Non Performing Assets Archives

What Went Wrong With IndusInd?

IndusInd Bank was set up in 1984 by the Hinduja Group and was one of the first private sector banks that helped in accelerating the process of reforms in post-liberalised India. You can read more about the Hinduja Group here.

IndusInd Bank, like any other bank, gives out loans from which it earns Interest Income. IndusInd’s loan book is managed by Bharat Financial Inclusion Limited (BFIL), a 100% subsidiary of IndusInd Bank.

Some of the senior officials at BFIL have alerted the Reserve Bank of India (RBI) and alleged some mismanagement and malpractices at IndusInd. The whistleblowers allege that IndusInd Bank has been ‘evergreening’ loans since the beginning of the COVID-19 pandemic.

What Is ‘Evergreening’ Of Loans?

Banks give out loans to earn interest income. A portion of the loans disbursed by banks remain unpaid by borrowers, or certain borrowers tend to ‘default’ on loans. If the loan remains unpaid for a certain period, it gets classified as a Non-Performing Asset or NPA. For every loan declared NPA, the bank has to set aside some money as ‘provision’. These provisions are set aside as assets to pay for anticipated future losses. They eat into the company’s profits. To avoid cutting down on profits, it is in the banks’ best interest to reduce the number of NPAs.

‘Evergreening’ of loans is when banks try to revive loans on the verge of being classified as Non-Performing Assets. A Bank gives out loans to the same borrowers to pay their older dues. Essentially, borrowers are paying back the bank by borrowing from the same bank. Evergreen loans are also known as Revolving Credit or Revolving Loans.

The evergreening of loans benefits both the banks as well as the borrowers. It gives the borrower more time to pay back the loan amount and prevents banks from getting higher NPAs, eventually translating into profit. But it can also be seen as pouring fuel into a fire, trying to get back cash by doubling down on the bad loans. This is not ideal in the long run.

What Is IndusInd’s Stance On The Allegations?

IndusInd Bank has refuted allegations made by the whistleblowers. In a PR statement, IndusInd has clarified the following:

It has refuted whistleblower allegations on loan evergreening as “grossly inaccurate and baseless.”

Due to a ‘ technical glitch’, it admitted to disbursing 84,000 loans to customers without their consent in May 2021. The problem was reported within two days and rectified.

Due to ‘Operational Issues’ in the second wave of the COVID-19 pandemic in India, the bank disbursed some loans in cash at the village/panchayat level.

The bank continues to follow biometric authentication, and has disbursed loans only in the bank accounts of clients.

Any additional liquidity or assistance given to borrowers was done within the ECLGS (Emergency Credit Line Guarantee Scheme) framework or other restructuring or moratorium guidelines issued by the RBI.

Even after the clarification by IndusInd Bank, its shares tanked 12% on both of the Indian exchanges. IndusInd Bank has reported an increase in stress in its microfinance loans portfolio. The NPA ratio in the microfinance segment went up from 1.69% to 3.09% in the September quarter. The allegations come after a stellar quarterly performance by IndusInd Bank.

The possibility of foul play can neither be confirmed nor be denied. A panel of the RBI is conducting a technical audit looking into the whistleblower’s allegations. An external audit might be ordered in case the need arises. Till then, it is in the best interest of investors and shareholders to stay alert about any updates on the audit by the RBI.

Indian Banks have performed unexpectedly and exceptionally well in the second quarter(Q2) of this financial year. Markets too were not sure of why the big banks in India are posting such good profits, reduction in bad loans, and improvement in asset quality. BANKNIFTY, the benchmark index for all the retail banks in India, too didn’t reflect for long on the profits that the banks were posting. This kind of exceptional performance wasn’t expected since India’s 23.9% April-June GDP contraction, the damage done to businesses by the COVID-19 Pandemic, and the RBI being vigilant on rising Bad Loans/Non-Performing Assets(NPAs).

The reason is clear for these high profit numbers. The banks are sitting on an NPA(Non-Performing Asset) time bomb, which will explode sooner or later.

Why Are The Banks Posting Such Good Profits?
What is The NPA Time Bomb?
What Next?

Why Are The Banks Posting Such Good Profits?

In the second quarter, ICICI Banks has posted a profit of 242.46% (YoY). HDFC Bank has posted a profit of 15% (YoY), RBL and IDFC First Bank have posted profits of 185% and 116% respectively. None of the 12 listed PSU banks have posted a loss. Even banks which have posted consecutive losses earlier have posted profits in this ‘stressed’ quarter. All of this, while the ill-effects of the COVID-19 pandemic still continue to impact businesses in India.

There are mainly two reasons for such good profits.

Net Interest Income: The Net Interest Income is the difference between the interest paid out and interest received by banks. The Net Interest Income has increased substantially. This means that banks received more interest money than the money it gave out to account holders, lenders, etc. As the economy gets back to normalcy, businesses and people are more likely to pay back the money that they had borrowed from these banks.

Improved Asset Quality and Reduced Provisions: The banks have seen an improved asset quality because they are vigilant and cautious while lending money. Banks aren’t lending money as freely as they did before. This decreases the NPA to some extent. The banks have to set aside “provisions” for these NPAs. Provisions are funds set aside by a company as current liabilities to pay for anticipated future losses. These provisions were reduced to almost half of what they were in the last quarter in many banks. The amount of provisions reduced coupled with reduced NPAs gets added to the companies’ book of accounts, thus increasing the profits.

What is The NPA Time Bomb?

India has been struggling with rising NPAs, low borrowings, and a low growth rate even before the COVID-19 pandemic came around. The RBI has been working on these problems for a long time through regulation and open market operations. It hasd implemented Long Term Repo Operations or LTRO to boost borrowing. The RBI has also announced frequent moratoriums and debt restructuring schemes for Micro, Small & Medium Enterprises(MSMEs).

This is where the problem arises. Banks were asked not to classify many loans as Non-Performing Assets(NPA) in case somebody defaulted during the moratorium period. The loan moratorium and debt restructuring schemes have been around way before the COVID-19 lockdown period. The Supreme Court has said that accounts that were not declared as NPAs till August 31, shall not be declared NPA till further orders. As said before, reduced NPA equals reduced provisions, equals more profit. The impact of NPAs has just been delayed and not written off.

SBI has funds worth Rs 8.2 lakh crores under the moratorium scheme. Kotak Mahindra Bank has Rs 9,000 crores, ICICI Bank has Rs 14,000 crores and HDFC Bank has 15,000 crores worth of loans which are under debt restructuring schemes or moratoriums. A huge chunk of them may turn out to be Non Performing Assets (NPAs), all at once. This will lead to banks keeping higher provisions aside which will eat into the operating profits of the company. You can expect an explosion of NPAs somewhere around Q3 FY 2020-21.

What Next?

The government has announced a waiver on the interest-on-interest on the loans availed for the period between 1st March and 31st August for an amount of upto Rs 2 crores. This might be a slight relief for borrowers and reduces the burden of NPAs on the banks.

Apart from this, there has been not much activity by the centre or the RBI to mitigate the burden of the bad debt that will arise in the future. One shall prepare for a turbulent ride for the banks in Q3 of this financial year.