The IndusInd Bank Ltd. logo is displayed on a savings account opening form booklet. (Photographer: Dhiraj Singh/Bloomberg)

Q3 Results: IndusInd Bank’s Lending To IL&FS Likely To Be NPA By Next Quarter

IndusInd Bank Ltd.’s Rs 2,000 crore loan to the debt-laden IL&FS group before the conglomerate went bust is currently in the “special mention account” status but may not be so in the next quarter, the bank’s Managing Director Ramesh Sobti said.

“Prior to October, there were monies held by banks for servicing the debt. They were in the form of escrows or debt service reserve accounts or fixed deposits etc... these accounts are SMA status but they were standard in the third quarter,” he told BloombergQuint in an interaction. “They may not be standard in the fourth quarter.”

The bank met its third-quarter profit estimates, despite making provisions for its exposure to the IL&FS Group, with net profit rising 5.23 percent year-on-year to Rs 985 crore.

Sobti said that the bank would decide on provisions after a final assessment of the realisable assets in IL&FS Group’s holding company, adding that it has already provided enough for a substandard loan. “... we have provided in excess than what it is needed as per the Income Payment and Asset Clarification norms.”

Watch the full conversation here:

Here are edited excerpts from the interview:

The quarter broadly, operationally, continued with the trend which we saw in the last few quarters. There is healthy growth in advances, deposit growth has kept pace; you got kick up from treasury, but you got a hit from the IL&FS account.

Core flows on headlines and core operating profits have grown well year-on-year and quarter-on-quarter, that trend is very important. Net income is up 4 percent on a quarterly basis and 21 percent on a yearly basis. Fee has grown well, and it has grown 24 percent, which includes an additional Rs 100 crore on the earning side. But the other elements have also done well. Revenue line grew almost 7 percent quarterly. Costs have held well, although we are expanding branches. Operating profits have very healthy 27 percent growth year-on-year. The core scene remains the same. Even if you come down to profit after tax, year-on-year, because of additional contingent provisioning which we have made on IL&FS, quarterly PAT grew by 7 percent and that is the most encouraging trend because that tells you the usual profit of business.

You said that Rs 2,000 crore is the bridge financing to the holding company. How has that remained standard? Payments on that have continued to come in during the quarter or are they now 30-60 days overdue? Where does it fall right now?

They are overdue. Prior to October, there were monies held by all banks to service debt, either in the form of escrows or debt service reserve accounts or fixed deposits. They were used to service these debts. These accounts are “special mention accounts” status, but they were “standard” in the second and third quarter. They may not be standard in the fourth quarter. For us, the position is that whether standard or not standard, whether money comes in or doesn’t comes in, we have provided in excess than what it is needed as per the Income Payment and Asset Clarification norms. We have already provided enough for a substandard loan and we have said that we will provide more based on our final assessment of the realisable value assets in the holding company.

The realisable value for Rs 2,000 crore would be low right now as there doesn’t seem to be much hope of a group-wide resolution plan. It looks like that individual assets get sold, in which case whatever exposure banks like yours have to the individual assets, you probably have more chance to recover that than Rs 2,000 crore bridge financing.

No, it was never bridge financing. It was financing against the assets and receivables. Our understanding is clear that there are assets which are attributable directly to the holding company, forget the operating companies. Operating companies’ special-purpose vehicles are separate. They have separate lenders. But we have a strong reason to believe that there is realisable value lying in assets attributed directly only to the holding company. It was not like if the rights issue didn’t come, debt will not be serviced. The debt is serviced in any case, whether rights happen or not. It was never classified as a bridge loan, but it got transformed as a bridge loan. It was otherwise to be paid in six installments, starting February.

What we have done so far is to very prudently make contingent provisioning, although it is a standard asset. We have taken attributable provision to almost 30 percent which is ahead of the IRAC norms, in case it becomes substandard. This quarter we will make further provisions linked to our final assessment of the realisable value because realisable value comes only when you have a buyer and the value the buyer is willing to pay for the assets and therefore what is the real value. Based on that, we will take a higher provisioning. We are committed to provisioning, to take it to levels where we are comfortable with and that we don’t have to provide anymore.

