IndusInd Bank and the big problem with small loans

The issue has cropped up from its micro finance arm Bharat Financial Inclusion Ltd (BFIL), which it had acquired in March 2019 through an all-stock deal. A group of whistleblowers have alleged that BFIL may be evergreening loans and highlighted lapses in the processes of loan disbursal, according to a 5 November story in The Economic Times. The whistle-blowers warned the banking regulator and IndusInd Bank’s board about it, the report said.

What’s more is that a pile of loans was disbursed in May without explicit borrower consent at the time of the disbursal.

In episodes that have a negative impact on both the balance sheet and the reputation of a bank, the best way to alleviate investor concern is proactive disclosures. Unfortunately, disclosures have been a sore point between investors and lenders time and again. In IndusInd Bank’s case, too, timely disclosure seems to be a point of concern.

IndusInd Bank explained its position through a statement and an investor call over the weekend. Even so, there seems to be little comfort considering the share price drop on Monday. The lender failed to disclose the exit of BFIL non-executive chairman M.R. Rao to investors though it had the opportunity to do so and this has caught attention.

“We believe that the bank’s turnaround story remains intact, but it needs to work more on strengthening credit underwriting/risk management and communication with stakeholders to sustain the long-term re-rating," analysts at Emkay Global Financial Services Ltd wrote in a note.

With regard to media reports that more top management personnel at BFIL are set to exit, the lender has clarified that it did not receive any resignations so far. Analysts at Macquarie said top management changes should be closely monitored for the bank.

In the meantime, some analysts do not seem to think that these lapses would hurt the bank in a big way. The lender has denied the allegations on evergreening but has admitted that 84,000 loans were given without borrower consent in May due to a ‘technical glitch’.

“This issue was highlighted by the field staff within two days and the technical glitch was rectified expeditiously. Out of the above, only 26,073 clients were active with the loan outstanding at ₹34 crore, which is 0.12% of the September-end portfolio," IndusInd Bank said.

Analysts at Jefferies India Pvt. Ltd said the bank has adequate provisioning against microfinance loans and the behaviour of the loans is not adverse. However, investors are concerned about the microfinance book, as the allegations will be lifted only by an independent forensic audit. The stress on its microfinance book has surged during the September quarter. Gross bad loans have risen to 3% of the book from 1.5% in the previous quarter. More than 3% of the book has been restructured as well.

The microfinance book needs to be closely watched because it has become a big contributor of growth and profitability for IndusInd Bank. Microfinance loans now form 12.7% of the bank’s total loan book. The book has grown 22% on a compound annual growth rate basis over the past two years. At the current pace of return on assets, the microfinance book has the potential to contribute more than a quarter of the bank’s profits. Therefore, it is essential for IndusInd Bank to address the concerns surrounding Bharat Financial Inclusion at the earliest.

IndusInd Bank’s overall performance during the September quarter had passed muster. Excluding Monday’s fall, shares of the lender have outperformed the broad Nifty by a big margin over the past six months.