Kolkata-based Bandhan Bank lit up on the bourses, jumping 20% to hit the upper circuit limit in early hours of trade Friday, ahead of the private sector lender's debut on the MSCI index, starting October 16.

Analysts suggest Bandhan Bank's inclusion in the MSCI index may lead to inflows to the tune of over $180 million. "It's a big positive for the bank as the stock will automatically be available to a larger pool of funds to buy,” notes Lalitabh Shrivastava, AVP Research- BFSI, Sharekhan.

The private sector lender's addition to the MSCI index is on the back of its merger with Gruh Finance, announced in January. The merger will be effective from October 17, and the combined entity's market cap will be over $2.5 billion, making it eligible to enter the large-cap index.

Bandhan Bank listed on the stock exchanges in March 2018 and maintained a conservative strategy to grow its loan book. "Bandhan Bank is an excellent bank and one of its key strengths is its leadership. The recent merger with Gruh Finance, coupled with easier norms for the micro-finance segment, will augur well for the bank's growth,” says Sanjiv Bhasin, executive VP, IIFL Securities.

The micro-finance segment contributes roughly 85% to the private sector bank's loan portfolio. Its merger with Gruh Finance allowed the promoter group to dilute stake to comply with RBI norms, and also diversify its loan book worth around ₹45,400 crore.

While Gruh Finance has a strong understanding of the housing finance business, and its asset quality is among the best in the industry, analysts say Bandhan Bank needs to be cautious as it increases exposure to housing loans.

"A key challenge for Bandhan Bank will be the ability to sustain spreads as yields tend to be lower in the housing finance segment while loans to developers continue to pose an element of high risk,” says Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services.

Bandhan Bank closed trade 14.86% higher on the BSE at ₹582.30 apiece.

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