Indusland has a few bumps ahead before a smooth ride
IndusInd Bank was rocked by a whistleblower complaint in November of last year, accusing the company of disbursing 84,000 microfinance loans without the express approval of the consumers. Investors could not help but notice that procedural flaws may be fatal to a bank's balance sheet, and they suspected that the bank had overextended its loans. Ever-greening is a procedure in which a stressed borrower's credit rating is maintained despite a worsening risk profile.
IndusInd Bank's stock has fallen out of favor with investors, losing 28% of its market value in only one month despite the management's explanation. Deloitte Touche Tohmatsu, an independent investigation firm, has now cleared the bank, claiming that the payment was the consequence of a technological fault and that no misconduct was involved. The bank's management has also used this as a line of defense.
Does this mean Indusland Bank's trouble is now finally over?
Since January, the bank's stock has outperformed the broad Nifty, perhaps indicating that investors are restoring faith in the firm. To be sure, the lender was prudent in providing enough provisions for future risks. The bank has Rs 3,300 crore in contingent provision as of the December quarter, which was adequate to offset any adverse effect on the typical microfinance loan portfolio. It also helps that the technological glitch-related loan distribution accounted for less than 1% of the microfinance loan book. In other words, the microfinance book may not significantly influence IndusInd Bank's profitability. Indeed, economists anticipate the microfinance portfolio to recover from the epidemic and start thriving again. The management had said that a quarterly average distribution rate of roughly Rs 10,000 crore would be resumed shortly.
However, the lender has gaps to fill, beginning with its microfinance division. By purchasing Bharat Financial Inclusion Ltd (BFIL) in 2019, the bank intensified its emphasis on microfinance. Microloans make for 12% of the entire loan portfolio.
After the chief executive officer and chief financial officer quit last year to join competitor organizations, the microfinance subsidiary lacks critical top management leaders. Changes in senior management are known to cause disruptions, and the bank must address this. Because of the significance and scale of microfinance loans, senior executives are required to oversee operations. Maintaining risk management requirements would need a smoother transition here.
Aside from microfinance, the company has a restructured loan portfolio of Rs 2853 crore or 3.3 percent of its overall loan book. Because some borrowers' loan covenants were loosened as a result of the pandemic's effect, the performance of restructured loans should be continuously monitored. According to analysts, banks may have unexpected slippages as a result of restructured loans.
Auto Loan Portfolio:
Another primary source of concern for IndusInd Bank is its auto loan portfolio, which is the foundation of its consumer finance business. Fuel prices will rise as global crude oil prices rise in the local market. As a result of the worldwide semiconductor chip scarcity, commercial vehicles have suffered a setback in recent quarters. In Q3FY22, IndusInd Bank's car loan portfolio dropped compared to the previous quarter. Commercial vehicle loans decreased by 5%, two-wheeler loans decreased by 22%, and three-wheeler loans decreased by 15.5 percent. More expensive gasoline might further stifle this portfolio's performance. The bank has reduced its total lousy loan ratio to 2.5 percent, although it is still above the historical norm of less than 2%.
IndusInd Bank has a dual challenge: expanding its loan book while reducing stress. The economic effect of the epidemic may be waning, but an inflationary climate might distort the growth pitch. For the time being, the lender's prospects in FY23 seem to be brighter than they are this year. That should be enough to convince investors to retain their money in the company.