What Went Wrong At IndusInd Bank?

IndusInd Bank is facing allegations of evergreening loans, according to a group of senior officials at Bharat Financial Inclusion Limited (BFIL), the micro-lending arm of IndusInd Bank.

The group of whistle-blowers had written to the bank’s CEO, Sumant Kathpalia, some independent directors and RBI officials. Evergreening is the process of lending further to existing borrowers that are likely to default, in order to lower the reported non-performing assets of the bank.

According to the whistleblowers, the alleged efforts to dress up the loan book could eat into the parent company’s financials. They have also alleged the involvement of the company’s Chief Executive Officer Salabh Saxena and Chief Financial Officer Ashish Damani in under-provisioning of the loans.

Both the officials are looking to quit BFIL, and join Spandana Sphoorty, a competing microfinance company.

According to reports, concerns of a similar variety had been raised by M.R. Rao, the non-executive Chairman of BFIL. In May 2021, as many as 84,000 loans were disbursed without customer consent.

In his resignation letter in September 2021, Rao had raised concerns about BFIL deliberately issuing these loans to shore up repayment rates. Rao also said that he had asked for a third-party audit regarding the disbursals.

But the bank has classified the disbursal as a "technical glitch". In addition, brokerage firm Macquarie highlighted that the bank had not informed analysts about Rao’s departure from the bank through exchange notifications, or during the October conference call.

“Due to a technical glitch in May 2021, nearly 84,000 loans were disbursed without customer consent getting recorded at the time of loan disbursement. This issue was highlighted by the field staff within two days and the technical glitch was rectified expeditiously,” the bank said in its clarification.

It also added that the loans represented 0.12 per cent of its entire portfolio, and that it had revised the standard operating procedure to include a biometric authorisation.

The bank also clarified on the loan ever-greening issue and said that all loans originated and managed by BFIL, including the ones in the Covid-19 period, are fully compliant with regulatory guidelines.

It has also said that the NPA recognition procedure is run on a daily basis and the data from BFIL goes directly into the bank’s NPA system without manual intervention.

Further, BFIL’s customers faced operational difficulties due to the pandemic. Consequently, the bank provided additional liquidity support to the extent of 20 per cent of the outstanding amount under ECLGS scheme (Emergency Credit Line Guarantee Scheme), in addition to loan restructuring, and longer tenor loans.

However, the whistle-blowers have alleged that the loans extended under the ECLGS scheme were used to “adjust arrears instead of giving credit to customers”.

The IndusInd Bank stock plunged 10 per cent on Monday, despite the company’s clarifications. Nevertheless, brokerages have continued to remain positive on the stock.

“We believe that IndusInd made 3 mistakes in the ILFS case — first being in a denial mode about the underlying problem, then miscommunication and under-provisioning. IndusInd has come a long way and carries adequate contingent provisions over and above specific PCR. But it could have done better in terms of communicating about management changes in BFIL and a technical glitch in the MFI book, which led to allegations of evergreening in the MFI book,” said Emkay.

Nevertheless, it believes that the bank’s turnaround story remains intact, and the fair value remains unchanged.

Similarly, brokerage firm Motilal Oswal believes that the company’s stock price might be affected in the short term due to adverse media articles, and asset-quality issues reported by other micro-finance companies. However, it kept the stock’s rating and target prices unchanged.

Similarly, Kotak Institutional Equities said that as the economy returns to normalcy, it expects the bank’s current problems to ease in the future.

Clearly, analysts have remained unfazed despite the various allegations against the bank. Nevertheless, broader markets appear to be sceptical.