Home / Markets / Mark To Market /  Bandhan Bank’s weak Q1 is a warning on microfinance

Investors of Bandhan Bank, micro-lender turned full-service bank, will need to watch out for additional pain on asset quality as a sharp fall in collection efficiency during the June quarter doesn’t bode well. The lender’s metrics also confirm worries about the severe impact of the second wave on the microfinance segment.

In an early update on the first quarter, the bank said its overall collection efficiency dropped to 80% during April-June from 96% in the previous quarter. That for microfinance loans was even lower at 72%, only marginally higher than that of previous year. Recall that the first quarter of FY21 was mostly under a strict nationwide lockdown which affected banking operations immensely. To be sure, most lenders that have released early updates have shown a drop in collections. That said, the fall in Bandhan Bank’s collections is worrisome.

The second wave has been severe in rural areas more than urban centres unlike last year. Ergo, microfinance lenders have been hit hard this time around. Besides, it is clear that the bank bore the brunt of the second wave of the pandemic and uncertainty in eastern and north eastern states. West Bengal and Assam account for the lion’s share in Bandhan Bank’s balance sheet. In Assam, the effects of a local law that restricts borrowers from taking loans from more than one lender continued to have its effect. Both the states also witnessed disruption due to lockdowns in the wake of the second wave.

The lender’s growth metrics disappointed too. Bandhan Bank reported an 8% contraction in its loan book sequentially. Among the nine lenders that have so far released early updates on their June quarter performance, Bandhan Bank’s loan book contraction is the steepest. Understandably, analysts are worried that the impact of the pandemic has been more than anticipated on the bank.

“Near-term asset quality would remain under pressure as well as drive an uptick in credit cost estimates," analysts at Motilal Oswal Financial Services Ltd wrote in a note. Those at Jefferies India Pvt Ltd warn that delayed improvement could be an overhang in the near term for the bank.

The bank also reported a modest 7.8% year-on-year loan growth. In short, Bandhan Bank’s metrics don’t impress even with the optical benefit of a low base. Shares of the bank were down nearly 3% in early deals on Friday, reflecting the disappointment of investors. With a roughly 8% fall since April, shares are trading at a modest multiple of 3 times estimated book value for FY22.

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