Bandhan Bank at a crossroads: Can Chandra Shekhar Ghosh's exit sink the struggling lender's revival blueprint?

The first three banks have managed to overcome some of the challenges after their founder-MDs left, but Bandhan Bank will begin its journey with its founder not even being a part of its board. While Bandhan is gradually recovering from a long period of asset quality deterioration and lower profitability, why is Ghosh leaving when his top two deputies are relatively new?

Sitting in his well-appointed office at the bank’s headquarters in Kolkata, Ghosh gives his reasons. “It (retirement) was always on my mind. The question was, ‘When?’,” says the soft-spoken Ghosh, adding that he was keeping track of three factors. The first was when the bank would “achieve stability”. “Stability, to me, means that after the challenges of the pandemic, the bank’s portfolio quality and growth would be in the best position. Second, I wanted to ensure my team was strong enough to execute any strategy we devised, and I needed to have confidence in their capabilities,” he explains. The third factor was the IT transformation that was completed in October 2023. “I’ve been evaluating these three key factors every month. Once I saw that these parameters had reached an optimal level, I felt it was the right time to step aside and facilitate a smooth transition,” he says.

While the bank’s asset quality has improved, profitability is still not at its peak, and the return on assets (RoA) has dropped to 1.44% in FY24 from 4.23% in FY19. The senior management team is also relatively new, with EDs Ratan Kumar Kesh and Rajinder Kumar Babbar joining the bank and its board within the past 15 months. Over nine years, Ghosh was unable to groom a successor, partly due to the departure of senior professionals. RBI had hinted at the need for a successor three years ago when the board proposed a five-year term for Ghosh, but the regulator approved a three-year one. “I have been a hands-on operational manager for the past 23 years. Regardless of how much longer I stayed, this hands-on approach would have continued… It’s not sustainable to continue in this manner indefinitely. How long can I keep doing this?” asks Ghosh.

The holding company question

During his tenure, Ghosh has had his run-ins with RBI. The first one took place in 2018, when the regulator put restrictions on the bank’s branch expansion and froze his salary, which were later lifted. The reason was RBI’s licensing guidelines required Bandhan Bank’s promoter, Bandhan Financial Holdings (BFHL), to reduce its stake from 82% to 40% within three years of the bank starting operations (it started operations in 2015). This was eventually achieved through the merger of GRUH Finance in 2019 and secondary market sales in 2020.

There are also private investments made by the promoter companies of Bandhan Financial Services Limited (BFSL), which acts as the bank’s core investment company and controls BFHL and Bandhan Bank. BFSL is promoted by the Financial Inclusion Trust (FIT, with a stake of 32.91%) and the North East Financial Inclusion Trust (NEFIT, 7.82%); both are public charitable trusts. Other investors include Bandhan Employees Welfare Trust (BEWT) with 14.61% and Caladium Investment with 16.1%. Eyebrows were raised when BEWT acquired a 20% stake in Nicco Parks & Resorts, a major amusement park in eastern India, in October 2021. Then in January 2024, Ghosh’s son Angshuman—along with FIT, NEFIT, and BEWT—acquired a 66.67% stake in Quadra Medical Services, a diagnostics chain in Kolkata. RBI’s guidelines don’t restrict investments by promoter entities in non-financial firms after making proper disclosures, while in the case of banking entities, they are allowed to buy stake up to 5%.

Ghosh responds, that “they (the promoter companies) should also be diversifying”, citing the example of Singapore’s sovereign fund GIC, an investor in the bank. “Are they not investing outside?” he asks, adding that the relationships should be at arm’s length. The promoter companies of BFSL are not technically wrong, but such investments complicate the supervisory work for regulators, as it leaves room for possible banking relationships—knowingly or unknowingly—in the future. That is why corporates are not allowed in the banking sector.

Pain points

For Bandhan Bank, it had been smooth sailing till 2018-19. The bank posted its best RoA (4.23%) and its lowest net NPA (0.58%) in FY19. But its performance has been downhill since. This could possibly be blamed on its legacy loan portfolio. In FY18, 86% of its loan portfolio was in microcredit. Given the high unsecured component, a series of events impacted its customers in the years leading to FY18, and subsequently: demonetisation in 2016; GST implementation in 2017; Cyclone Fani in Odisha in 2019; the Assam microfinance crisis in 2020; and the periodic farm loan waivers in various states; not to mention the pandemic. As a result, gross NPA ballooned from 1.25% in FY18 to 6.81% in FY21, before coming down to 3.84% in FY24. RoA, too, plunged from 4% levels to 1.44% in FY24.

The bank also faced an audit from the National Credit Guarantee Trustee Company Ltd (NCGTC), which offers guarantees for collateral-free microloans. The bank used the Credit Guarantee Fund for Micro Units (CGFMU) in FY21, covering a portfolio of Rs 20,800 crore. The maximum eligible insurance claim under CGFMU is 15% of the insured amount, that is, Rs 3,100 crore. By December 2022, the bank had claimed and received Rs 917 crore and made an additional claim of Rs 1,296 crore in Q2FY24. The issue arose when NCGTC conducted a sample audit after the second claim, making certain observations. The bank said it had consistently followed the microloan process before, during, and after Covid-19, with specific deviations only during lockdowns. The bank provided the necessary documents, and NCGTC decided to conduct a thorough audit of the portfolio that has 3 million borrowers. The findings are likely to be out soon. The bank, meanwhile, has made 100% provisions for these NPA loans.

