Shares of IndusInd Bank are sharply down by 15% on disappointing earnings, after the lender reported a 39 percent year-on-year (YoY) decline in net profit for the second quarter, surprising the market as higher provisions for bad loans, shrinking margins, and stress in the micro-finance (MFI) segment weighed on performance.
This the worst fall in the share price of IndusInd Bank in nearly five months. Bloomberg News on October 25 has also reported a block trade in the lender where 2.38 million shares exchanged hands.
During the earnings call, management acknowledged the mounting stress in MFI loans, particularly in tier-2 and tier-3 cities, but expressed cautious optimism about recovery in the quarters ahead.
"MFI stress has been emerging in certain regions, notably in Bihar, Maharashtra, Odisha, and other areas," said Sumant Kathpalia, Managing Director and CEO of IndusInd Bank. "However, we expect a turnaround soon. Once disbursements resume and the funding process restarts, growth will pick up again."
Micro-finance loans account for 9 percent of the bank's loan book, but asset quality within the segment deteriorated significantly. Gross non-performing assets (NPAs) in the MFI segment surged to 6.5 percent in Q2FY25, up from 5.16 percent in the previous quarter. Meanwhile, the bank’s overall gross NPA ratio rose to 2.76 percent from 2.49 percent in Q1FY25, indicating broad-based stress across its portfolio.
In response to the challenging environment, IndusInd Bank increased its contingent provisions by Rs 525 crore in Q2FY25 to buffer against potential risks. Contingent provisions allow banks to set aside funds to cover unforeseen bad loans, a strategy that became common during the COVID-19 pandemic. Out of this Rs 525 crore, Rs 250 crore was earmarked specifically for the MFI segment, providing the bank flexibility to manage future risks in the business.
When asked about the sharp provisioning in a difficult quarter, Kathpalia clarified that it was a one-time measure aimed at securing long-term stability. "The decision to increase provisions reflects our intent to fortify the balance sheet. Though this quarter’s performance was disappointing, this step ensures smoother profitability in the upcoming quarters," he said. "We aim to deliver stronger results in Q3 and Q4, building on the steps we’ve taken now."
While the bank faces persistent stress in the micro-finance segment, management remains hopeful that disbursements will normalise soon, driving recovery. However, challenges in asset quality and profitability could continue to pose risks in the near term.
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