Was RBI not comfortable with Bandhan Bank’s founder Chandra Shekhar Ghosh continuing as CEO?

Three years ago, the Reserve Bank of India (RBI) had given some subtle hints when it cleared the re-appointment of Bandhan Bank’s founder Chandra Shekhar Ghosh as the MD & CEO of only for three years, as against a five-year tenure sought by the bank’s board. The reasons were not given, but there were ongoing issues with the Kolkata-based bank as the RBI had earlier put restrictions on branch expansion and also a restrain on Ghosh's remuneration. But all that was reversed by the regulator later.

As a founder, Ghosh was instrumental in building the microfinance business from scratch some 23 years ago. He transformed the fledgling business from an NGO to a non-banking finance company in the mid-2000s, and later converted it into a universal bank in August 2015. In fact, Bandhan was the first case of a microfinance institution securing a full-scale banking license. The RBI did give banking licenses to a dozen MFIs later, but all were for Small Finance Banks, a new category of differentiated banking licenses along with Payments Banks.

Operating in a risky MFI business, the private bank's journey was full of challenges, which could have prompted the RBI to restrict Ghosh's tenure to three years.

This week, another surprise hit the market when Ghosh announced his plan to retire from the private bank. The bank's board had actually approved his name for another 3-year term to the RBI in November last year. Was RBI not comfortable with Ghosh continuing with the bank as MD & CEO beyond July this year?

"There is always constant dialogue between the RBI and the bank when it comes to RBI's observations on the extension of MD & CEO," says a banker.

Some in the industry link it to the performance of the bank under Ghosh. The bank had smooth sailing till 2018-19. That was the time when the bank made the highest return of assets of 4.23%, the lowest net NPAs at 0.58 %. The share price soared close to Rs 700 between July to September period of 2018. But something happened post that period which took the bank on a new journey from where it was finding it difficult to come out. The current share price of Rs 182 per share reflects the concerns of investors’ community.

Given the bank's portfolio of risky micro credit, a series of events like demonetization in 2016, GST in 2017, Fani Cyclone in Orissa in 2019, and the Assam crisis in 2020 and farm loan waivers in some states from time to time came as a big blow to the bank's business model. There was a spillover impact of these events which gradually impacted the earning of its bottom of the pyramid borrowers. These events pushed the bank’s NPAs slightly up, but Ghosh dismissed all speculations by assuring investors that NPA was not a very big issue. But he probably didn’t anticipate the other big events waiting to strike. Take for instance, the pandemic and the nationwide lockdown. The NPA soon started ballooning from 1.25% in 2017-18 to a high of 6.81% in 2020-21.

And there were other reasons, too. Like they say, when it rains, it pours. In early 2018, there was another trouble brewing for Ghosh. The loan default by infrastructure financing institution, IL&FS, sent shock waves in the financial market. Ghosh's bank had parked some surplus money of Rs 385 crore in the then triple A rated IL&FS for better returns. This exposure was kind of an experiment to invest in secured instruments. But that didn't play out the way Ghosh thought. IL&FS finally defaulted on multiple loans. The bank had to make the entire 100 per cent provision for IL&FS, which pushed up the NPAs and lowered its profitability.

In its fifth financial year in 2019-20, the bank faced the biggest of all challenges - a pandemic which shut everything for months. It impacted its customers with no fixed income. The bank immediately made Rs 690 crores of standard provisioning in 2019-20. But since the pandemic came in March, the last month of the financial year, the bank recorded its highest profit of Rs 3,023 crore in 2019-20. This level of profit, the bank has not reached even today.

In 2022-23, it closed the year with a lower profit of Rs 2,194 crore. Since it has to go for accelerated provisioning and write-off post-covid, the first covid year 2020-21 saw the profitability drop from Rs 3,023 crore in 2019-20 to Rs 2,205 crore. The elephant in the room was gross NPAs, which jumped to 6.8 percent from 1.48 per cent in 2019-20. That was a big negative for the investors. The struggle of Ghosh started post Covid. In 2021-22, the net profit crashed to a low of Rs 125 crore.

The pandemic also impacted the bank’s 5-year plan, covering 2020-21 to 2024-25, with a focus on diversification of asset portfolio, strengthening people capabilities, building digital capabilities, and consolidating CASA.

The bank under Ghosh was also hit by the audit of the National Credit Guarantee Trustee Company (NCGTC).  The institution offers portfolio guarantees for collateral-free micro loans up to Rs 10 lakh sanctioned by banks, NBFCs, and MFIs. Bandhan took insurance cover for its loan portfolio.

NCGTC had done a regular audit of the bank’s claims where the agency made certain observations. “We believe that some of these observations were inadequate and rather inappropriate. We (have) clarified our stand on those,” the bank had stated earlier to investors community. However, NCGTC soon decided to carry out a detailed audit of the loan portfolio. “This was also seen as a negative under Ghosh’s tenure, “ says a market expert.

The bank will now have to start the process of succession before Ghosh’s term ends in July. "The bank has witnessed frequent changes in its top leadership team recently,” states Motilal Oswal in its report. In fact , the current succession may also result in some top management exits, which could impact the bank. “The MD's resignation at this juncture may delay the recovery in underlying business and earnings," adds the Motilal Oswal report.