Relay stress clearly

Analysts have a valid concern that the bank may be behaving leniently with borrowers. If it is doing so, it needs to make this known upfront.

What’s worrying about Bandhan Bank’s whopping Rs 3,008-crore loss—for the three months to September—is not so much the magnitude, as much as how wholly unexpected it was. Indeed, good corporate governance would have warranted a profit warning.

As analysts have pointed out, the loss was nowhere near expectations with the lender creating Rs 5,578 crore of provisions based on an assessment of recoveries and provisioning requirements. Even in the June quarter, the provisioning was much smaller at Rs 1,374 crore.

Given the economy’s recovery has gained momentum in the last few months, the jump in provisions is surprising. It suggests the management has either been caught off-guard by some developments or not been able to assess the situation correctly.

It has been known for some time now that the impact of the pandemic has been fairly severe. One understands the bank needed to build the buffer to prepare for possible loan impairments; its book is not in the best of shape with gross non-performing assets (NPAs) at 10%, restructured loans at 11% and special mention accounts (SMAs) in the micro-finance portfolio at 20%. However, this has not been communicated clearly enough to shareholders. While a return to normalcy is some time away, the lender has, to its credit, managed to improve recoveries.

Typically, customers in the MFI category do tend to repay their loans as soon as their incomes are restored. However, the regulators need to keep a close watch on the situation because these are difficult times and, as we know, households in the informal sector have been badly hurt. Analysts have a valid concern that the bank may be behaving leniently with borrowers. If it is doing so, it needs to make this known upfront.

That the environment is not an easy one is clear from the results of other lenders too. M&M Financial has had a rough patch for several years now but was able to reduce the stressed loans in the September quarter; overall, in the three months to September, the company reported a decline in stressed loans by 270 basis points to just under 35%. Given the lender is a member of a large conglomerate, it would not suffer for want of financial support.

However, smaller lenders, without strong parents, are vulnerable to a serious erosion of their capital. This is especially true in the case of lenders where the loan portfolio is not well-diversified and is concentrated on a few segments.
In the current environment, shareholders are entitled to a fair assessment of how the business is progressing. At Equitas Small Finance Bank, for instance, there was a rise in provisions—to Rs 138 crore in Q2FY22 from just `75 crore in the June quarter.

This crimped earnings and profits slumped 60% y-o-y. While the lender reported overall stress of around 20%, lower than the 24% in the June quarter, the improvement in asset quality is expected to take a while given the customer profile. Indeed, the recovery process could be a slow one for certain sectors of the economy and, therefore, lenders with exposures to these sectors will feel the pressure for longer.

The fact is that good lending opportunities too are scarce as is evident form very tepid increase in advances during the September quarter. In the interests of systemic risk, it’s important all lenders red-flag any stress so that it can be dealt with quickly.