Brokerages have red-flagged microfinance as the lockdown will have a bigger impact on the very small borrowers.

Ambit Capital in a note has raised serious questions over Bandhan Bank.

The brokerage has drastically cut the target price to Rs 65 per share from Rs 395 per share, while maintaining a sell rating on the Calcutta-based lender.

In a report, Ambit Capital has said that it expects a significant deterioration in the asset quality of Bandhan in 2020-21 as microfinance borrowers are the most impacted by the lockdown.

Many of them are daily wage earners whose payment capability will be hit. Besides, the lockdown will impact the ability to conduct and collect dues from the borrowers since almost the entire collection is in cash.

“Once the lockdown is over, we expect political activism to come into play, impacting Bandhan’s ability to collect money from borrowers. Historically, we have seen that it becomes difficult to collect receivables once borrowers have not repaid for a couple of months (Andhra Pradesh crisis in 2010 and demonetisation in 2016-17),” the report said.

Bandhan Bank is more exposed in the current environment as 62 per cent of its portfolio is concentrated in eastern India where the leverage among borrowers is the highest because of rising loan sizes over the past three years.

Even Bandhan’s corporate portfolio, which is five per cent of the loan book, is entirely exposed to micro-finance institutions or non-banking finance companies (NBFCs), which are the most exposed in the current environment.

'We expect 15 per cent, 5 per cent slippage in its microfinance/corporate loan portfolio and hence credit cost to rise to around 6.7/3.4 per cent in 2020-21 from an estimated 1.7 per cent in 2019-20,' the analysts said, adding that high defaults in microfinance will lead to a significant slowdown in loan growth and compression in net interest margins, which should lead to losses in 2020-21.

According to the investor presentation made by the bank following its third quarter results for 2019-20, total advances stood at Rs 65,456 crore as on December 31, 2019. The bank said the book size of the microfinance portfolio stood at Rs 40,100 crore. Of this, Rs 6,586 crore came from Assam, Rs 18,381 crore from Bengal and Rs 15,134 crore from the rest of India.

Bandhan Bank had in the presentation said that it has been successful in the past in handling external events which impacted delinquencies. For instance, after the demonetisation in 2016, the lender improved its delinquency numbers and came back to normalcy in the following three months.

Shares of Bandhan Bank on Tuesday ended marginally lower at Rs 192.30 — a loss of 0.72 per cent on the BSE in an otherwise firm market.