What is an Evergreening loan and why is it hurting IndusInd Bank investors?

  • Loan renewal is a term in which banks attempt to revive a loan on the verge of default by making more loans to the same borrower.
  • A group of whistleblowers wrote to the RBI to address their concerns about poor corporate governance in the IndusInd BankThe microfinance affiliate of s allegedly renews loans.
  • However, the lender has denied all allegations and said it disbursed 84,000 loans without customer consent in May 2021 due to a technical glitch.
  • As a result, the bank’s shares fell more than 11% on November 8.

IndusInd Bank investors appeared extremely disappointed with the lender on Monday morning as its shares were down more than 11% amid concerns over the company’s handling of bad debts.

Between October 17 and 24, a few whistleblowers wrote to the banking regulator, the Reserve Bank of India (RBI), to express their concerns about the poor corporate governance of the microfinance subsidiary of IndusInd Bank, which would have practiced the “conversion” of loans.

Whistleblowers, including a group of senior IndusInd Bank employees, have claimed that subsidiary Bharat Financial Inclusion has granted evergreen loans worth thousands of crore since the start of the pandemic.

Bharat Financial Inclusion is a non-bank financial corporation (NBFC) focused on providing loans to women to support their businesses. IndusInd acquired the microfinance lender in a share purchase transaction in March 2019.

What is persistence?

Loan renewal is a term in which banks attempt to revive a loan on the verge of default by making more loans to the same borrower.

Basically, banks are giving more loans to borrowers to keep them from turning into huge non-performing assets (NPAs). When clients do not repay principal and interest for a period of time, then these loans are considered non-performing assets or NPAs.

This practice could expose lenders to huge amounts of defaults.

Additionally, the RBI does not approve permanent loans and has set strict standards and potential penalties for banks that commit this practice.

What did IndusInd do that rocked investors?

While the bank has denied allegations made by whistleblowers in a letter to RBI and CEO Sumant Kathpalia for loan renewals, it admitted to disbursing nearly 84,000 loans without customer consent due to a “technical problem”.

“Due to a technical problem in May 2021, nearly 84,000 loans were disbursed without the client’s consent being recorded at the time of loan disbursement. This problem was highlighted by the field staff within two days and the technical issue was corrected quickly. Of the above, only 26,073 clients were active with an outstanding loan of 34 crore, or 0.12% of the end-September portfolio, ”IndusInd Bank said in an exchange brief on November 6.

Booming chart / BSE data

What are the analysts saying?

Banking and financial analyst Hemindra Hazari told Business Insider US that the bank somehow admitted the allegations made by whistleblowers in a press release.

“I have never seen a bank accept permanent loan renewals. No bank will publicly admit such loans as it will destroy their credibility. Although permanent loan renewals are widely used in the industry, no bank can publicly admit to doing it, ”Hazari said.

Responding to the reasons why investors are selling the bank’s shares even as the lender has made it clear that he denies the allegations, Hazari said: “This is the number of loans, which is 84. 000 loans which is worrying, not the amount of 34 crore. The fact that the system allowed 84,000 loans to be granted without any approval is a very serious accusation. In fact, they admitted the whistleblower’s main point. Today the market reaction is very clear: they don’t believe what management has said and there is a much bigger problem, ”he said.

Brokerage firm Emkay Global has highlighted concerns that the bank is not disclosing such issues in the loan books in advance.

“Regarding provisioning, IndusInd Bank has come a long way and is making adequate contingency provisions beyond the specific PCR (provisioning coverage ratio). But he could have done better in terms of communicating about the management changes in Bharat Financial Inclusion and a technical issue in the Microfinance Loan Book (MFI), which led to renewal allegations in the MFI book ( which otherwise has always been an area of ​​suspicion), ”brokerage firm Emkay Global is said to have said in a report.

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