In a developing economy, many people require a source of funds to support their well-being. Many Institutions do not provide loans without collateral or credit history. These initiatives create a barrier for credit growth which limits potential clients who require the funds. Microfinance provides a way for many underprivileged people who access their funds towards spending.
This helps to improve their lifestyle as well as the economy. However, in downtimes this is a cause of concern due to unsecured loans and people suffering to repay will have a huge effect on the bank compared to secured loans. In this article, we will look at Bandhan Bank which is under pressure to improve the bank’s stability operating in the Microfinance space.
About Bandhan Bank
Bandhan Bank transformed from a microfinance institution to a full-service universal bank in 2015. They operate through a network of around 6,300 banking outlets and serve more than 3.35 crore customers across 35 states and union territories. Bandhan Bank has maintained its strong presence in the eastern and northeastern regions of India, particularly in West Bengal.
The bank specializes in microfinance lending, which constitutes approximately 32.70% of its loan portfolio as of March 2024, which decreased from 34.90% in March 2023. Since its inception, the bank has focused on financial inclusion and serving the underbanked population, particularly in rural and semi-urban areas.
The bank’s business model combines traditional banking services as well as microfinance operations. Despite recent challenges, Bandhan Bank remains one of India’s largest microfinance lenders, with a huge market share in this segment.
Why Did Bandhan Bank Underperform?
Bandhan Bank’s share price has experienced significant volatility in recent years, reflecting investor sentiment tied to its operational challenges. After its IPO, the stock initially soared, due to the optimism about its growth potential in microfinance.
However, share prices began to decline as the bank struggled with rising NPAs and regulatory scrutiny. This downward trend had impacted during periods when the bank reported disappointing quarterly results as per analysts.
The bank faced several challenges that led to its underperformance in recent years. The COVID-19 pandemic impacted its core microfinance business, causing a spike in non-performing assets (NPAs) as borrowers struggled to repay loans. The bank’s gross NPA ratio increased to concerning levels, reaching 7.02% by December 2023.
Geographic concentration risk emerged as one of the major issues, with a substantial portion of the loan book being concentrated in West Bengal and Assam. This concentration became a problem when these regions faced natural calamities and political interventions in microfinance operations.
The bank’s inability to diversify its loan portfolio quickly enough into other segments like housing loans and MSMEs also contributed to its struggles. Now, Management said they are looking to diversify their portfolio in the upcoming years and bring down microfinance exposure.
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Bandhan Bank‘s Share Price Impact
The bank’s stock price has experienced significant volatility since its listing. From its peak of ₹742 in 2018, the share price declined over time. It was trading below ₹200 in early 2024. This decline shows the destruction of shareholder wealth over the period. Market concerns about asset quality, geographic concentration, and management effectiveness had a huge impact on the stock.
The company stock’s underperformance stands in contrast to the broader banking sector, which has shown resilience and increased shareholder value. Institutional investors have reduced their holdings, which reflects negative sentiment about the bank’s near-term prospects. However, recent management changes might bring more positive momentum to the stock price.
Outlook on the Microfinance Industry
The microfinance industry in India shows promising growth potential, with the sector recovering strongly post-pandemic. Regulatory changes by the Reserve Bank of India have created a more stable operating environment for microfinance institutions.
Competition has intensified with small finance banks and traditional banks expanding their microfinance operations. Digital transformation is reshaping the industry, with technology adoption improving operational efficiency and reducing costs.
Collection efficiency has improved significantly across the sector, returning to pre-pandemic levels. The government’s focus on financial inclusion and support for micro-enterprises continues to create opportunities for microfinance lenders. However, natural calamity risks and regional political interventions remain key challenges for the industry.
Analysts valued, In 2023 India’s microfinance market stood at USD 46.12 billion, and by 2029, they expect it to grow at a CAGR of 7.20%.
Recent Management Shuffle
Recently, RBI approved Partha Pratim Sengupta as Managing Director and CEO for 3 years succeeding Chandra Shekhar Ghosh. The newly appointed CEO has worked in various segments of the banking industry. He holds experience as MD and Chief credit officer in SBI and then worked as MD and CEO of Indian Overseas Bank.
The management reshuffle shows that they aim to address key challenges which include portfolio diversification, asset quality improvement, and geographic expansion. The new team has pressure to improve the bank’s financial stability, asset liability, concentration risk, risk management practice, and digital transformation.
The appointment of experienced professionals in key positions signals a shift that can make investor’s sentiments turn positive. Recently, the bank’s CFO said they are aiming at 18% advance growth and a strategic shift towards secured loans. Investors need to look at the execution of the plans to understand the management decision effectiveness.
Conclusion
Bandhan Bank’s potential comeback relies on several factors. The new management’s execution capabilities and strategic initiatives will play a crucial role in determining the bank’s future trajectory. The bank’s strong brand in microfinance, including its extensive distribution network, can provide a foundation for its recovery.
The focus on portfolio diversification and geographic expansion could help mitigate concentration risks. Improved risk management practices and digital capabilities under new leadership may strengthen operational efficiency. While challenges remain, especially in asset quality and competitive pressures, the bank’s strong capital position and renewed strategic focus under new management create the potential for a turnaround.
However, investors should monitor the execution of the bank’s initiatives and improvement in key metrics over the period and make necessary decisions based on their risk appetite.
Written by Santhosh
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