profitability evidenced by material and sustained improvement in RoA.

 

Downward Factors

• Prolonged stress in asset quality constraining the overall profitability of the bank
• Overall capital adequacy ratio (CAR) remaining below 15% for a prolonged period

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 6,219 branches, banking units, doorstep service centres (DSCs), and GRUH centres, spread across 35 states and union territories.

Key Financial Indicators

As on / for the period ended		Mar-24	Mar-23	Mar-22
Total assets	Rs crore	177,841	155,770	138,867
Total income	Rs crore	21,034	18,374	16,694
PAT	Rs crore	2,230	2,195	126
Gross NPA	%	3.8	4.9	6.5
Overall capital adequacy ratio	%	14.3	19.8	20.1
Return on assets	%	1.3	1.5	0.1

 

As on / for the period ended		Sep-24	Sep-23
Total assets	Rs crore	179,768	1,52,438
Total income	Rs crore	12,158	9,940
PAT	Rs crore	2,001	1,442
Gross NPA	%	4.7	7.3
Overall capital adequacy ratio	%	14.3	19.2
Return on assets	%	2.2*	1.9*

*Annualised

Any other information: Not Applicable