IndusInd Bank is currently facing an investigation into its microfinance loans, which could lead to a major change in how the bank handles its microfinance business. IndusInd Bank has suffered from loss of networth of thousands of crores due to irregularities and Bank is investigating the reason for the loss.
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Pause in Microfinance Loan Activity
As of January 2025, IndusInd Bank has stopped onboarding new microfinance institution (MFI) customers. This decision was made after the Reserve Bank of India (RBI) provided feedback on the bank’s operations. Sources indicate that for most of the first quarter of 2025 (from January to March), the bank didn’t approve new MFI loans from Bharat Financial Inclusion Ltd (BIFL), which is the bank’s MFI arm.
Reasons for the Halt
The bank’s board decided to pause the MFI business in late January after receiving the RBI’s input. Vikas Muttoo, the Chief Operating Officer and head of member services at BIFL, resigned when the decision was made. He had been leading the MFI unit, which contributed 9% to IndusInd Bank’s total loans in the first nine months of FY25.
Ongoing Investigation by EY
The decision to stop onboarding new customers also comes amid an ongoing investigation by Ernst & Young (EY). EY has been hired by the bank to review and address accounting mistakes and flawed business practices within BFIL. The investigation is focused on issues like incorrectly accounting for interest income reversals, improper expense reporting, and pricing of loans. These problems may have led to the practice of “evergreening,” which means rolling over loans to avoid recognizing them as non-performing.
The MFI loan book, which was valued at Rs 32,564 crore as of December 2024, is under review. While the bank issued Rs 4,614 crore in MFI loans in the first nine months of FY25, it might face a one-time financial hit once the EY investigation concludes.
Loan Defaults and Non-Performing Assets (NPAs)
As of FY25, IndusInd Bank recognized Rs 6,679 crore of MFI loans as non-performing assets (NPAs). However, it’s difficult to predict how much more may need to be written off after the investigation is completed. Some insiders have said it’s unclear if the clean-up efforts done so far are enough.
Past Scrutiny of MFI Business
This is not the first time that the bank’s MFI business has been under scrutiny. After Sumant Kathpalia became the bank’s Managing Director and CEO in March 2020, the MFI book came under a cloud once again. In November 2021, following a whistleblower complaint, Deloitte conducted an investigation into the MFI book. The current investigation is focused on similar concerns about the way the MFI loans have been managed.
Plans to Restructure the MFI Business
IndusInd Bank had plans to rebrand its MFI unit as an affordable lending division under the name Bharat Banking. This plan was designed to offer a wider range of products, including two-wheeler loans, affordable housing, and small-ticket gold loans. The proposal was approved by the board, but it still needs approval from the RBI.
The bank presented a detailed plan for the new business model in January 2025. However, the RBI advised the bank to first complete a thorough investigation into the MFI unit, address the identified issues, and make the necessary provisions before launching the new initiative.
Conclusion
The investigation into the MFI loans is expected to conclude by June 2025, although EY may provide initial reports with estimates on provisions earlier. The outcome of the investigation and the future of the MFI business at IndusInd Bank remain uncertain for now.
