The Curious Case Of Bandhan Bank's 'Creative' Growth Tactics

So what exactly drives this mirage? The answer lies in a long-standing practice the bank has followed in its microfinance segment. The peculiar—and somewhat brazen—growth hack helps the bank artificially boost its deposit base and also delay recognition of loans that have turned sour, according to three analysts that track the firm and two microfinance industry executives. These people spoke to BQ Prime on the condition of anonymity.

Analysts BQ Prime spoke with described the practice in the following way: 

• A borrower approaches Bandhan Bank for a microloan of Rs 50,000 (notional value). 

• Instead of sanctioning the requested amount, Bandhan Bank sanctions a loan exceeding the borrower’s request. For instance, on a Rs 50,000 loan request, the sanctioned amount could range from Rs 55,000 to Rs 1,00,000. 

• While the bank’s loan sanction exceeds the borrower’s request, the bank only disburses the requested amount to the borrower. 

• The remaining money is held in a restricted way in a Bandhan Bank savings account

• The money held in the savings account boosts the bank’s deposit base.

• In case the borrower defaults on payments, Bandhan Bank then uses the restricted amount to deduct the due payments and close the loan account—thereby preventing the loan from turning into a non-performing asset. 

The two senior microfinance industry executives quoted above confirmed the existence of such a practice at Bandhan Bank. While it’s hard to gauge its exact scale, its impact on Bandhan Bank’s financials is enough to make a dent, one of them told BQ Prime.  

The bank, however, denied the practice.

"The point mentioned is completely baseless. Bandhan Bank has a very robust credit policy for all kinds of lending products including MFI Loans. The eligibility is ascertained as per the credit policy of the Bank and in line with the MFI guidelines introduced by the RBI on April 1, 2022," a Bandhan Bank spokesperson told BQ Prime in an emailed response to queries.

Bandhan Bank as a practice, over the last many years, establishes the borrowers’ eligibility through proper appraisal of the applicant, the spokesperson said.

While there are no explicit norms laid down by Reserve Bank of India prohibiting such a practice, the over-sanctioning of loans violates the spirit of credit decisioning norms as stated by the regulator, a former deputy governor of the Reserve Bank of India told BQ Prime, declining to be formally quoted.

Over-sanctioning of loans is also a consumer protection issue as it can lead to a debt trap and if the restricted funds held in the savings account are used to cover defaults or close the loan, it could be a case of evergreening the loans, a second former deputy governor of the RBI said, also on the condition of anonymity.

It's unclear how exactly Bandhan Bank has operationalised the practice in a way that has avoided detection in regulatory inspections. But both former central bankers quoted above said that if the money locked in savings accounts is used to prevent the loans from going bad, it would be a clear violation of RBI norms.

Bandhan Bank held a deposit base of Rs 1.08 lakh crore as of March 31, of which Rs 42,471 crore belonged to the low-cost current account and savings account bucket, according to an April 4 exchange filing by the bank.

"Customers always have the option of paying their installments through any medium convenient to them – cash at their location, cash at the branch or by their debit cards either at the weekly meeting or at the branch. As of Q3 FY22-23 banking unit vertical (which caters to MFI Customers) deposits contribute about only 4% of the total deposits," Bandhan Bank's spokesperson said in the lender's response.

Bandhan Bank's non-performing assets surged in the final quarter of FY21 with its gross NPA numbers jumping 6.8% in Q4 FY21, up from 1.1% in Q3 FY21.

While the NPAs have stayed elevated for almost the last two financial years, the bank has managed to somewhat reduce them—from 10.81% in December 2021 to 7.19% in December 2022—as a result of bad loans worth Rs 8,897 crore being sold to an asset reconstruction company (ARC) in December 2022. 

Additionally, Bandhan Bank also sold stressed assets worth Rs 4,930 crore to another ARC in March 2023, according to an exchange filing by the bank. This would bring the total amount of stressed assets sold to Rs 13,827 crore, which denotes about 12.6% of Bandhan Bank’s total loans and advances outstanding as of March 2023.

The large bad loan problem saw Bandhan Bank take a knock over the last financial year but its net interest margins are expected to improve over the next couple of quarters, Pankaj Agarwal, lead banking analyst at Ambit Capital, told BQ Prime.

But the bank's "provision cost will remain high," Agarwal said, noting that the bank is yet to prove its mettle on credit underwriting and high provisions will continue exert downward pressure on the bank's profitability.

Shares of Bandhan Bank's closed 1.2% higher on Wednesday as against a 0/9% rise in the benchmark Nifty 50.