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Bandhan Bank Ltd’s June quarter metrics confirmed investors’ concerns over asset quality. The lender reported a surge in gross bad loan ratio as collections dropped in the wake of the second wave of the covid-19 pandemic.

Earlier last month, the bank had said its overall collection efficiency dropped from 96% in the March quarter to 80% in the June quarter.

For microfinance loans, it was even lower at 72%, only marginally higher than that of the previous year though the first quarter of FY21 was mostly under a strict nationwide lockdown, impacting banking operations.

Asset quality fears ring true in Bandhan Bank’s Q1 metrics
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Asset quality fears ring true in Bandhan Bank’s Q1 metrics

Lockdowns returned this year, albeit with less restrictions. The second wave and the restrictions that it triggered resulted in gross bad loans rising to 8.2% of the bank’s total loan book in the June quarter from 6.8% in the previous quarter.

The pain points were Assam and West Bengal, where the bank has the bulk of its operations. Collection efficiency in Assam dropped to 49% in June while for the whole quarter it was 67%. The lender said the restrictions during the second wave in the states from mid-May to mid-July affected collection efficiencies.

The silver lining is that the bank received repayments from borrowers who had missed scheduled payments. Repayments were made even for loans that had turned bad. In short, the lender is confident that recoveries from delinquencies would be robust and that all bad assets will not turn loss-making for the bank.

That said, the bank had to restructure microfinance loans worth 4,057 crore and home loans worth 604 crore during the quarter.

Another source of comfort for the lender is that its core interest income showed healthy growth, though the loan book shrank 8% sequentially. The low cost of funds helped improve margins. Net interest income grew 20% from the previous quarter, lifting operating profit by 8.2%. The bank has managed to beat Street estimates by reporting a net profit of 373.10 crore for the quarter.

Bandhan Bank’s shares have dropped 8.8% since the bank’s update on key metrics on 16 July and are down 14% since April. It is clear that asset quality has been the main worry for investors. The bank will have to show improved recoveries in the coming quarters to alleviate the concerns and help valuations

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