IndusInd Bank Limited (INDUSINDBK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to IndusInd Bank Limited Analyst Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sumant Kathpalia, Managing Director and CEO, IndusInd Bank. Thank you, and over to you, sir.

Dear all, thank you for joining on this call on a festival weekend. I hope you would have seen our press release yesterday, clarifying the facts and thus will keep my opening remarks short followed by question-and-answer. As you all know, IndusInd had a great long-standing business correspondent arrangement with Bharat Financial Inclusion Limited, which culminated into a merger in July 2019. We feel price itself as a process-driven organization with the professional management. The banks inherited these processes built over years of operations in the deepest of geographies and added further layers of oversight once the merger was consummated. The bank, however, received allegations made by anonymous individuals during October. The key issues raised in these allegations and our findings are as follows: governance and control. Basel has been an independently run company for a large part of its existence. This was a professionally run organization with a strong governance practices, taking into account sensitive customer segment. Basel was a business correspondent to over 5 years before the merger and bank had developed oversight mechanism for a BC structure, including a formal risk management committee. Post the merger, the bank extended its oversight to cover entire operations of Bharat Financial and also included additional measures applicable to a bank. Our risk management policies ensures all products are in compliance with the extent regulatory guidelines. The process is followed by Basel pass through audit, inspection and risk and compliance ships. The bank does believe the governance has been strengthened over the years. evergreening. The bank strongly denies the allegations of evergreening. All the loans originated and managed by our Bharat Financial are fully compliant with the regulatory guidelines. The COVID spread has impacted livelihood across the country, including the microfinance segment. The bank extended the support measures, including moratorium, ECLGS scheme, and restructuring of loans as per the applicable regulatory framework. All the loans follow a weekly repent. If there is any default, the same gets recorded as missed installment. In view of the weekly repayment model the concept of evergreening is infeasible. The business model is conservatively focused on lower ticket size, geographical diversification and lower customer indebtedness levels, which has withstood multiple channels over -- challenges over the last decade. The next thing was loans without customer consent. Basel for years had a process of taking biometric consent through [indiscernible] then the OTP from the customer. There was a glitch in the system due to which loans got originated without OTP in May 2021. This was flagged off by Bharat Financial field staff through routine process. Their technology team immediately rectified this issue. Of nearly 84,000 loans that were disbursed without the customer consent getting recorded at the time of loan disbursement, out of the above, only 26,073 clients were active with the loan outstanding of INR 34 crore, which is 0.12% of the September end portfolio. The bank carries necessary provision against this portfolio. The standard operating procedure has since been revised to make biometric authorization compulsory. I want to reiterate that there is a strong risk management and a controlled framework in place, both within the bank and at Basel. We have been following conservative recognition and provisioning approach. We will never shy away from taking provisions if it has to be taken, and we will not conceal any stress in the portfolio. We have discussed credit cost range during the quarter 2 analyst call, and we remain comfortable with that, including for microfinance. We have also given an update on the growth and asset quality of microfinance during the analyst call last month, and the portfolio continues to perform well. Thank you, and I open the floor for questions-and-answers.

[Operator Instructions] The first question is from the line of Rahul Jain from Goldman Sachs.

I've got couple of questions. Number 1 is, has RBI already opined on this particular matter? And would this be also part of the risk provision audit that gets conducted for the previous audited year?

So Rahul, very valid question. I think we have kept all our stakeholders updated on all these. And in fact, the whistleblowing complaint has been marked to the regulator also. So we have been in touch with them, and we have completely kept them abreast of what we are doing as an internal review process. Number two, yes, it's part of the review process -- the annual review process, which happens and it is already going on, and they are reviewing this portfolio.

Got it. Is it also possible to get the data points with regards to the bucket movements in the MFI portfolio as to -- were you going to tell us what were the portfolio in the various buckets 0 -- 1 to 30 DPD, 30, 60 and 60, 90...

So I can -- yes, yes, absolutely. Let me tell you what is the -- what are the buckets and where they are. The bucket movement X plus bucket total overall portfolio is INR 5,000 crores today, as of now. I'm talking to you as of October 31, INR 5,050 crores is the exact amount. Out of that [ INR 2,600 crores ] in X to 30 bucket, which is the X to 30 bucket and it's people who are paying intermittent. The 30 to 60 bucket is INR 1,000 crores -- INR 1,160 crores and the balance is in the 30 -- 60 to 90 and 90-plus bucket. 90-plus bucket is about INR 464 crores, which we have -- which are lying in the gross NPA. So you'll have to back out that because it's lying in the gross NPA and already provided 100%. So please understand that out of this bucket, most of INR 3,000 -- about INR 3,400 crores is lying with the X plus or 30 to 60 bucket and the balance is in the 30 to 60 and 60 to 90 bucket.

