Micro loans disbursed by BFIL sans customers' consent: IndusInd Bank

IndusInd Bank has set up a panel to assess the accountability of its staff, if any, in the matter related to disbursal of loans by its microfinance subsidiary BFIL without the consent of customers during March 2020-October 2021.

The bank said audit firm Deloitte has submitted its report, according to which the loans were disbursed without the consent of customers due to the "technical glitch".

The matter relates to allegations of disbursal of microfinance loans by its subsidiary Bharat Financial Inclusion Ltd (BFIL) between March 2020 and October 2021, without seeking the consent of customers.

In a late-night stock exchange filing on Tuesday, IndusInd Bank said Deloitte submitted its final report on March 7, 2022. On the basis of the assessment and findings of the report, the bank's board noted key points that there was a technical glitch that led to the disbursement of loans without recording of client consent, it said.

It was a result of the IT change management and process gap, IndusInd Bank said in the filing.

"The board has constituted a committee to assess staff accountability, if any, arising out of the findings of the report," the lender added.

In November, the private sector lender had admitted disbursing as many as 84,000 loans by its fully owned subsidiary BFIL without the consent of customers, while dismissing the whistleblower allegations on loan evergreening as "grossly inaccurate and baseless" and that it was due to "technical glitch".

Allegations were made by anonymous individuals on IndusInd's business correspondent for microfinance loans, BFIL, following which the bank took corrective steps, including conducting an internal audit, IT audit and discontinuation of OTP-based authentication.

Subsequently, it appointed Deloitte Touche Tohmatsu India LLP (Deloitte) to conduct an independent review.

Scope of Deloitte's audit review included examining the technical glitch resulting in disbursal of loans without biometric authentication and OTP (one-time password) validation; examining product design and rollout during March 2020 to October 2021; review of the overall loan portfolio and NPA (non-performing asset) identification process followed by BFIL, among others.

The private sector lender said its microfinance products require a full collection of arrears or repayment of overdue loan outstanding prior to fresh disbursement to a customer.

"Certain operational issues were highlighted in product roll-out. In one of the products, introduced to provide liquidity support to customers during the COVID-19 pandemic, the sequencing of collections and disbursements could not be established as both happened on the same day," it said.

The lender said this product was discontinued in September 2021 and the bank on a prudent basis fully provided for the exposure from this product as of December 31, 2021.

IndusInd Bank said its board noted that there are some areas for improvement in process and oversight of the banking correspondent activities of the subsidiary, especially in technology and control.

"The potential implications of the review findings, including the lapses in product execution and the client consent recording, in terms of income recognition and provisioning requirement is Rs 13.5 crore," it said.

However, as far as product design is concerned, there were no adverse findings by Deloitte in terms of compliance with regulatory guidelines, the bank said.

On a prudent basis, the bank carries a contingent provision of Rs 3,328 crore outside of the provision coverage ratio, including Rs 368 crore towards the standard microfinance portfolio, as of December 31, 2021.

Further, the bank will make an additional provision of Rs 13.5 crore in Q4FY22 based on the findings of the review.

The lender reiterated that there is a "strong risk management and control framework in place", which will be further strengthened on the basis of the findings of the independent review.