IndusInd Bank Reviews Large Corporate Lending Strategy

The lender has seen a sharp decline in its stock price as each of these concerns came together over the last few months, leading to weaker investor sentiment around the lender.

Under new chief executive Sumant Kathpalia, the bank is reviewing its exposure to large corporates and may trim the size of that book if needed, said two people familiar with the matter, who spoke on condition of anonymity.

The strategy, according to these two officials, is to look at exposures to large inter-connected companies and redirect direct lending to better performing firms within the groups. The bank is also trying to negotiate better terms with these borrower groups to ensure adequate security backing these loans.

As a consequence of this review, the bank may see the size of its corporate loan book shrink. As of December 2019, corporate banking advances made up 46 percent of IndusInd Bank’s loan book of Rs 2.07 lakh crore. Large corporate advances accounted for 25 percent of the book.

Corporate advances are not the only pressure point for IndusInd Bank.

The lender has high exposure to both vehicle finance and micro finance, which are already seeing delayed collections. Analysts also see the risk of eventual defaults to be higher in these segment. To tackle this risk, IndusInd Bank will pull back on any growth in these portfolios, said the people quoted above.

As on December 31, 2019, the bank had Rs 58,071 crore worth vehicle loans and Rs 20,757 crore worth microfinance loans. These two together contributed 38 percent of the bank’s total loan book.

On April 3, Moody’s Investors Service placed the baseline credit rating of IndusInd Bank under review. “The bank's loan portfolio includes a relatively higher proportion of micro finance and vehicle finance loans than its peers, which are at a high risk of being negatively impacted by the economic shock,” Moody’s said in its statement.

A spokesperson for the bank, when asked about the bank’s plan to cut its large corporate loan exposure said that “private sector banks will engage with the concerned stakeholder to address any concerns that may be unfounded.”

On Tuesday, the bank declared that its total advances stood at approximately Rs 2.09 lakh crore on March 31, as compared with Rs 1.86 lakh crore a year ago. As on December 31, total advances stood at Rs 2.07 lakh crore.

Managing Liabilities

The bank is also focused on rebuilding its deposit base after it saw close to 10 percent of deposits flow out, mostly because a large state government decided to switch deposits away from private lenders.

According to the first of the two senior officials quoted above, the bank is in the process of adding depositors from its microfinance and vehicle finance portfolio. This gives the bank a better handle on the quality of these customers and allows it to diversify its deposit base, the first official said.

In an email response, a spokesperson for IndusInd Bank said that the bank has a network of 10 million borrowers in those two loan portfolios and it has been adding depositors from it, sometimes at a rate of 25,000 accounts per day.

To be sure, the bank will find it difficult to replace large bulk deposit outflows with small depositors. In the meantime, the bank is relying on raising certificates of deposits, even though that raises the lender’s cost of funds and will hurt lending margins.

“Presently the issues facing the bank are on the liabilities front where it is facing some withdrawals and this will hamper the growth prospects for IndusInd Bank for 12-18 months at least,” said Asutosh Mishra of Ashika Broking.

On Tuesday, the bank disclosed that its total deposits fell to approximately Rs 2.02 lakh crore as on March 31, as compared with Rs 2.16 lakh crore as on December 31, 2019.