The ongoing investigation into IndusInd Bank’s microfinance loans may lead to a complete overhaul of the private lender's microfinance business.
According to several highly placed sources, the Mumbai-based bank has halted onboarding new microfinance institution (MFI) customers since January. For most of the March quarter, the bank didn’t underwrite new MFI loans sourced by Bharat Financial Inclusion Ltd (BIFL), the bank’s MFI unit.
The decision to pause the MFI business was taken by the board in late January based on feedback received from the Reserve Bank of India, the sources said.
Vikas Muttoo, COO and head of member services of BIFL, quit when the bank decided to halt taking on new MFI customers, they said. He was the business head of the MFI unit, which accounted for 9 percent of IndusInd Bank’s total loans in the first nine months of FY25.
“IndusInd bank hereby denies claims of any halt in customer acquisition within its microfinance (MFI) segment. The Bank has not received any instructions from the RBI to stop onboarding customers in the microfinance segment. We deny that the senior official in the MFI business has been let go by the Bank," said a spokesperson of IndusInd Bank in response to queries sent by Moneycontrol.
Scope of EY's audit
The decision to halt onboarding may also be due to the ongoing investigation by EY.
The global audit firm has been tasked by the bank to review and recommend rectifications of certain accounting lapses and faulty business practices in BFIL.
It is gathered that lapses such as accounting for interest income reversal, expenses accounting and pricing of loans are under the scanner.
These lapses may also have resulted in the evergreening (rolling over of loans) of the MFI book.
The sources said the entire MFI book, which was at Rs 32,564 crore as of December 2024, is under review.
While the bank provided Rs 4,614 crore in the nine months of FY25, it may have to take a one-time hit once the EY review is over.
IndusInd Bank has recognised Rs 6,679 crore of MFI loans as non-performing assets in the nine months of FY25.
“At this juncture, it’s tough to quantify the number and it’s not clear whether whatever clean-up that has been done till December should suffice,” said a person with knowledge of the matter.
This is the second time in five years after Sumant Kathpalia, MD & CEO, took charge in March 2020 that the MFI book is under a cloud.
In November 2021, following a whistleblower complaint, the MFI book was subjected to a rigorous investigation by Deloitte.
“The book is again under scrutiny for pretty much the same charges,” one of the sources cited above said.
Future on hold
The bank’s plan to realign and rebrand the MFI unit as an affordable lending business under the name Bharat Banking, proposed by its leadership team and approved by the board, is yet to be ratified by the RBI.
A detailed plan to overhaul the MFI business into a broad-based affordable lending unit catering to two-wheeler loans, affordable housing and low-ticket gold loans was presented to the board in January.
Upon the board’s approval, a presentation was made to the RBI as part of its routine three-year plan submission. “However, the regulator’s feedback to the bank was to first conduct a detailed investigation on its MFI business, fix the loopholes and take the necessary provisioning and then roll out the new plan,” a source said.
EY is said to have been roped in following the RBI’s feedback, the source added.
The investigation is expected to end by June, though the audit firm may submit a pro forma report capturing the initial estimates of provisioning earlier, sources said.
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