Inside IndusInd Bank: Turf Wars, Tech Glitches And Compliance Concerns
A whistleblower alleging evergreening of bad loans, a management scrambling to explain an inexplicably large tech glitch, analysts questioning compliance and disclosures—IndusInd Bank Ltd. finds itself in the middle of a storm.
But the crisis, which snowballed over the past week, may trace its origins back to 2019, when the country's fifth largest private lender made its biggest acquisition yet—of Bharat Financial Inclusion Ltd., earlier known as SKS Microfinance. Structures and processes put in place at the time, which persisted until recently, may be partly to blame for turf wars which have underpinned troubles emerging at the bank's microfinance unit, according to conversations BloombergQuint had with those familiar with the bank's functioning.
In response to whistleblower complaints of evergreening of loans at the unit, which the bank has denied, the lender has decided to commission an independent audit, according to two people familiar with the matter. This, it hopes, will put to rest any concerns analysts might have, the people said. The Reserve Bank of India's supervisory unit, too, is looking into the matter, a third person familiar with the matter said.
Emails sent to IndusInd Bank and the RBI on Thursday remained unanswered.
Trouble In Threes
Trouble at the bank's microloan unit started to build towards the first quarter of the current financial year. During this time period, three sets of parallel happenings were taking place at the bank, their timing perhaps coincidental.
First, the country was experiencing a severe Covid-19 wave and collections across microloan businesses had taken a hit. Second, the bank was in the midst of a tech upgrade. Third, a management transition was underway at the bank's microlending unit.
The Tech Glitch
In April, IndusInd Bank sent out an upgrade patch for the handheld devices used by its microloan officers, according to two people familiar with the matter. These devices are used to open new savings accounts, extend loans and collect repayments for microfinance customers. The upgrade came at a time when businesses were at a near standstill and a severe wave of infections had impacted on-ground operations across lenders.
According to the first of the two people quoted above, who spoke on the condition of anonymity, by May it was discovered that the patch led to the devices malfunctioning.
As a result, 84,000 new loan accounts were opened without customer consent. While large in absolute terms, this is about 1% of the total microloan accounts held by the bank.
The problem, according to the bank's statement to exchanges, was discovered within two days by the ground staff and was resolved "expeditiously". Currently, of the 84,000 loan accounts opened due to the glitch, 26,073 accounts are active with outstanding loans worth Rs 34 crore, or 0.12% of the microfinance book.
A third person, a former IndusInd Bank executive speaking anonymously, however, pointed out that while the loans might be small in value, the large volume of loans sanctioned during this glitch can't be ignored.
Analysts are not buying the bank's explanation either.
"Assuming IndusInd Bank’s explanation to be credible, it highlights the high operational risk in the bank, as it implemented a technology upgrade in its end-to-end digital customer loan disbursal system with inadequate testing," Hemindra Hazari, an independent banking analyst, wrote in a note on Nov. 10.
"With such a loss of credibility, only an RBI inspection and/or a forensic audit authorised by the banking regulator can unearth what exactly happened in IndusInd Bank, as the market has discarded the bank’s explanation," Hazari said.
While the bank was dealing with these issues in May, the RBI was conducting its annual supervisory audit, the first person said. The bank had kept the supervisory team fully updated on the developments and the measures it took to address them, this person said.
The bank, however, disclosed the glitch to exchanges and spoke of an independent audit only after the whistleblower letter surfaced.
Alongside, IndusInd Bank, like all other microlenders, was seeing a rise in stress in its book due to the second wave. Localised lockdowns across states had impacted movement and collection efficiency of lenders.
According to a monthly collections trend report released by rating agency ICRA Ltd., the collection efficiency of microfinance lenders had improved above 100% in March, but dropped sharply to below 90% in April. It dropped further in May to below 80%, during the height of the second wave.
