Why Bandhan Bank's Rs 23,300-Crore Credit Guarantee Portfolio Is Under Audit — Exclusive

The portfolios under review are part of the Credit Guarantee Fund Scheme for Micro Units and the Emergency Credit Line Guarantee Scheme, for which the lender registered and obtained guarantees.

<div class="paragraphs"><p>A Bandhan Bank branch and ATM in Kolkata. (Source: Bank's website)</p></div>
A Bandhan Bank branch and ATM in Kolkata. (Source: Bank's website)

The National Credit Guarantee Trustee Co. has called for a forensic audit of loans worth Rs 23,300 crore at Bandhan Bank Ltd., according to a document circulated by the trust.

The portfolios under review are part of the Credit Guarantee Fund Scheme for Micro Units and the Emergency Credit Line Guarantee Scheme, for which the lender registered and obtained guarantees, according a copy of the document reviewed by NDTV Profit.

Loans under review include: Rs 20,800 crore of CGFMU lending to 29 lakh borrowers; and Rs 2,500 crore ECLGS loans to 22 lakh entities, according to the document.

The two schemes were active during the Covid pandemic as a way to provide emergency credit to small borrowers while providing banks with government guarantees against at least a part of the losses.

Rationale Behind The Audit

Bandhan Bank on Jan. 9 told exchanges that the NCGTC was conducting a "detailed" audit of the CGFMU portfolio for FY21.

“We would further like to clarify that this is not an audit of the bank initiated by the regulator. It is only the audit of the CGFMU claim made by the bank pertaining to the portfolio,” it said.

While the bank, in the exchange filing, emphasised that the "detailed audit" is just for the second tranche of the CGFMU claim, the NCGTC document revealed that the audit will focus on the ECLGS and CGFMU portfolios.

The NCGTC conducted a preliminary audit in late 2023, a person with direct knowledge of the matter told NDTV Profit on the condition of anonymity. But since NCGTC had concerns, it decided to initiate a forensic audit.

According to the NCGTC document, the period under review for the CGFMU portfolio is FY21. During this time, around 5.5 lakh borrowers for loans amounting to Rs 4,000 crore have been classified as NPAs, according to the document.

Under the ECLGS portfolio, the period of review ranges from May 2020 to June 30, 2021. Here, around 7.55 lakh borrowers have been classified as NPAs, with outstanding dues worth Rs 955 crore, according to the document.

The document states that most of these accounts are spread across West Bengal, Assam and Odisha.

While the forensic audit is for the entire portfolio, the focus remains on 4.9 lakh borrowers which were classified as NPA, according to the person quoted above.

Queries sent to Bandhan Bank on Jan. 18 did not elicit a response till the time of publishing this story.

The lender's net profit rose three times to Rs 721 crore in the second quarter, compared to Rs 209 crore a year ago. Net interest income, or core income, for the bank rose 11.3% year-on-year to Rs 2,443 crore for the quarter ended September.

Asset quality for the lender worsened in the September quarter with gross non-performing asset ratio rising 5 basis points quarter-on-quarter to 7.3%. Net NPA ratio, however, stayed flat at 2.3%, compared to 2.2% in the previous quarter.

The bank is yet to declare its December quarter results.

A possible reason for the rise in NPAs post-Q4 FY23 could be the way banks disclosed CGFMU and ECLGS in their books.

In its Q1 FY24 analyst call, the management explained that since CGFMU was in the nature of insurance, it used to mark it as an NPA whenever the customer crossed 90 days past due. However, loans under ECLGS were not as government-guaranteed, and there was no payment of premiums.

But things changed after the RBI released revised norms for Income Recognition, Asset Classification and Provisioning pertaining to advances.

According to these rules, all loans granted under the NCGTC and Credit Guarantee Fund Trust for micro and small enterprises must be treated as NPA and banks are not allowed to make any provisions against these exposures.

The bank made a coverage of 86% in terms of provision over these loans of NCGTC, under ECLGS and CGFMU, said Sunil Samdani, former chief financial officer of Bandhan Bank, in a Q1 FY24 analyst call.

Accordingly, the bank's stress pool coverage in March 2023 stood at Rs 5,500 crore, with a provision of Rs 3,800 crore and the CGFMU guarantee of Rs 1,700 crore.

In Q2 FY24, while the bank applied for the second tranche of the CGFMU claim, it also received Rs 85 crore in ECLGS.

"The total amount to be received is about Rs 500 crore, of which 85% is received; Rs 410 crore is something that is pending," Samdani said.