Bandhan Bank: Sufficient clarification on Audit, Stay invested
15-02-2024

In response to recent media reports regarding concerns over potential loan evergreening practices, Bandhan Bank witnessed a decline in its share price. These reports also indicated that a forensic audit of the Bank’s loan portfolio would be conducted. Let’s delve into a detailed understanding of this development

About Credit Guarantee Fund for Micro Units (CGFMU):

The CGFMU scheme was set up by the Government of India to guarantee payment against default in micro loans extended to eligible borrowers by Banks/NBFCs/MFIs managed by the Board of National Credit Guarantee Trustee Company Limited (NCGTC) as the trustee of the Fund. This was done to enable collateral-free micro loans and overdraft facility under Pradhan Mantri MUDRA Yojana and collateral-free loans to Self Help Groups with the overall objective of financial inclusion. 

Under this Scheme, Banks would pay a premium amount to insure the eligible loan portfolio. Upon default, up to 5% of the loss would be borne by the bank itself and the incremental loss would be borne by the NCGTC. However, on an aggregate level, claims can be made for only up to 15% of the insured amount. 

Under this scheme, Bandhan Bank has insured its portfolio for Rs. 20,800 Cr and disbursed over Rs. 1,950 Cr under the Emergency Credit Line Guarantee Scheme (ECLGS) in FY21. To date, the Bank has received Rs. 917 Cr from the NCGTC. The Bank has already recovered over 20% of the received amount from customers. The Bank made an additional claim of Rs. 1,296 Cr in the second quarter of FY24. However, the total claimed amount remains substantially below the maximum eligible amount (15% of the total insured amount).

Following the additional claim in FY24, an initial sample audit was conducted by an independent agency for the claims raised and NCGTC raised certain observations with the potential of evergreening (In banking parlance, evergreening of loans refers to the practice of a bank giving a fresh loan to pay up an existing loan). Subsequently, NCGTC decided to commission a detailed audit of the claims. 

Management Clarification: 

Management clarified that the audit is initiated by NCGTC, the implementing agency of these schemes and not RBI. It's noteworthy that approximately 85% of the disbursed funds have been repaid by customers. Additionally, the non-performing portfolio is already provisioned at around 88%. 

Chandra Shekhar Ghosh, MD & CEO denying the existence of evergreening said, “If you look at Bandhan's lending practice for the last 23 years, we have been giving single loans per borrower. The practice is until the first loan is not closed, they are not eligible to get the second loan. That means, there is no chance of evergreening". He also emphasized that some of the observations made in the sample audit were inadequate and inappropriate. The audit is ongoing and management expects results within the next few months, expressing full confidence in recovering the funds from NCGTC.

Moneywork4me Opinion: 

Bandhan is seeing pressure in advances growth as it has not come out of the stress in slippages yet. The recovery from NPAs is taking more time than expected. As far as the NCGTC Audit is concerned; Bandhan Bank's management history does not suggest involvement in unethical practices. Even if NCGTC does not fully reimburse the claimed amount, the majority of the NPA book being already provisioned for, the impact on the bank's overall financial health would not be severe. However, we have downgraded the MRP to Rs. 250 due to a consistent increase in slippages.

From our recommended price, Bandhan has corrected about 23%. However, this is a recovery story and the timing of such recoveries can be delayed. As MFI loans are low-duration loans, the payback period is low, thus loan book will get replenished faster than a housing finance or a corporate loan book. This replenished loan book is expected to have lower slippages; in line with the company’s aim of diversifying its loan book.

Even with all the NPA issues, Bandhan still has been able to generate a ROE of 14% which means unless there are any significant incremental slippages, de-rating of P/B should not happen. At CMP, Bandhan trades at P/B of 1.6x, with lower incremental slippages and higher ROE, P/B should get rerated to upwards of 2x. Given the long runway of the business model and structural advantages, we believe that we can make good returns over the long term and thus we advise investors to stay invested. We will be completely agile in tracking future events and if things don’t go our way we will exit our position.