Bandhan Bank: Flying High Or Too Close To The Sun?

Bandhan Bank outperformed despite slowing credit growth and concerns in Assam and West Bengal. Some analysts are asking how.

A passenger aircraft flies at sunset from Frankfurt Airport in Germany. (Photographer: Alex Kraus/Bloomberg)
A passenger aircraft flies at sunset from Frankfurt Airport in Germany. (Photographer: Alex Kraus/Bloomberg)

Bandhan Bank Ltd., a two-decade-old micro-lender that turned into a commercial bank a little over five years ago, has been a consistent out-performer compared to the industry it operates in. So much so, that a small minority of analysts are now questioning whether its performance is too good to be true, even as many others remain positive on the bank and its stock.

Over March and April, Macquarie Research questioned whether top-up loans are being used by Bandhan Bank’s borrowers for repayments and if write-offs are being used to keep collection ratios high. Nitin Mangal, an independent research analyst, too has questioned whether the bank “like Icarus, is flying too close to the sun.” But others like Gautam Chhugani of Bernstein have called these inquiries a “wild goose chase.”

When contacted, Bandhan Bank declined to comment, citing the silent period ahead of its fiscal 2021 results announcement.

The Numbers; The Questions

The numbers that are raising eyebrows pertain to collection efficiency maintained by Bandhan even amid the Covid crisis and the pace at which its loan book has grown during recent quarters. Some of these concerns are specific to markets like West Bengal and Assam, where stress has been high and Bandhan is a large lender.

For instance:

  • Bandhan Bank’s collection efficiency in Assam and West Bengal, which comprised about 60% of its microfinance loans, stood at 88% and 90%, respectively, as of December, based on its investor presentation. In comparison, the industry average stood at 70% for Assam and 82% for West Bengal, during the same period, as per data from industry bodies Association of Microfinance Institutions – West Bengal (AMFI-WB) and Sa-Dhan.
  • For the January to March quarter, the bank, in its business update, reported a collection efficiency of 95% for microfinance loans and 96% overall. This was an improvement from the 90% efficiency reported in January even though conditions in Assam — the market which led to a drop in collections — remain difficult.
  • Bandhan Bank has also reported superior growth in microfinance loan assets, which rose 32% year-on-year in the October-December quarter to Rs 53,050 crore. The industry grew at a relatively slower pace at 10%.

In a report dated March 16, Macquarie Analyst Nishant Shah connected the dots to ask the question: “Are top-up loans being misused?”

“In the second quarter of FY21, Bandhan changed its policy of only one loan per customer to allowing top-up loans to existing customers. 7.6% of its MFI AUM comprised top-up loans,” Shah wrote. Further, in Assam, Bandhan added 1.25 lakh and 4.93 lakh loan accounts, respectively, in the second and third quarters, compared to its quarterly run rate of 27,000 per quarter. These largely represent top-up loans to the same customer, as new customer acquisition in the state has been low, Shah said.

To be sure, giving top-up loans isn’t uncommon. Microlenders give out further loans to their existing customers close to the end of their repayment period, generally, once 80-90% of the loan is repaid, said Sa-Dhan's executive director, P Satish.

The question, as Shah puts it, is whether these top-up loans are being used purely to boost repayments and collection efficiency.

There is a subtle difference between top-up funding being used to grow out of a problem and redirected by customers for repayments. Money is fungible and monitoring end-use is hard. We worry that, despite best intentions, top-up loans are in part masking some of the real pain in the industry.
Nishant Shah, Analyst, Macquarie Research

Shah raised more questions in a note last week where he said the improved collection efficiency ratios reported as of March “don’t intuitively make sense,” adding that write-offs may have helped push up collection efficiencies.

Improved collections may help keep bad loans in check after pro forma gross non-performing assets spiked to 7.12% at the end of the December quarter.

Another equity analyst, who spoke to BloombergQuint on condition of anonymity, said that while most micro-lenders slowed disbursements during the pandemic, Bandhan's loans have grown in double digits. Some of it, he also said, was due to sanctioning of top-up loans to near-defaulting borrowers.

Nitin Mangal, an independent research analyst shares some of these concerns.

The bank’s outperformance, according to Mangal, is backed by an aggressive lending strategy to its existing borrowers, especially in Assam and West Bengal, which is hurting the entire microfinance market.

“Bandhan has managed to put up a good show despite headwinds being faced by the sector, which begs the question of whether it is an outlier or a hyper-aggressive bank lending at lower rates to beat the competition. But, just like Icarus it is probably flying too close to the sun,” he said.

Rumblings Within The Industry

There are rumblings within the microfinance industry too, which competes with Bandhan Bank.

The issue of over-heating and increasing indebtedness of the bank's borrowers, according to Alok Prasad, an industry veteran and former chief executive of Microfinance Institutions Network, has hues of 2010 Andhra Pradesh microfinance crisis in the sense that, “one player’s actions are having sectoral repercussions. In Assam we are already witnessing that.”

That Bandhan’s loan book metrics diverge from that of the industry is visible in data.

  • As of December, the bank’s average loan ticket size was over Rs 65,000, according to CRISIL. However, the average loan ticket size for the microfinance industry was about Rs 33,000, shows data from microfinance industry body Sa-Dhan.
  • In terms of the average indebtedness of Bandhan Bank’s borrower base, Jefferies estimated it to be Rs 70,000, compared to the industry average of about Rs 40,000, according to Sa-Dhan data.

This, however, may be explained by the fact that Bandhan has been in the market for a long time.

“Owing to relatively lower competition and Bandhan’s long-standing presence in the East and North-East India, the bank captured a fairly 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 by the bank,” said a CRISIL Rating note dated March 24.

Another factor contributing to the divergence between Bandhan and non-bank MFIs is regulations. Non-bank MFIs are subject to loan caps and income criteria for borrowers but these rules do not apply for banks doing micro-lending. The RBI is now in the process of harmonising rules, it said in February.

Bandhan Bank has been leveraging the regulatory arbitrage between banks and non-banks catering to the microfinance sector, which is causing over-heating in specific geographies, said Prasad. "While aggressive lending was adopted as a business tactic by one player, its collateral damage is an industry-wide phenomenon," he said.

Still A Minority View

Those raising questions about the sustainability of Bandhan’s track record remain in a minority.

According to Bloomberg data, 79% of analysts who track the stock have a buy call on it while only 7% have a sell.

"The aggregate industry data is not an adequate reflection of Bandhan Bank's performance as it masks the actual characteristics of loan accounts. Besides, Bandhan Bank's collection efficiency and performance have always been relatively better than the industry,” said Bernstein’s Chhugani. “So, in my view, this is a bit of a wild goose chase.”

Goldman Sachs, too, in a March 17 brokerage report said that, "investor concerns on aggressive lending seem overdone given there was no significant growth in top-up loans in the third quarter FY21”. The brokerage house added that Bandhan has been constantly delivering healthy growth in active MFI borrowers. Also, according to Goldman, the share of loans due by 30-days or more for Bandhan Bank are in line with those reported across the industry by credit bureau CRIF-Highmark.