MC EXCLUSIVE IndusInd Bank’s MFI, unsecured loans under scanner for possible flouting of lending norms

Industry sources says the practice of netting off stressed loans has now been stopped and IndusInd bank is taking corrective steps.

Fresh issues may emerge as IndusInd Bank continues its probe into the Mumbai-based lender’s microfinance loan portfolio. Sources said around Rs 6,000-7,000 crore of loans could be under the scanner for improper lending practices.

These are predominantly small-ticket unsecured loans, some of which may have been classified as agriculture loans, though they were connected to microfinance institution (MFI) loans.

These loans were primarily given to ensure that existing MFI loans did not turn bad, sources said. “What has happened is not a classic case of loan rollover but something like that,” one of the bankers aware of the investigations told Moneycontrol on condition of anonymity.

The issue 

Consider the following example to understand how the practice worked. A loan of Rs 20,000 is extended to an MFI borrower but remains unpaid for 60 days or more. The bank extends a fresh loan of higher value to the spouse, mostly the husband of the borrower, the sources said.

The bank apparently had a practice of netting off such new loans against outstanding MFI loans, which were under stress.

This was done to ensure that the earlier MFI exposure was no longer an overdue account. It is understood that the fresh loans extended after netting off the MFI exposure were classified as small-ticket unsecured loans by the bank. Some of these loans may also have been tagged as agriculture loans.

“Classifying these loans as agri-loans could have been beneficial to the bank, as these loans do not have a structured monthly or weekly repayment schedule and become due for repayment only at the end of the year,” said another banker who, too, did not want to be identified.

The sources said the practice of netting off stressed loans may have been flagged during an audit and has now been stopped.

How did it work?

Unlike the straight-forward case of evergreening of loans, which is easy to track and trace as the same borrower is given a new loan, in this case, traceability can be difficult, said sources.

“Customer details and KYC of the borrower and her spouse would be completely different and hence to plot how the MFI loan was regularised would be extremely difficult,” a senior official in the MFI industry said.

Such small-ticket unsecured loans were mostly handed out in early 2024. “This practice was quite prevalent at the bank till about July–August last year,” a senior official in the microfinance industry said, refusing to be identified.

It is believed that around March–April this year, the practice came to light during an internal review when the private bank found delinquencies to be on the higher side for certain unsecured loans.

EY was asked to conduct an audit of the MFI portfolio, while a forensic audit was done by Grant Thornton to fix faulty processes at the bank, including lapses in derivative accounting.

When contacted, the spokesperson for IndusInd Bank said, “The report is false, inaccurate, and speculative. As part of its microfinance business, IndusInd Bank Limited lends only to women and not their spouses.”

“Women are central to our microfinance business, with products designed to foster financial independence and support their entrepreneurial endeavours. The core of IndusInd Bank’s microfinance business is to provide small-value unsecured loans and other basic financial services to women, primarily located in rural India, by delivering financial services directly to doorsteps,” the spokesperson said.

Stress in microfinance loans

In March, the bank revealed that there could be issues in accounting for certain derivative trades and these were being audited by PWC. It turned out that lapses in accounting practices were found in other businesses as well, mainly microfinance. Grant Thornton is in the process of recommending suggestions to rectify the procedural issues.

On May 23, Moneycontrol, based on an analysis of IndusInd Bank's March FY25 quarter disclosures, reported that MFI-related issues outweigh the concerns from its derivatives issues, which was the starting point for the bank to come under scrutiny.

Industry sources said the practice of netting off stressed loans has now been stopped and the bank is taking corrective steps.

“Out of the Rs 6,000–7,000 crore of loans which may have been classified as agri-loans, it is not clear how much has turned bad,” a senior industry official said. Another source said the bank is in the process of taking remedial steps but the financial impact could spill over into the June quarter.