Promoters of Bandhan Bank sold a 20.9 percent stake in India’s most profitable bank to meet RBI’s ownership rules.

Bandhan financial holdings, a promoter group entity, raised an out Rs 10500 crore by selling shares in the secondary market on Monday, translating into a translation price that amounts to about 10 percent less than the stock’s closing price Friday.

Bandhan Financial Holdings Ltd. sold 337.4 million shares in the Indian lender at 313.1 rupees in a block trade on Monday, according to deal teams seen by Bloomberg News.

The latest sale helps founder and Chief Executive Officer Chandra Shekhar Ghosh cut his stake to 40% from 60.95%, according to data available as of June.

The RBI imposed restrictions on branch expansion by Bandhan Bank, which specializes in lending to small borrowers after it failed to lower its stake to 40% last year. Bandhan Bank then agreed to combine with mortgage financier Gruh Finance Ltd. in an $11.7 billion deal to pare the founder’s stake as mandated, following which the central bank partially relaxed its curbs on the lender.

“RBI is very clear that shareholding in private banks should be diversified as it reduces concentration risk,” Karthik Srinivasan, group head, financial sector ratings at ICRA Ltd., the local arm of Moody’s Investors Service. “The urgency of stake sale by Bandhan founders shows that RBI is on its track on its rules regarding shareholding in private banks.”

Last month, Kotak Mahindra Bank raised nearly $2 billion by selling shares to institutions in two separate secondary market deals.

The central bank is currently reviewing its norms on shareholding in private banks, which stipulate founders cut their stake to 15%, as it aims to improve corporate governance in a sector plagued by bad loans.

Some of Bandhan Bank’s profitability metrics, including return on assets and return on equity, are the highest among Indian banks.

Credit Suisse Securities (India) Pvt., J.P. Morgan India Pvt., Goldman Sachs (India) Securities Pvt. and JM Financial Institutional Securities Ltd. are joint bookrunners for the deal.

Consequences: 

Bandhan Bank shares tanked nearly 11 percent on the BSE post a block deal, which saw 345.6 million shares changing hands. The details of the buyers and sellers in the block deal are not known. The shares of Bandhan Bank ended the session at Rs 308.65, down 10.60 per cent, on the BSE. The stock had opened at the intra-day high of Rs 321.10 and touched a low of Rs 304.20 during the day. This event significantly weakened several investors’ confidence in the company and they chose to sell the stocks over holding it.

The problem for Bandhan Bank doesn’t end there,

Bandhan Bank because of the huge concentration of microcredit in the overall book. About a quarter of Bandhan’s loan book is still under moratorium. Bandhan’s big bet is also on the microcredit business. Out of its total customer base of 20.31 million, 15.46 million are micro banking customers. Out of the total loan book of Rs 74,300 crores, Rs 47,500 crore or around 64 percent is microloans. This includes individual loan portfolio amounting to Rs 2,200 crore.

Bandhan  Bank’s story is built on small loans to low-income borrowers. Bank has a deep understanding and expertise about how microcredit works on the ground. Still, the COVID impact is a major negative factor in the rural economy. The prolonged lockdown has affected the livelihoods of small borrowers and small and medium entrepreneurs since March. The ripple effects of the COVID crisis are highly unpredictable and could last longer than one can imagine. Only beginning the third quarter the exact impact of the moratorium loan defaults will be visible. It will be a major test for institutions like Bandhan Bank.

Conclusion

But even after all the problems, Bandhan Bank can still generate good returns for the investors in the long run

Bandhan Bank Ltd. is an Indian banking and financial services company headquartered in Kolkata, West Bengal. Bandhan Bank is present in 34 out of 37 states and Union Territories of India.

Bandhan Bank started with 501 branches, 50 ATMs, and 2022 Banking Units on day one. Presently, Bandhan Bank has 4559 banking outlets pan-India serving more than 2.03 crore customers.

The Bank has mobilized deposit more than Rs 60610 crore and it’s total advances stand at Rs 74331 crore taking the total business to Rs 134941 crore as of June 30, 2020. The bank has a team of 41563 employees on a roll.

The Quarter 1 result of 2020 was really positive for the bank, Its operating profit rose 17 percent at Rs 1,584 crore against Rs 1,356 crore in the same period last year with net interest income growing 15 percent at Rs 1,811 crore (Rs 1575 crore). During the quarter it took accelerated additional provision on standard advances amounting to Rs 750 crore to cover the COVID-19-related credit risks. Total provisions stood at Rs 849 crore as against Rs 125 crore.

The Kolkata-based private sector lender with 61 percent weightage on microfinance has witnessed 68 percent repayment efficiency from micro borrowers till the end of June while the collection from home loan borrowers revived to 85 percent.

Bandhan said it has added 2.13 lakh customers during the quarter to take the base to over two crores even as the economic uncertainty looms large with demand and supply chains taking time to normalize after a three-month-long lockdown.

Its gross non-performing assets ratio improved to 1.43 percent against 1.70 percent last year while the net ratio was at 0.48 percent against 0.58 percent.

Bandhan’s capital adequacy ratio was at 26.45 percent, more than comfortable than the regulatory minimum.