Detailed Rationale

CRISIL Ratings has downgraded its rating on non-convertible debentures of Bandhan Bank Ltd (Bandhan) to ‘CRISIL AA-/Stable’ from ‘CRISIL AA/Negative’ and reaffirmed its ‘CRISIL A1+’ rating on the certificate of deposits.

 

CRISIL Ratings has also withdrawn Rs 265 crore of non- convertible debentures as the same has been repaid. The withdrawal is in line with CRISIL Ratings' withdrawal policy.

 

The rating action reflects the longer than anticipated delay in restoration of asset quality and overall profitability of the bank, to pre-covid levels. Despite momentary correction in fourth quarter of fiscal 2023, the bank’s asset quality metrics have remained volatile since the pandemic outbreak, thereby constraining its overall profitability. Amidst legacy asset quality issues pertaining to pre-Covid-19 portfolio and slow restoration in ground level credit discipline in the core territory, the bank’s ability to revise its growth strategy and business model to tap the market potential remains critical. While the bank is endeavoring to diversify its presence into non-eastern parts of the country through its retail secured asset portfolio – its ability to replicate the growth trajectory for the non-microfinance (non-Emerging Entrepreneurs Business [EEB] vertical) portfolio across the country will remain crucial.

 

The bank’s portfolio remains regionally concentrated and susceptible to local socio-political risks inherent in the micro loan business given the modest credit risk profile of borrowers. Nonetheless, the ratings remain driven by the bank’s established track record in the micro-loan segment and potential benefits accruing from gradual diversification across secured asset classes, robust capitalisation, and healthy deposit franchise.

 

The bank’s gross and net non-performing assets (GNPA and NNPA) increased to 7.3% and 2.3% respectively, as on September 30, 2023, from 4.9% and 1.2%, respectively as on March 31, 2023. This increase was a factor of fresh slippages and reclassification of ECLGS loans as NPA during the period (earlier classified in Special Mention Accounts (SMA)-2). The slippage ratio increased to 10.5% in fiscal 2023 from 2.4% in fiscal 2019.  During H1 2024, though moderated, it remained elevated at 6.3% (annualized). Bank reported normal recoveries of Rs 694 crore against NPA during the period. Additionally, ~Rs 514 crore was recovered from the customers and paid back against the pool sold to asset reconstruction companies (ARCs) and that covered by the Credit Guarantee Fund for Micro Units (CGFMU).

 

Earlier, in December 2022, the bank had received Rs 917 crore as reimbursement under CGFMU scheme and, was expected to receive another Rs 1,700 crore as recovery in the near term. However, the recovery has been delayed due to ongoing procedural formalities. The quantum and timeline of reimbursement through this credit guarantee scheme will remain a monitorable. While the bank has been implementing various qualitative measures to strengthen collection practices and reinstate the credit discipline within vulnerable borrower groups, its effectiveness is yet to be determined.

 

Until then, the asset quality metrics are expected to remain volatile. As against the earlier expectation of significant reduction in stressed assets (SMA pool + NPA) to 3% of gross advances towards the close of 2024, the bank’s stressed assets has remained elevated at ~13% as of September 30, 2023.

 

Asset quality challenges have kept provisioning requirement high, thereby constraining profitability. The bank reported return on assets (RoA) of 1.9% for the first half of fiscal 2024 and 1.5% for fiscal 2023 (0.1% for fiscal 2022). Though moderated from its previous levels, the bank’s profitability remains comparable with peer universal banks. For the first half of fiscal 2024, the bank’s credit costs stood at 1.6% (annualized), lower than 2.8% for fiscal 2023 (6.2% for fiscal 2022). Correspondingly, the provisioning coverage ratio was 70% as on September 30, 2023 as against 76.8% as on March 31, 2023 (75.5% on March 31, 2022). Gross advances were at Rs 1,07,633 crore as on September 30, 2023, down 1.4% from Rs 1,09,122 crore on March 31, 2023. Annual growth in advances for fiscal 2023 and 2022 was 9.8% and 14.1%, respectively, as against an average of 28.8% over the five years through fiscal 2019.

 

CRISIL Ratings, in its rating rationale dated July 12, 2023, had taken note of the announcement made by Bandhan (dated July 3, 2023) regarding the resignation of its officiating Chief Financial Officer (CFO). It is understood that the bank is in the process of selecting a new CFO and until then, has appointed an interim CFO to spearhead the function.

Analytical Approach

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

Key Rating Drivers & Detailed Description

Strengths:

Robust capital position continues to support the financial risk profile; 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 20,795 crore and tier I and overall capital adequacy ratio (CAR) of 18.2% and 19.2%, respectively as on September 30, 2023, are a result of timely capital raising and steady internal accrual. 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. Networth coverage of NNPAs was 9 times as on September 30, 2023, compared with 16 times as on March 31, 2023.

 

Bandhan's pre-provision profitability, though moderated, remained comfortable at 4.1% for the first half of fiscal 2024 as against 4.9% for the corresponding half of the previous fiscal. For fiscal 2023, this metric was 4.6%, down from 6.3% in fiscal 2022. After absorbing credit costs of 2.8% in fiscal 2023 and 6.2% in fiscal 2022, RoA stood at 1.5% and 0.1%, respectively, as against an average of >3% for the previous fiscals. For first half of fiscal 2024, as the credit cost was relatively lower at 1.6% (annualized), RoA corrected marginally to 1.9% (annualized).

 

Hereon, any significant deviation in earnings leading to pressure on the overall capital position of the bank, will be a key rating sensitivity factor.

