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Micro lender Bandhan Bank Ltd’s December quarter update showed that investors were right about its resilience amid the pandemic.

The bank reported a 23% year-on-year loan growth, higher than the previous quarter. The sequential growth in loans was 5%. To be sure, this is nowhere close to the growth rates the lender reported in the past years. Further, growth is aided by festival season optimism and the government’s guarantee scheme that essentially took the credit risk away for banks. The sustainability of loan growth in the absence of these is debatable.

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That said, the sanguine outlook on rural economic prospects augurs well for Bandhan Bank, both on growth and asset quality. While analysts await the extent of restructuring, the expectation is that the damage is limited. Improving collection efficiency in the September quarter has also given confidence to investors.

However, Assam and West Bengal are due for elections. Promises of loan waivers have begun, according to media reports. More than 40% of Bandhan Bank’s asset under management comes from these two states, according to analysts at Nomura Financial Advisory and Securities India Ltd. To be sure, the lender has fared well in previous political uncertainties, a sign that it can withstand once more. Ergo, a big impact on asset quality is not expected. “We expect LGDs to remain lower (v/s those of peers) given Bandhan’s strong market share and higher unique customer base," wrote analysts at Motilal Oswal Financial Services Ltd.

Investors should also gauge the impact of the Micro Finance Institutions (Regulation of Money Lending) Bill 2020 passed by the Assam state assembly. The bill stipulates a cap on total leverage of microfinance borrowers in the state. This is also a near term overhang on Bandhan Bank’s growth prospects.

For now, investors have taken a positive view on the quarterly update. The bank’s stock gained around 2% today and valuations still remain modest compared with peers.

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