The Rise, Fall, and Recovery: A Case Study of Bandhan Bank

Intro

This blog article addresses the various problems and challenges faced by Bandhan Bank, one of India's leading banking institutions. Bandhan Bank is a unique case due to its vast 70% dip from its peak level. We delve into understanding the root causes of such a problematic downfall—whether the pain persists, and the various corrective measures taken by the management to mitigate these issues.

Before proceeding, 3 key takeaways from this blog are:

1. Bandhan Bank has significantly diversified its portfolio in recent years, mitigating the high concentration of risky assets.
2. Excessive promoter stakes and geographical concentration were significant issues addressed.
3. The bank still faces challenges regarding gross NPA numbers, which may need careful management attention.

Background: An Overview of Bandhan Bank

In 2006, Bandhan Financial Services Pvt Ltd was established and later became the largest NBFC-MFI (Non-Banking Financial Company- Micro Finance Institution) in India by 2015. Such institutions primarily serve those often underserved by other banks, typically small businessmen and self-help groups.

In September 2015, Bandhan received a banking license from RBI, becoming the first bank established in eastern India after independence. By 2016, substantial growth had taken place with more ATMs, branches, and a growing loan book.

The Pain Points

Bandhan Bank began to face significant challenges, including:

• High Concentration of Portfolio in Risky Assets: As a microfinance institution, the bank's portfolio was primarily centered around microcredit loans, posing a potential risk if there were reduced repayment rates.

• Excessive Stake: Per RBI guidelines, a banking entity can't hold over 40% stake, but Bandhan Bank's promoters held an 89% stake.

• Geographical Concentration: The bank primarily operated in Eastern and Northeastern India, leading to geographic concentration risk.

Steps to Mitigate the Problems

Bandhan Bank management took proactive steps to mitigate these issues:

• Diversifying Risk: Bandhan Bank reduced its overreliance on microcredit loans from 100% in March 2016 to 85% in March 2018, thereby reducing its concentration of portfolio risk.

• Managing Stakeholding: To comply with RBI guidelines, the bank's promoters reduced their stake from 89% to 39.9% through amalgamation and further offers. Additionally, HDFC reduced its stakes from 10% to 4.9% to meet regulatory requirements.

• Geographical Expansion: Through a strategic merger with Gruha Finance, Bandhan Bank expanded geographically, thereby reducing the geographic concentration risk.

Current Challenges

Despite these corrective measures, Bandhan Bank currently faces challenges with gross NPAs. The COVID-19 pandemic impacted the revenue, profitability, and repayment capacity of Bandhan’s customers, ultimately leading to an increase in gross NPAs for the bank.

In Q3 FY21, the bank saw its provision increase significantly and in Q4 FY21, its profits dropped from 6.33 billion to 1.03 billion. The bank is making attempts to reduce their exposure from MFIs to emerging entrepreneur businesses.

Conclusion

Despite facing significant challenges, Bandhan Bank has shown determination in addressing its issues. While the excessive promoter stake and geographic concentration have been successfully mitigated, the problem of NPAs persists, and the Bank should focus on managing this in the future. This in-depth case study provides key insights into Bandhan Bank's strategies and will be intriguing to stakeholders, market watchers, and finance enthusiasts.