Bandhan 2.0

In a nearly decade-long journey, Bandhan has been working towards becoming a universal bank while continuing to create an impact at the bottom of the society. It has put in place a strategy, which it calls Bandhan 2.0, to create the tech architecture, digital solutions, compliance and risk management framework, and customer experience necessary to transform into a truly universal bank. In March 2023, Ghosh hired Kesh, also the bank’s COO, to speed up the transformation exercise. The bank has shifted its core banking solution (CBS) from FIS to Oracle, as the FIS system made it challenging to incorporate regulatory changes and fast-changing customer requirements, creating friction with RBI.

By completing the transformation in October, Bandhan has addressed almost 90% of the pending regulatory issues. This March, Ghosh picked Babbar, also the bank’s Chief Business Officer, with a mandate to drive Bandhan towards sustained growth and success while maintaining a strong focus on customer satisfaction, regulatory compliance, and operational efficiency. “Some of my key responsibilities are enhancing business opportunities, bringing in innovation and digital transformation, driving revenue growth and managing risk at the same time,” says Babbar, who spent a large part of his career at HDFC Bank.

With Ghosh set to retire on July 9, the bank is ready with a comprehensive plan for the next three years, involving all business units. Ghosh, along with the new team including CFO Rajeev Mantri, has ensured that the strategy focusses on increasing the share of secured assets while maintaining a balance between portfolio quality and returns. Currently, the bank’s portfolio is 57.4% unsecured loans and 42.6% secured loans. The plan is to achieve a 50:50 ratio by FY26. Atul Parakh, CEO of Bigul, the digital investment platform of Bonanza Portfolio Ltd, says that effective execution and risk management will be key to maintaining profitability while serving core microfinance customers and exploring new segments. “Overall, the diversification strategy is prudent but requires careful implementation to leverage Bandhan’s microfinance expertise while expanding sustainably,” he says.

Mantri, a former CFO of Citi India, explains that the bank will continue to grow at 18%. The microfinance segment will grow at a slightly lower rate of 14-15%; this means that the other segments (housing, two-wheeler, auto, commercial vehicle, and gold loans) will need to grow faster to achieve the overall growth target. “We have built our capability and knowledge around specific industries where we can deepen our relationships with customers. By doing so, we will acquire corporate salary accounts, generate trade and other fee income, and attract low-cost deposits,” says Kesh, who has had stints at ICICI Bank, HDFC Bank, YES Bank, and Axis Bank.

The bank has diversified its book to include commercial banking (SME), corporate banking, housing finance including higher-yielding affordable housing, commercial vehicle loans, car loans, two-wheeler loans, four-wheeler loans, gold loans, etc. It aims to offer products for the affluent like priority cards and lounge access, besides salary accounts. In the corporate vertical, it is targeting transactional banking for fee income.

It has also overhauled its credit underwriting processes. For instance, it has introduced the concept of a cooling-off period. If a customer’s account becomes NPA, there is a system-enforced 90-day cooling-off period before issuing a fresh loan. The bank has also set up a data analytics team, hiring dozens of graduates from IIMs and IITs. It has also created a separate recovery team to focus on SMA (special mention account, that shows sign of stress) borrowers to prevent them from slipping into further delinquency and to recover any existing slippages. The bank has a comprehensive strategy to optimise risk management with customer-centric growth. “This approach leverages data science, analytics, and a deep understanding of customer behaviour to drive growth-oriented decision-making,” says Babbar.

Bandhan is also focussing on improving branch productivity. “Some existing branches will now migrate to larger spaces or be upgraded to full-service branches. There could be separate counters for gold loans, loans, current accounts, etc.,” says Kesh.

The bank can provide current account customers with products like trade finance, POS solutions, and CMS capabilities. It is also planning to create targeted value propositions for its savings account customers. This is expected to attract more customers to savings accounts. “It’s clearly a liability-first approach, which basically means that if advances are growing by 18%, we want deposits to grow much faster, upwards of 20-21%. The quality of the deposits also improves. So, what will happen is the cost of funds will come down, which improves the NIM (net interest margin),” says Mantri.

The way ahead

Investors are, however, concerned about the extent to which the bank’s business mix will change, as NIM will be impacted with secured advances. Historically, the bank has had higher RoA and NIM due to the dominant share of the microfinance business. Its NIM for FY24 was 7.3%, which is very healthy compared to 4% for universal banks. “We will continue to grow the microfinance business, but we will grow the secured portion of the book faster. So, both segments will grow, but the mix will keep changing,” says Mantri. “We believe the biggest challenge the bank would face for a few quarters will be to find a balance between maintaining high growth and improved asset quality and not of human resources,” says Siddarth Bhamre, Head of Research at Asit C Mehta Investment Interrmediates.

Mantri explains that what will offset the pressure on margins are lower slippages in the post-Covid book, better credit quality due to tightened credit standards, lower NPAs in the secured book, and lower cost of funds via CASA initiatives. “We are investing primarily in people, technology building capabilities, and our branches. While the cost-income ratio may remain at similar levels next year, we will start seeing the efficiencies and benefits of scale,” he says.

While Ghosh has prepared a strategy before he steps down, the challenge lies with the relatively new team at the helm. Most senior management members have been in their positions for less than two years. “Exits are typical during transitions,” says Parakh of Bigul. In a private bank that serves the underserved and unbanked and is emerging from a challenging phase, the situation becomes even more daunting. “The current team at Bandhan Bank is fairly new but has vast, diverse, and relevant experience in the banking industry,” says Bhamre.

The spotlight is now on the new MD & CEO to steer ahead Bandhan Bank 2.0.

@anandadhikari