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A couple of favourable incremental developments

Bandhan Bank witnessed a couple of favourable developments in the week gone by (Jun 13-19). Firstly, RBI’s consultative paper on harmonisation of regulations for MFIs subsides the concerns of the bank being subjected to maximum number of lenders or lending rate cap. Secondly, Assam government’s decision of providing relief as well as incentive for MFI loans will partially address one of the key concerns of its elevated stress pool in Assam (14% in 90+dpd and 11% in 31-90 dpd bucket for Assam as of Mar ’21). Bandhan Bank, with highest market share in Assam (>55% market share with Rs70bn exposure), is naturally bound to benefit from the scheme designed in a way to retain credit culture and promote responsible repayment behaviour. However, it is difficult to quantify the extent of impact as borrower indebtedness of only up to Rs125k is eligible and Bandhan is actively graduating borrower from MFI to individual loans. Maintain BUY with a target price of Rs465. Key risk: Stress elevated beyond our expectations due to second covid wave disruption.

Assam government announces relief/incentive, staying committed to its poll promise:

Assam government is staying committed to its poll promise, announced its decision of providing relief as well as incentives for MFI loans. Assam, in particular, has witnessed huge stress build up for the entire MFI industry (due to socio-economic-political reasons) with 0+ dpd being as high as 50% as of March 31st, ’21 – this includes 180+ dpd at 13.6%, 90+ dpd at 10.5%, 30+ dpd at 24.4% and 1+dpd at 11.7%.

Our view on incentive and relief announced by the state government:

* The proposed announcement is win-win for lenders as well as borrowers. The nuances and conditionalities attached will help retain the credit culture (which is otherwise the biggest risk of any waiver announcement). At the same time, it also will promote responsible lending, borrowing and repayment behaviour.

* Regular/standard (0 dpd) customers are encouraged by offering them incentive and risk of they becoming overdue due to interim disruption can be addressed adequately.

* Overdue customers are offered waiver only for overdue installments (not undue outstanding exposure). Government by waiving overdue installments will make them regular and post that the borrower will be further incentivised to regularly honour his/her upcoming installment. With this, forward flow to higher dpd bucket will be capped.

* Also, complete waiver to stressed/needy borrowers is offered with conditionality of borrowers being downgraded in credit bureau score. This being detrimental to future loan eligibility, borrowers will try to settle the loan rather than seeking full waiver.

What about individual loans of Bandhan Bank with higher ticket size:

Bandhan Bank has been actively graduating its high vintage borrowers from group to individual loans - proportion of Assam in individual loans is up from 1% in FY20 to 12% in FY21. However, given these are high vintage customers with repayment track record, delinquency behaviour for them will be superior to group loans.

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