IndusInd Bank and the big problem with small loans
Concerns about risk management are not new to Indian banks. However, they are by far the most troublesome for lenders, as they easily erode investor confidence. Whether it’s public sector banks or even the most valuable lender HDFC Bank, slippages in lending processes have raised angst among investors. IndusInd Bank now finds itself at the mercy of such angst, with its shares losing more than 10% on Monday.
The problem stems from its microfinance arm Bharat Financial Inclusion Ltd (BFIL), which it acquired in March 2019 as part of an all-equity transaction. A group of whistleblowers alleged that BFIL could renew loans and highlighted failings in loan disbursement processes, according to a Nov. 5 article in The Economic Times. Whistleblowers warned the banking regulator and IndusInd Bank’s board of directors about it, according to the report.
In addition, a bunch of loans were disbursed in May without the borrower’s explicit consent at the time of disbursement.
In episodes that negatively impact both a bank’s balance sheet and reputation, the best way to alleviate investor concerns is through proactive disclosure. Unfortunately, disclosures have been a sore point between investors and lenders time and time again. In the case of IndusInd Bank as well, timely disclosure appears to be a concern.
IndusInd Bank explained its position through a statement and a call to investors this weekend. Even so, there appears to be little comfort given the stock price decline on Monday. The lender did not disclose the exit of the non-executive chairman of BFIL MR Rao to investors although he had the opportunity and it drew attention.
“We believe the story of the bank’s turnaround remains intact, but it needs to work more on strengthening credit underwriting / risk management and communication with stakeholders to maintain the revaluation over the long term.” , wrote analysts at Emkay Global Financial Services Ltd in a note. .
Regarding media reports that more senior BFIL executives are about to leave, the lender clarified that it has so far not received any resignations. Macquarie analysts said changes in leadership should be closely watched for the bank.
In the meantime, some analysts do not seem to think that these defaults would seriously harm the bank. The lender denied the renewal claims but admitted that 84,000 loans were made without the borrower’s consent in May due to a “technical glitch.”
“This issue was highlighted by field staff within two days and the technical issue was corrected quickly. Of these, only 26,073 clients were active with the outstanding loan ??34 crore, or 0.12% of the end-September portfolio, ”IndusInd Bank said.
Analysts at Jefferies India Pvt. Ltd stated that the bank has adequate provisioning for microfinance loans and that the behavior of the loans was not unfavorable. However, investors are concerned about the microfinance book, as the allegations will only be lifted by an independent forensic audit. The stress on his microfinance portfolio increased during the September quarter. Gross bad debt increased to 3% of the portfolio, compared to 1.5% in the previous quarter. Over 3% of the book has also been restructured.
The book of microfinance needs to be watched closely as it has become an important factor in growth and profitability for IndusInd Bank. Microfinance loans now represent 12.7% of the bank’s total loan portfolio. The book has grown 22% on a compound annual growth rate basis over the past two years. At the current rate of return on assets, the microfinance portfolio has the potential to contribute more than a quarter of the bank’s profits. Therefore, it is essential for IndusInd Bank to address concerns about financial inclusion in Bharat as soon as possible.
The overall performance of IndusInd Bank in the September quarter was above mark. Excluding Monday’s fall, the lender’s shares have outperformed broad Nifty by a wide margin over the past six months.
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