IndusInd Bank, India's fifth largest private bank, is currently facing allegations by a whistleblowers that it is "evergreening" its loan book and of governance issues with respect to its microfinance arm. Several whistleblowers, who include senior employees of Bharat Financial Inclusion Limited (BFIL) - have intimated the Reserve Bank of India and the bank's board of gaps in the bank's accounting norms and governance to "evergreen" loans in the wake of the COVID-19 pandemic.
The whistleblowers said that if the management of bank is unable to control this, BFIL could eat into the financials of the parent. BFIL - formerly known as SKS Microfinance - was purchased by IndusInd Bank in 2019.
The issue was reported by the Economic Times on November 5. On November 8, the bank's stock price tumbled 11% on the exchanges. However, today November 9, the price of the closed at ₹1,069.40, 0.78% higher.
Evergreening is a practice where a loan by a borrower is on the verge is going bad but is rescued by banks by giving additional loans to the same borrower. This prevents the loan from being classified as a non-performing asset, but could pose significant risks to the bank.
The RBI does not approve of the practice of evergreening. In 2018, under then Governor Urjit Patel, bolstered NPA norms by making them stricter and tightening the rules around bad debt resolution norms so as to plug the holes that were otherwise becoming conduits to evergreening.
However, this is not the first set of problems related to governance faced by the bank. In September, the Non-Executive Vice-Chairman of BFIL, MR Rao, stepped down. In his resignation letter reported he raised concerns around 80,000 loans being disbursed in May this year to customers without their consent to shore up repayment rates, and that the RBI had raised concerns on this.
IndusInd's clarification
The bank, in a newspaper clarification and in a notification to the exchanges, has called these allegations on evergreening baseless.
With respect to the loans disbursed to customers without their consent, the bank has said that 84,000 loans were disbursed to customers without their consent due to a "technical glitch". But this has been rectified according to them.
"Due to a technical glitch in May 2021, nearly 84,000 loans were disbursed without the 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".
In the exchange filing, the bank said of the loans mentioned above, only 26,073 clients were active with outstanding loans of ₹34 crore, which was 0.12% of the active portfolio as of September-end.
The CEO and MD of the bank, Sumant Kathpalia, held an analyst call held on November 6 to address this issue. "We will validate. We will have the review process completed. We will have a committee which will have an external auditor validating the [audit] result and will have an independent process going on to give comfort to the investors that everything is right in Bharat Financials. We will not be happy with only an internal audit", he said.
This was different from the one held on October 27 to discuss the bank's quarterly results. During this call, he also said although Rao had stepped down from BFIL, he is currently an advisor to bank. An analyst asked Rao on why Rao's leaving was not disclosed during the earnings call. Kathpalia replied that Rao was still an advisor with the bank, and this [BFIL] is a company which is not listed, therefore it was not considered necessary for the bank to inform of that.
Read the bank's statement to the Bombay Stock Exchange here, and find the audio to their call here.
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