"Better accessibility, higher activity levels and working closely with our customers ensured stable collections in spite of the wide lockdown in May and intermittent lockdowns in June," Sumant Kathpalia, managing director and chief executive officer at IndusInd Bank, had told analysts after announcing the first quarter results.
For the bank, slippages from the microfinance book during the April-June quarter were Rs 674 crore or 2.6% of portfolio. Apart from this, loans worth Rs 500 crore or 2% of the book had been restructured. The restructuring under the second wave was markedly higher since the bank hardly restructured any microfinance loans during the first wave, Kathpalia had said.
Things have since stabilised.
As of Sept. 30, collection efficiency improved to 94.7% for the microfinance portfolio, compared with 89% as of June 30. However, gross non-performing assets in the microfinance portfolio as of Sept. 30 had risen to 3%, compared with 1.69% in June and 1.49% in March.
Alongside tech troubles and a period of financial stress in the business, the bank's microloan unit was also seeing a leadership transition.
IndusInd Bank believes that the whistleblower problems have been blown out of proportion by the old guard at Bharat Financial, which is unhappy with the change in leadership, the two people quoted above said.
Senior executives at Bharat Financial, who have been associated with the company much before the merger with IndusInd Bank, have felt that the new leadership appointments over the last 12-18 months have jeopardised their position in the company, the people said.
In April 2020, MR Rao, then managing director and chief executive officer of Bharat Financial, was elevated to executive vice chairman position and Shalabh Saxena was appointed as CEO in November 2020. Saxena has previously worked with HSBC Life Insurance, ING Life Insurance and Standard Chartered Bank. IndusInd Bank also appointed former MakeMyTrip executive Vishal Sharma as chief operating officer of Bharat Financial.
By March 2021, Rao moved to being non-executive vice chairman of Bharat Financial. After serving six months in the role, Rao resigned.
According to an Economic Times news report, Rao had highlighted in his resignation letter that the loans extended through the technical glitch were a deliberate attempt to improve repayments. "To me it appears to be not a process lapse but a deliberate act to shore up repayment rates. I had warned the board too about the serious consequences...," ET reported quoting Rao's letter.
BloombergQuint was not able to independently avail a copy of Rao's resignation letter.
Rao, himself, has had a complicated history with Bharat Financial, previously known as SKS Microfinance. Vikram Akula, the founder of SKS Microfinance had alleged that Rao, along with then Chief Financial Officer, Dilli Raj, plotted Akula's ouster from the company, in an eventually unreleased book in 2018. Bharat Financial had rejected Akula's claims at the time.
Queries mailed to Rao on Thursday did not yield any response.
The bank is now attempting a clean-up, not just of technical glitches and its loan book but of management structures.
When the IndusInd-Bharat Financial merger was announced, the bank chose to keep Bharat Financial as a 100% owned subsidiary, rather than merge it with the bank's operations. The bank's existing microfinance business was transferred to Bharat Financial and the company was appointed as a business correspondent.
But this meant that Bharat Financial had continued to exist as an entity with its own systems and processes, which are slightly different from the bank's, the people quoted above said. The bank is now in the process of implementing tougher compliance systems across the unit.
While IndusInd Bank is addressing the operational issues, it has also sent a clear message to the senior team at Bharat Financial that the bank owns the microfinance company and will not tolerate any non-compliance.
In its report on Nov. 7, ICICI Securities said that Bharat Financial has an executive level risk management committee which meets every month, to ensure control over the quality of lending. "In June 2021, the bank further strengthened its governance framework through a board-approved policy to ensure a cross-functional review of BFIL’s activities," the ICICI Securities report said.
More may need to be done to assuage investor concerns.
"We believe it is essential that IndusInd 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," wrote Macquarie analyst Suresh Ganapathy in a note dated Nov. 8. "Evergreening is usually difficult to detect in any financial services organisation. Hence, we believe that unless an external forensic auditor certifies BFIL’s financials in addition to RBI’s audit, the market could remain sceptical about IndusInd Bank," he wrote.