IndusInd Bank Shares Drop 10% As Brokerages Seek Clarity On Evergreening Concerns

Shares of IndusInd Bank Ltd. slumped the most in 18 months after whistleblowers alleged evergreening at the lender's micro loan portfolio in the aftermath of the Covid crisis.

Analysts sought greater clarity and improved disclosures. Concerns over exits, undisclosed to exchanges, also left them questioning the management.

The Economic Times on Nov. 5 reported that a group of people, including senior employees of the IndusInd Bank's arm Bharat Financial Inclusion Ltd., alerted the Reserve Bank of India and the private lender's board about lapses in governance and accounting norms to allegedly evergreen loans running into thousands of crores since the outbreak of Covid-19. Loans were given and adjusted without customer consent, and if unchecked, will impact the bank, it said citing the people who didn't wish to be named.

The bank, in a filing to exchanges, however, denied these allegations. The stock dropped as much as 10% in intraday trade on Monday, the biggest since April 21, 2020.

Here's what brokerages are saying:

Jefferies

• Management clarified that lending conformed with norms with no evergreening. It admitted to a technical glitch in May 2021 on 84,000 loans, but this wasn't done to regularise loans and the outstanding amount is 0.1% of MFI (microfinance institution) loans.

• During Covid-19, the bank offered three options to borrowers — liquidity up to 20% of loans under the government's emergency credit line scheme, restructuring of loans and loans with longer tenures.

• The technical glitch emerged from a bug that overrode OTP-based verification of borrower before disbursal. There was no definite pattern here and it happened on a pan-India basis. The behaviour of these loans is similar to overall loans.

• It may conduct independent audit to assuage concerns.

• Collections and overdues of MFI loans are improving, so there is no change in credit cost guidance for this segment (6-8%).

• Succession planning is key. Management/ team changes will be a key issue to be managed, especially in case of multiple exits.

Macquarie

• Evergreening is usually difficult to detect in any financial services organisation. Hence, unless an external forensic auditor certifies Bharat Financial Inclusion's financials in addition to the RBI’s audit, the market could remain sceptical about IndusInd Bank.

• Surprised by the fact that non-executive vice chairman of BFIL, MR Rao had resigned in September 2021 but there was no exchange notification or information given to the analyst community in their recently held conference call post results in October.

• Also, as per media sources, even the CEO and CFO of BFIL may join a competitor soon. Hence, it is essential that the bank addresses the concerns in the MFI business on a top priority basis as any delay could affect the market’s perception of the stock.

• The MFI book is very profitable and hence, any impact could adversely affect overall bank’s return on assets. The MFI book forms 13% of the loan portfolio of IndusInd Bank and generates close to 4% ROA over the cycle.

• Assuming a long-term, sustainable ROA of 1.8%, the MFI business could be contributing 25-30% of profits over the longer term and hence, we need to closely monitor this portfolio for any adverse events.

Emkay

• Management claims that all the loans follow a weekly repayment model and any instance of default is recorded as a missed instalment. In view of the weekly repayment model, ever-greening is difficult.

• IndusInd Bank has a practice of giving top-up loans, but it never allows two core loans to run simultaneously.

• The bank has an executive-level risk management committee to strengthen the governance framework and to ensure a cross-functional review of the activities of BFIL.

• However, an independent review has been initiated by the bank to see if there is any procedural lapse or accounting failure at BFIL. If needed, it will also have an external auditor to validate the results.

• The bank 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.

• 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 rerating.