IndusInd Bank to make additional provisions after Deloitte review of unit

Bharat Financial Inclusion Limited gave out micro loans without consent of customers, apparently due to a technical glitch

IndusInd Bank has informed the stock exchanges that it will set aside Rs 13.5 crore as additional provision this financial quarter (Q4FY22), responding to an external review of on allegations by anonymous people about the lender’s subsidiary.

The private bank's board noted the potential impact of Deloitte’s review which talked of lapses in product execution and client consent recording at Bharat Financial Inclusion Limited (BFIL). It constituted a committee to assess staff accountability, if any.

Deloitte’s review found that the technical glitch leading to the disbursement of loans without client consent was the result of IT change management and process gap. And, the portfolio, net of provisions, where consent recording was an issue amounted to Rs 8.87 crore as of December, 2021.

After a whistle-blower complaint it was found in November 2021, it was found that Bharat Financial Inclusion had disbursed nearly 84,000 loans without customer consent in May that year.

The bank had taken immediate corrective steps, including conducting internal audit, IT audit, and discontinuation of OTP-based authentication. Subsequently, Deloitte was appointed to conduct an independent review.

The internal review conducted by the bank found that there was one microfinance product that offered liquidity support to customers who were impacted by the second wave of Covid-19 after they cleared the existing dues. However, it was observed that cash disbursements and repayments arrears took place on the same day, which was a procedural lapse.

The Deloitte review report, which was shared with the bank’s board, has said that the banks’ microfinance products require full collection of arrears or repayment of overdue loan outstanding prior to fresh disbursement to a customer. It also pointed to certain operational issues in the product roll out. “In one of the products, introduced to provide liquidity support to customers during Covid-19 pandemic, the sequencing of collections and disbursements could not be established as both happened on the same day”, the banks’ board has noted following the review report being submitted by Deloitte.

This product was discontinued in September 2021 and the bank has on a prudent basis fully provided for the exposure from this product as of December 31, 2021. Further, the board has noted that there is room for improvement in process and oversight of the banking correspondent activities of the subsidiary, especially in technology and control.

“Since the independent audit report largely cites procedural lapses, we believe, as such, there is no widespread evergreening of loans,” said Suresh Ganapathy, Associate Director, Macquarie Capital.

There were worries that the quality of the book was an issue, and credibility and trust in management/board were emerging as key concerns. Under the new CEO, the bank has taken corrective steps in terms of recalibrating balance-sheet growth and recognising problems upfront and providing for them. The bank structurally has a higher pre-provision operating profit to average assets ratio, which helps it generate high ROAs, and we don’t see any risk to those return ratios now,” he said.