Bandhan's micro challenge

The bank is addressing asset quality concerns, but the unsecured loan book is still heavy, and then there is the matter of the CEO's tenure

- MANOJIT SAHA

It is 10 years since Bandhan Financial Services became the first microfinance institution (MFI) to receive a universal bank licence. A year later, in 2015, it started operations.

Bandhan's entry into banking was seen as a vote of confidence by the Reserve Bank of India (RBI) for the country's microfinance sector. Subsequently, the RBI awarded small finance bank licences to nine MFIs.

For any microlender that evolves into a bank, the challenge is how to quickly diversify the loan book to include a higher share of secured loan. Microloans are unsecured.

Conscious of this, the Kolkata-based Bandhan acquired affordable housing finance company Gruh Finance in 2019 from what was then HDFC Ltd. This helped it to increase the share of its secured loan book.

The bank's unsecured book, however, is still heavy at 55.5 per cent. Asset quality concerns over these unsecured microloans have returned.

Asset quality and NPA concerns

Before the Covid-19 pandemic struck, the bank's gross non-performing assets (NPAs), as a percentage of gross advances, were below 2 per cent.

During the pandemic years, the gross NPA ratio shot up: to 6.81 per cent in 2020-21 (FY21) and 6.46 per cent in (FY22) from 1.48 per cent in 2019-20 (FY20).

The bank managed to bring it down to 4.87 per cent in FY23.

This financial year, though, the gross NPAs are on the rise again. They shot up to 7.3 per cent towards the end of September, before slipping slightly to 7 per cent by the end of December, courtesy an NPA sale to asset reconstruction companies (ARCS).