Whistleblowers accuse IndusInd Bank arm of dressing up defaults under evergreening

A group of senior officials at Bharat Financial Inclusion, a micro-finance lender, have alerted the Reserve Bank of India (RBI), IndusInd Bank CEO Sumant Kathpalia and independent directors of the bank of ‘misgovernance and lapse of accounting norms to evergreen loans’ since the pandemic, according to a CNBC-TV18 report.

Bharat Financial Inclusion (BFIL) is a subsidiary of IndusInd Bank. BFIL –known as SKS Microfinance till it was acquired in 2019 – sent out the letters between October 17 and 24, the report said. Moneycontrol could not immediately verify the report.

As per the original report by The Economic Times, the whistleblowers warned that if the practice of “adjusting new loan money with overdues from earlier loans is not checked immediately”, the subsidiary would “eat into the financials of the parent”.

Another whistleblower complained to the RBI on October 14 that Bharat Financial Inclusion had ignored setting up the risk management and audit committees, the newspaper cited two sources as saying.

In September, non-executive chairman MR Rao resigned saying, “I am aware that the RBI has raised issues with respect to BFIL, particularly to the 80,000 loans given in May 2021, without customer consent.” He added that these concerns were a “deliberate act to shore up repayment rates”.

Evergreening loans means a bank grants new loans to an account to revive those loans on the verge of default. The method is used to hide NPAs.

On its part, IndusInd Bank in a statement to exchanges called the allegations “grossly inaccurate and baseless”.

The press release stated that all loan products managed by BFIL are approved by the bank and “fully compliant with regulatory guidelines”. It added that the micro-lender has an executive-level Risk Management Committee in place which meets monthly.

The bank also “strongly” denied accusations of evergreening and said all loans, “including (those disbursed) during COVID period are fully compliant with regulatory guidelines”.

It said a “multi-pronged approach” was adopted “depending on the need of the client”. It added that customers “faced operational difficulties and some have turned intermittent payers, though a large part of them demonstrated a strong intent to repay on many occasions”.

The bank also refuted the allegation of issuing loans without customer consent and said all loans issued through BFIL are through biometric authorisation of the customers – except the technical glitch in May 2021, where nearly 84,000 loans were disbursed without the customer consent getting recorded at the time of loan disbursement.

“The bank wishes to reiterate that there is a strong risk management and control framework in place, both within the bank and at BFIL. Nevertheless, an independent review has been initiated by the bank to see if there is any process lapse or accounting failure at BFIL. Should there be any need, the bank will immediately take corrective action as appropriate and keep all the stakeholders adequately informed,” the statement added.

It further said that the bank has been following a conservative provisioning approach and “reiterates that there is no change in the credit cost estimates including that in the micro-finance business. The Bank once again denies all the allegations”.