Last updated: 11 Nov, 2021 | 07:04 pm
Rating agency ICRA has downgraded the rating outlook on Bandhan Bank from ‘stable’ to ‘negative’ following the sustained weakness in its emerging entrepreneur business (EEB) portfolio despite the improvement in collections in Q2 FY22.
What is EEB
EEB is a vertical Bandhan Bank set up in September 2020. It was launched to support the emerging needs of the unbanked and underbanked segment of customers. The vertical will focus on supporting this segment of customers in their journey to becoming entrepreneurs. In addition to micro loans, the vertical will also manage micro home loan, micro bazaar loan and micro enterprise loan. These small loans are considered a risky class of assets for the bank.
Why the downgrade
The gross stress pool in the EEB segment, which comprises gross Non-performing assets + gross restructured assets + Special mention accounts in category 1 & 2, increased to Rs 19,457 cr (36 per cent of the EEB portfolio) as on September 30, 2021 compared to Rs 15,657 cr, (29.4%) as on June 30, 2021.
According to ICRA, the uncertainty over the quantity and timing of the final recovery has prompted the bank to accelerate the provision for the entire pool of stress in the EEB segment.
The bank held only 49% provision on its gross stress pool of Rs 19,457 crore as on September 30, 2021. This provision was based on expected collections from the portfolio till March 2022 and estimated recoveries under various government schemes.
Outlook going forward
Bandhan Bank witnessed collections of around Rs 1,000 crore in October 2021 from the stressed assets and targets to collect Rs 6,000 crore by March 2022. Additionally, the bank is aiming for a recovery through the Credit Guarantee Fund for Micro Units (CGFMU) scheme of Rs 3,000 crore. This is apart from likely recovery from the Assam Microfinance Incentive and Relief Scheme (AMIRS), but the value is not ascertained yet. With accelerated provisions during Q2 FY22, the bank reported a net loss of Rs 3008.6 cr in the quarter ended September. The Tier I capital ratio declined to 19.48% in September 2021 from 23.85% in June 2021.
ICRA said the high level of provision on the stressed pool of assets (including standard accounts) provides some comfort. However, the ability of the bank to reduce its stressed pool of assets will continue to drive future credit provisions, profitability and capital. It reaffirmed ratings assigned to debentures and term loans from banks.
Asset quality concerns in Q2
The bank’s asset quality worsened in Jul-Sep 21 quarter. The bank reported gross NPA ratio stood at 10.82% compared to 8.18% in the last quarter. Net NPA reported by the bank is 3.04% compared to 3.29% in the last quarter and 0.36% from a year ago. To tackle the huge increase in NPAs, Bandhan Bank has made accelerated NPA provisions of Rs 1,500 crore resulting in a provision coverage ratio of 74% against 62% as of last quarter. The total provision for the second quarter stood at Rs 5,578 crore compared with Rs 380 crore a year ago.
Overall, analysts remain cautious and uncertain about Bandhan Bank’s asset quality, and hence, estimate its credit cost to remain elevated at 11% of loans for FY22. Hence, this could remain a near-term overhang.