In IndusInd Bank’s ongoing microfinance saga, we learned earlier of a “technical glitch‘ whereby the bank generously disbursed loans to customers without their consent. Now comes the bank’s request for a ‘procedural lapse‘ whereby the bank received repayments from a large number of loans and disbursed new loans to the same accounts, on the same day and in cash.
Curiously, on November 6, 2021, Sumant Kathpalia, Chief Executive Officer (CEO) of IndusInd Bank, during an analyst call declared that the Bank had an approved product during the second wave of COVID-19, whereby the cool-down period between repayment of previous loans and disbursement of new loans to the same clients was reduced from 30 days to “the same day and three days.

The revised policy was fraught with risk. The Bank expressed concern to ensure that the repayment of the previous loan would precede the disbursement of the new loan. But when the policy apparently allowed both transactions to take place on the same day and also allowed the transactions to be conducted in cash, it ultimately led to a situation where the Bank was unable to determine when repayment of the old loan. and disbursement of the new loan. In other words, the borrowers may have financed their repayment with a new loan from the bank. The “procedural vacuum” was therefore the direct result of a product approved by the Bank’s Risk Management Committee.

The ongoing investigation will therefore need to probe the role of senior management, which approved the product and enabled repayment of previous loans and disbursement of new cash loans on the same day. As this was an unusual policy revision, it needs to be reviewed not only by the external consultant, but also by the regulator. When a bank’s senior management plays a critical role in an episode of impropriety, the credibility of external consultants hired by the bank becomes questionable, and this forces the banking regulator to undertake an investigation.

It remains to be seen how the board of directors of IndusInd Bank, in particular the chairmen of the board of directors, the audit committee and the nominations and remuneration committee, examine the “technical problem” and the “vacuum of procedure”, both of which reflect badly on executive management at IndusInd Bank.

IndusInd Bank shareholders should be concerned, as the Reserve Bank of India (RBI) has been putting its heavy emphasis on small and medium sized private sector banks, and apparently deleted Vishwavir Ahuja as CEO, RBL Bank as of end-December 2021. Depending on how seriously the regulator views the “technical glitch” and “procedural lapse”, shareholders should not consider retaining Mr. Kathpalia as CEO. Head of the Bank as acquired.

DISCLOSURE

I, Hemindra Hazari, am an independent research analyst registered with the Securities and Exchange Board of India (SEBI) (Regd. No. INH000000594). I hold shares in Indusind Bank. The views expressed in this overview accurately reflect my personal opinion on the securities and issuers referenced and/or other matters, as applicable. This preview does not contain and is not based on any non-public material information. To the best of my knowledge, the views expressed in this overview are in accordance with Indian law as well as applicable law in the country from which it is published. I have not been commissioned to write this overview nor have any particular opinion on the titles referenced herein. This overview is for informational purposes only and is not intended to provide financial, investment or other professional advice. It should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security.

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