The attention span of the purveyors and consumers of business news is extremely short. Bandhan Bank acquiring Gruh Finance, therefore, is a deal done and left behind. When the news broke, most analysts felt the country’s youngest universal bank had overpaid to acquire the affordable housing finance subsidiary of HDFC.
This is indeed the case if we go by the valuation numbers available and the share swap ratio. But that does not give the whole picture and here is an alternative scenario and a contrary view.
Bandhan Bank is in a bit of a fix as it has been put under restrictions because of its inability to stick to the Reserve Bank of India schedule to reduce its promoters’ stake to 40%. The Gruh acquisition will go part of the way in reducing that stake, from 82% to 61%. Therefore it can be taken as a transaction done under some pressure and so may not be on the best possible commercial terms.
But what is important is that there are several other factors going in favour of the deal in commercial terms too and the big difference in perception can have resulted from analysts having the short-term perspective of equity investors whereas Bandhan is simply taking a longer-term view.
Bandhan is acquiring a readymade portfolio of affordable housing loans whose quality is assured by the standards associated with HDFC, which is a leader in the housing finance market. Post-merger, retail home loans will account for 28% of Bandhan’s loan book compared to negligible pre-merger.
This affordable housing loan portfolio is important for Bandhan as, through it, the microfinance institution turned bank is taking the next step in growing its loan book in such a manner that over time it starts resembling that of any other bank.
It is yet to go in for corporate lending in view of the fact that such lending has been fraught. The high level of NPAs of nationalised banks bears testimony to that. Affordable housing finance loans, which are disbursed to individuals, offer a good stepping stone by way of bigger ticket loans for an erstwhile microfinance organisation.
But Bandhan did not start life as a housing finance company; Gruh did. The portfolio that Bandhan bank is taken over will offer it a chance to see what good quality housing loans look like and derive parameters for it to undertake its own journey into affordable housing finance.
Although Bandhan has been a universal bank since late 2015, as much as 87% of its leading continues to be in its legacy small ticket microfinance area. As a result of the acquisition, the share of its microfinance loan portfolio will go down to 58%.
Bandhan also needs to go in for higher ticket lending in order to place gainfully the substantial deposits it has been acquiring. As a microfinance organisation, it was not permitted to accept deposits and hence when it became a bank, its deposit base was zero, its entire loan portfolio being financed by borrowings, mostly from banks.
But in four years its reliance on borrowings has come down to under 1%. It has been able to acquire a deposit base of Rs 34,600 crore (September 2018), thanks to the good brand recognition that it has come to have, particularly in eastern India. Today almost its entire loan portfolio of Rs 35,600 crore is funded by its own deposits, like other banks.
As a microfinance entity, Bandhan borrowed at around 10% but now its cost of funds is 6.3%, with low-cost CASA (current and savings account) deposits accounting for 41% of total deposits.
There is also a crisis in the NBFC sector, particularly housing finance companies which borrowed short and lent long. In the wake of the IL&FS crisis, they are facing some difficulty in rolling over their borrowing and consequently not in a position to entertain the new customers seeking affordable housing loans.
In this situation of a dearth of liquidity, Bandhan is there ready and waiting with both the resources and the expertise to hike its affordable loan portfolio.
It also needs to be noted that the economy’s ability to absorb affordable housing finance loans is virtually unlimited, what with the GDP growing at a rapid rate and the many government incentives for affordable housing loan customers. Public sector commercial banks who should be ideal in stepping into this opportunity have troubles of their own, what with a good half of them unable to make fresh lending for having been put under the RBI’s “prompt corrective action” restrictions.
There is a further aspect – the nature of microfinance customers who seek affordable housing finance. Their title to the land or the property that they may be already occupying often may not be of the best quality. As you move from the core areas of cities to slums or semi slums, recognised or unrecognised, microfinance borrowers who live there are often eager to improve the quality of their lives by living in better conditions through home improvement or acquiring a small place of their own.
Banks like Bandhan and the small finance banks began life as microfinance organisations whose sole portfolio was giving small unsecured loans to poor women to improve their incomes. The organisations survived and thrived on their critical ability to know their customers. They have had an NPA rate of less than 2% and Bandhan now has a gross NPA of 1.3%, the same as private banks market leader HDFC Bank.
The nationalised banks did not have this customer connect and so turned in vastly poor loan recovery rates where microfinance organisations thrived.
It is this expertise that Bandhan historically has and it will be able to give affordable housing loans to customers who have a good track record of repayment but whose paperwork (title documents or whatever may go by that name) may not be the best which the banks’ lawyers would like.
So Bandhan Bank stands a chance of making a success of its acquisition of Gruh by learning from its paperwork, being able to access its proprietary operating system and using that in conjunction with its customer knowledge to build up a good affordable housing loan portfolio.
Subir Roy is a senior journalist and the author of Made in India: A study of emerging competitiveness (Tata Mcgraw Hill, 2005) and Ujjivan: Transforming With Technology (OUP, 2018).