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Bandhan Bank Ltd’s shareholders are going through a rough patch, as the lender continues to grapple with asset quality issues. Elevated exposure to West Bengal and Assam — two states severely impacted by the pandemic and floods — has weighed on bank’s collection efficiency in these states. Unsurprisingly,

The lender is taking corrective measures. At its ‘Analyst Day 2022’ held last week, Bandhan Bank shared the strategic priorities that aim at product portfolio and geographical diversification along with continued focus on granular deposits.

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Change underway

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In the half year ending September (H1FY23), Bandhan had 52% geographical concentration in West Bengal & Assam for microfinance and small bushares of Bandhan Bank are down 5% in CY22 so far, at a time juicy net interest margins of many banks have fuelled a stellar 21.5% rally in the Nifty Bank index.siness and agri loans. The management expects to bring this down to 40% by FY25. Also, the share of microfinance loans is expected to drop from 40% in H1FY23 to 26% in FY25. It also expects to increase the share of the non-microfinance book, which includes commercial banking, housing and retail finance.“Bandhan seems to have read the writing on the wall and is trying to diversify from a sub-prime customer franchise towards the prime customer by expanding their product suite to include secured loans and commercial loans," said Krishnan A.S.V., senior vice president, institutional analyst, HDFC Securities Ltd.

While these are steps in the right direction, the efforts are expected to yield results only gradually and in the medium term. Motilal Oswal Financial Services Ltd cautions that the bank’s near-term slippages are likely to remain high as it looks to clean up the remaining stress, which will continue to exert pressure on loan growth and margin. “We remain watchful of its asset quality, particularly in the Assam portfolio, which can keep credit cost elevated. Though the management expects healthy recoveries over H2FY23/Q1FY24, slippages are likely to be higher during Q3/Q4FY23, thus keeping its overall performance under pressure," it said in a report.

Meanwhile, in the long run, Bandhan’s structural shift towards secured and low-yielding assets is expected to reduce its asset quality volatility, but the extent of improvement in RoA needs closer tracking.

Also, the change in strategy entails significant execution risks and elevated investments in expanding the product portfolio across multiple new businesses, said Krishnan.

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