Also read: Q3 Results: IndusInd Bank Meets Estimates Despite Higher Provisions 

So, by the end of the fourth quarter, the credit cost associated with this will be over? Will there be a fresh start next year?

Yes, that is our intention and that’s why we keep pointing out to look at underlying profits which is indicated by the operating profit before these provisions are made. You will see how healthy the operating profit is. We will start April 1 on a new page, hopefully having made these provisions and put this behind us and look at the run rate of the underlying profit. Added to that will be the Bharat Financial inclusion income as well.

Why did you do the bridge financing? If you hadn’t done that so close to that group going under, perhaps IndusInd could have remain unscathed.

This was a short-term low-risk exposure. It ended up being a longer-term high-risk exposure. When it was given, not a single company in the whole group was in default. People were writing all kinds of things and they have become hindsight experts. The companies were also rated very highly, whether holder company or SPVs. There is no such thing as risk-free banking. It is low, medium or high, depending on how you access it. We have said openly, clearly that there are learnings out of this, not only for us but for the whole industry on financing of complex holding company structures. We hope to address this and put it behind us and get on with life.

How is growth looking across your portfolio? You were among the first to be optimistic about credit growth starting to pick up across a number of your segments. Has that sustained? There is some worry starting to crop up on the economy. Is there anything reflecting on your books?

We’re seeing good underlying growth and pull across the sectors. We are across the entire life cycle of a loan. We started with microfinance, the ‘S’ of the SME, large corporates, PSUs, financial institutions. We do the whole lot. We are seeing a secular trend across; that’s corporate. We have vehicle finance. Even if the market shrinks because non-banking financial companies may not be financing, our market share improves, and it has improved. In commercial vehicles, we have improved market share by almost 2 percent. So, we are growing there by 30 percent. Non-vehicle retail, eight-nine products, they are sub in terms of scale and therefore growth rates are going to be high and they are growing between 28 and 30 percent. We are seeing across-the-board pull and across-sector pull and it’s not linked to solar or transmission. Towards the end of the fiscal, you will see that this trend has continued, and it is strong and secular.

Is there potential in margin improvement or are you at peak of the margins?

We are at the trough of the margins. Three quarters ago, we were at 3.98 and we are now 3.83 which is 15 basis points. Even in the last quarter, we said that we see stability coming in as cost of funds and yield starts matching. The yields were lagging cost of funds. Now that the lag has caught up, we are seeing increase in yields. Our outlook on interest margins is stable or with an upward stance.

Where is your strategic focus for the next couple of years in terms of growth?

We have two parts of the bank emerging. One is, urban and semi-urban. The second part is rural. That part is now buttressed by the addition of Bharat Finance. While the semi-urban model continues to go along, this is where we do our corporate lending. There is a new frontier we will address which is the rural banking frontier. With the addition of Bharat Finance, we will have a coverage, which probably is difficult to match in rural India, with 115,000 villages and nine million customers and in a year’s time, 2,000-odd branches of Bharat Finance. That is going to be a huge focus area for us. The synergies which we will draw out of rural India have yet to be fully baked in and appreciated. We now have a opportunity of addressing rural India and its growth potential like we never had before.

Can you give us a sense of your gems and jewellery portfolio? Are you de-emphasising it or its parts?

Our portfolio is squeaky clean, and it has always been so. Apart from an inherited account from 10.5 years ago, we did not have a single delinquency. The portfolio which we purchased from ABN Amro, not a single delinquency has been seen the four-five years it has been with us. We financed the crème de la crème of the diamond industry. We have a deep understanding of the industry because we know that’s not about collateral and security, but it’s about the flow of cash. There is a domain expertise which gives us domain leadership there. But we are aware that there have been delinquencies in parts of the industry which has impacted banks. Our process of sifting the good from the weak has held up pretty strongly over the years.