Bandhan Bank Looks At Growing Its Micro-LAP Portfolio

To ensure credit quality, the bank has undertaken a stricter underwriting process to assess creditworthiness of borrowers.

<div class="paragraphs"><p>Bandhan Bank branch in Mumbai. (Source: NDTV Profit)</p></div>
Bandhan Bank branch in Mumbai. (Source: NDTV Profit)

Bandhan Bank Ltd. is focusing on increasing its small and micro loans against property, according to Chief Operating Officer Ratan Kumar Kesh.

"We have a very small book of micro LAP loans, but we intend to grow that portfolio because there is an opportunity to fulfill customer requirements, and also add one more product (LAP) and grow that product in our kitty," Kesh told NDTV Profit.

Micro LAP loans are secured loans that can be utilised by customers to meet their personal or business needs. The collateral of small and micro loans against property can be either residential or commercial property. The property can either be self occupied, rented or mixed-used.

Out of the overall housing loan portfolio of about Rs 28,000 crore, the micro-housing loan portfolio stands at around Rs 400 crore, including micro-LAP, at Bandhan Bank now.

"We are witnessing an increasing demand for our housing loan products, including for the Micro LAP, in several geographies, especially after the rise in the digital footprint of cash flows," the bank said in response to a separate email query.

<div class="paragraphs"><p>(Courtesy:&nbsp;Bandhan Bank)</p></div>

The average ticket size of the micro LAP loans is Rs 6–8 lakh with a maturity of eight to 10 years, Kesh said. The average loan-to-value ratio on these loans is 50%, indicating the extent of risk on the book. The rate of interest ranges between 14–16%, depending on the type of security, cash flow visibility, bureau score and previous repayment track record.

This comes after the Reserve Bank of India increased credit risk weights on unsecured consumer credit in November, specifically on personal loans and credit card loans. This resulted in a major hit to banks' capital adequacy as banks have to set aside additional capital against such loans.

However, the RBI did not increase credit risk weights on home loans, education loans, vehicle loans, microfinance and gold loans.

As of Dec. 31, Bandhan Bank's capital adequacy ratio fell by 130 basis points on a sequential basis to 17.9%. The private sector bank, which has a large portfolio of microfinance loans, has 6,245 branches and banking units spread across the country, with nearly half of the presence in the eastern region.

"We have (the) deepest presence across this segment where people do not necessarily have access to housing loans and LAP in the manner metro and Tier-2 cities have. Many of these customers do have these requirements and they don't fit into normal credit underwriting models," Kesh said.

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To ensure credit quality, the bank has undertaken a stricter underwriting process to assess creditworthiness of borrowers. They are carrying out checks based on cash flows, repayment history, household income and other metrics.

"We have a presence in the geographies where we can do field visits, understand household income, their overall exposure to the industry, cash flow assessment to know whether they are creditworthy to be given a fresh exposure. Therefore, we can fulfill the requirement without compromising on net interest margin. Whatever book we have, credit quality is pristine," Kesh said.

The product is being offered in select geographies and to existing borrowers, Kesh added. At a time when the banking industry is struggling with margin compression, Bandhan Bank reported a steady net interest margin at 7.2% in Q3.

The chief operating officer said the bank will keep growing in segments where there is an opportunity "to deliver business growth wherever the opportunity is, while maintaining quality".

Further, Kesh said the margin on micro LAP loans is better than those on affordable home loans and prime home loans offered by the bank.

Amit Khurana, head of equities of Dolat Capital Market Pvt., said that while banks may tap the mortgage market through LAP, underwriting standards ought to be strong to keep risks in check.

"The decision to grant the loan has to be controlled... if underlying protocols are followed, the risk can be mitigated," Khurana said. "Control over cash flows is what makes the difference."

Khurana does not see many banks following suit because of good returns on home loans as of now. For Bandhan Bank, the offering is complementary in nature and helps the bank to tap the mortgage market to earn "an extra spread".

On being asked about the target on micro-LAP, the bank said that several banks and housing finance companies have 20–25% exposure on the LAP portfolio. The private lender has built specific evaluation programmes to suit certain geographies and profiles for a steady growth in this segment, it said.

Going forward, loan growth is targeted at 18–20%, with non-emerging entrepreneurial business loans outpacing the EEB portfolio, Kesh said. About 66% of the retail book is secured in nature, with the bank focusing more on the affordable housing yield.

Bandhan Bank is also close to finalising a co-lending pact with two fintech platforms to boost lending opportunities, the chief operating officer said.

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