 

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 74% of the total deposit base as on September 30, 2023 (71% 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 September 30, 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 38.5% of total deposits as on September 30, 2023, compared with 39.3% as on March 31, 2023. The bank has been 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.

 

Market position supported by established track record in the micro-loan segment alongside gradual diversification into secured asset classes

As on September 30, 2023, Bandhan’s gross advances stood at Rs 1,07,633 crore, rising 4.3% quarter on quarter after de-growing by 5.5% over first quarter of fiscal 2024. For half year ended September 30, 2023, the portfolio has registered a decline of 1.4%.  This reduction was driven by the decline in EEB book due to muted seasonal demand, prevailing disturbances in a few north-eastern states and the bank’s strategic decision to arrest the growth momentum in problematic areas. Additionally, there was a single large short-term loan against the fixed deposit of Rs 2,151 crore which was repaid during the period, contributing to the decline in overall advances.

 

However, the bank continues to have a competitive edge in the microfinance sector through reach and local knowledge, especially in east and north-east India, which accounted for ~33% of the overall loan portfolio and 65% of the EEB portfolio as on September 30, 2023 (35% and 67%, respectively as on March 31, 2023). 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 33% of the bank’s advances while EEB individual loans make up 17%. Mortgages portfolio accounted for about 23% of Bandhan's total loan portfolio as September 30, 2023 whereas commercial banking portfolio stood at 21% (including the SME portfolio) on the same date. On a steady state basis, the bank intends to maintain an equal mix of EEB and non-EEB portfolio. Over the medium term, the bank’s ability to sustainably scale its secured loan portfolio remains a key monitorable.

 

Weaknesses:

Slower than anticipated recovery in asset quality metrics

The bank’s asset quality has remained vulnerable ever since the outbreak of the pandemic. Apart from the lockdown, successive ground-level challenges in Assam and West Bengal resulted in NPAs rising to 7.12% as on December 31,2020 (pro-forma GNPA, however reported GNPA - after factoring Hon Supreme court order on NPA recognition standstill - stood at 1.1% 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. However, as on September 30, 2023, GNPA and NNPA rose to 7.3% and 2.3% respectively on account of cumulative slippages of Rs 2,687 crore and Rs 583 crore of ECLGS covered advances being classified as NPA during the period. Bank reported normal recoveries of Rs 694 crore against NPA during the period. Additionally, ~Rs 514 crore was recovered from the customers and paid back against the pool sold to ARCs and that covered under CGFMU.

 

Within the EEB portfolio, the bank's total stressed asset portfolio was Rs 6900 crore which was either NPA, restructured or in SMA (including 1 and 2) and this formed ~13% of the total EEB book. Under the CGFMU scheme availed by the bank, Rs 917 crore was received in December 2022 and another Rs 1,700 crore was expected to be received in tranches of Rs 1,100 crore in the first half of fiscal 2024 and Rs 600 crore in fiscal 2025. However, the last two tranches of recovery have been delayed due to procedural formalities.

 

Over the medium term, Bandhan’s asset quality is expected to remain a monitorable owing to uncertainties in its key markets 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, recoveries under guarantee schemes 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 comprised around 65% of its portfolio as on September 30, 2023 (67% as on March 31, 2023). The bank is exposed to geographical concentration risk inherent to the segment. As of September 30, 2023, around 37% of its microfinance loan exposure, which is the largest loan portfolio, was in West Bengal alone. The top three states (including Uttar Pradesh and Bihar) constitute nearly 60% of its micro loan book whereas concentration within the top three states (West Bengal, Maharashtra and Gujarat) in the overall portfolio was over 44%.

 

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 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 impacted the bank’s asset quality. As a result, the bank has cumulatively written off Rs 11,354 crore over fiscals 2021, 2022 and 2023. The situation in Assam, though stabilizing, remains vulnerable and continues to have a bearing on the overall asset quality and profitability of the bank. 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, typical borrowers of individual loans and micro and small enterprise loans 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  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 micro-banking 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 154.56% (average) as on September 30, 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 60%. 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 kilolitre of rainwater. The bank has planted 251,500 saplings of mangroves and sequestered more than 4,400 tonne of carbon.
• Water conservation initiatives have supported the construction of 23 water harvesting structures with storage capacity of over 120,000 kilolitre of water, which not only provided drinking water to over 1,500 families but also supported participatory irrigation of various crops and helped generate income of more than Rs 123 lakh.
• In fiscal 2021, 49 community-level reverse osmosis water treatment plants were set up, which provided 14,752 kilolitre of purified safe drinking water to 33,749 households.
• In terms of social impact, the bank has uplifted 47,500 ultra-poor women from poverty through its Targeting the Hardcore Poor (THP) programme and covered 1,291,980 women under a preventive health programme. It has also provided education support to 404,869 women and has skilled 13,887 youths for jobs in the organised sector.
• The bank allocates 2.0-2.5% 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 positions 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 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 RoA improving back to and remaining above 3% on a steady state basis

 

Downward Factors

• Prolonged stress in asset quality constraining the overall profitability of the bank
• 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 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	Unit	Sep-23	Mar-23	Mar-22	Mar-21
Total assets	Rs crore	1,52,438	155,770	138,867	115,016
Total income	Rs crore	9,940	18,374	16,694	14,546
PAT	Rs crore	1,442	2,195	126	2,205
Gross NPA	%	7.3	4.9	6.5	6.8
Overall capital adequacy ratio	%	19.2	19.8	20.1	23.5
Return on assets	%	1.9*	1.5	0.1	2.1

*Annualised

Any other information: Not Applicable