The fresh accounting lapse at IndusInd Bank has further shaken up confidence in the lender, sending shares sharply lower by over two percent on May 16 to be among the top losers on the Nifty 50 index.
Top business and regulatory advisor Abizer Diwanji of NeoStrat Advisors LLP told CNBC-TV18 during a conversation that he expects a '3-4 year turnaround period' where growth will be 'least important', and remedial actions will need to be taken.
"There will be a new CEO and a period of stabilisation, where he will take stock of everything. Because he will not want dripping information to come in later on," said Diwanji, on the remedial measures likely next. During this turnaround period, 'growth will be take the backseat, but governance and regulation will take a front seat', Diwanji added.
In a stock exchange filing, IndusInd Bank had disclosed on May 15 discrepancies in the bank’s microfinance business following a whistle-blower complaint. The bank's Internal Audit Department (IAD) had on May 8 found unsubstantiated balances of Rs 595 crore under 'Other Assets' category, a disclosure which had not been reported by the lender previously.
The banks' auditors too will also need to do a lot of explaining, said Abizer Diwanji, on how the internal controls failed to spot the 'unsubstantiated balances' in its other assets account. The lender will need to get to the root cause of these discrepancies, said Diwanji, questioning why the lender has not disclosed 'comprehensively', which is the root cause of the problems at the bank.
Diwanji said the auditors will also need to explain as to how they established the internal controls and financial reporting (ICFR). These are policies and procedures to ensure accuracy and reliability of the financial statements. "There are many lines of defence that need to explain this," he added.
"...the bank has lost confidence because of the derivative issue; thereafter successive issues are dripping out of the balance sheet. Then also, we get reasons like 'incorrectly recorded', or offsetted 'unsubstantiated balances'. There needs to be a far more clearer explanation of the root cause and the remedial measures so the people know that this is not systemic," said Diwanji.
The lender will now hope to clean up the balance sheet so that it can start afresh, said Diwanji, adding that there have been several successful examples of a turnaround, such as Yes Bank.
He also expressed confidence that the new governance structure being put in place at IndusInd Bank may ensure there is not intervention by the banking regulator. "Let it decide on a CEO and give it time to recover," the lawyer said.
Mid-sized lenders in reported errors in the past in their quest to grow, but if the bank is well-capitalised, there should not be a major issue, said Abizer Diwanji.
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