That's helpful, Sumant. And one more last question is, could you please tell us the ECLGS that you would have disbursed in the MFI?

INR 600 crore. INR 600 crore.

That's the outstanding?

Yes. That's the disbursement also, I think what we disbursed INR 600 crores, I think. I don't have the real outstanding as of now, but the INR 600 crore was the ECLGS that is disbursed, original amount.

That is the total disbursal in the last 1.5 years under 2...

Yes. If you remember, we took a hit on the P&L, and we never did restructuring in the COVID 1.0.

The next question is from the line of Jiten Doshi from ENAM AMC.

Sumant, I wish you and your team a very happy Diwali. Happy New Year, and thank you for responding so quick to the announcements. Now that we are on this call, with your permission, I would like you to give us an update on the outlook of the business, probably how has your October been? And how do you see the whole year ahead?

So happy Diwali to you, Jiten bhai, and happy Diwali to all my colleagues out there and investor community. I think the business has done very well in the month of October. And -- hello, Can you hear me?

Yes.

Yes, the business continues to do very well in the month of October. And we believe that we are back on track in the month of October. I think all the businesses have done well and are nearing the pre-COVID level, in fact, over the pre-COVID level. And up to our expectation of what we've committed to the community, we will be able to achieve that number. That's number one. Number two, on the collection front also, we are seeing improvement in all the business. In microfinance, I have told you there are 2 states where there is a problem and there's been very low improvement in those states. One is Kerala, the other is West Bengal.

So given the situation now, I mean, there is no change in your outlook on credit cost?

Not at all. I think we have taken that into account when we said we took into account 6% to 8% of flows in the microfinance business when we gave the credit cost and that remains.

Okay. Wonderful. And my last question would actually pertain to going forward, how do you see the momentum as you go into the next year?

So one thing which I want to convey to the community is that the past legacy as well as the bad loan throughput should be behind us, and we would have adequate provisions -- contingent provisions to take us forward as we move ahead into the next year. I think the growth is back in the economy, and all our businesses are at cyclical lows, whether you look at retail finance business, whether you look at micro finance business or you look at even the corporate business of ours, which is a cyclical low. I think the business is going to ramp up. We are now positioned for growth. We have extra -- excess capital. We have now also raised a Tier 2 bond to take a capital adequacy ratio above 18%. So we've seen the announcement. So I think we are poised for growth. And I think you will see the growth happening very strongly, and my view is you will not see these issues of legacy of non-NPA declaration and all as we move into the next year. All of the legacy issues have been taken care of. And if there are any issues which come through the review process and an independent review process of the Bharat Financial, we will take that on our chin and move ahead. I assure you that there will not be any legacies left behind.

Yes. But Sumant, last 1 or 2 years it has been very challenging for the Indian economy, which I think is now coming out of its shell, and we are looking at 2022-'23 to be a very robust period for India, within which we believe the commercial vehicle cycle rebounds, along with rural India doing well. So do you believe that you can grow at a multiplier of the systemic growth because your present both in commercial vehicles as well as micro finance. And I think you have completed your correction of the portfolio in the corporate side. So do you believe you will be able to grow as a multiplier of the systemic growth rate?

So Jiten bhai, we have given a guidance of 16% to 18% CAGR for the 3-year period. Our year 1 was a washout because of -- and we had a negative growth because of the COVID. Year 2, we will see a good growth of 14% to 16%. I think year 3 would be a better growth. And I think we have always said that we will continue to perform better in our domain businesses. And I believe that we will continue to outperform the industry in our domain business.

So there's nothing that's actually changed in your outlook?

Nothing I'm changing in my outlook. Yes.

Fine. So you remain very confident for the period ahead?

Yes. Absolutely.

The next question is from the line of Kunal Shah from ICICI Securities.

I wish you a very happy New Year and happy Diwali. So 2 questions. Firstly, in terms of the management change which has been talked about at BFIL. So if you can just give some color in terms of the management team change and the plans out there? And I have one more question, I'll take it after that, yes.

So this is a news in the market, and we've also heard it. There are no such resignations received by the bank or the Bharat Financial Board. In case of any such event, the bank has a well thought through talent management and succession planning process to ensure seamless operation of business. So Kunal, I don't see us having an issue if somebody wants to go. I think the bank has a backup plan, which is -- a succession plan, which is always ready with and as we talk, we have already started putting some resources there to make sure that they understand the process and understand. Example, Srinivas Bonam, who's a veteran of microfinance industry is already in Bharat Financial reviewing the business as an independent person and will run the business as the Chief Operating Officer if the need arises. So we have already got a backup and a contingency plan in place to make sure that there is no stoppage of the processes and the growth of the business as we move ahead. Did I answer your question?

Yes, yes. Got that reply. And the second question was in terms of the new loans getting extended, what you have highlighted in bullet point 3 in terms of -- on the payment of arrears that we have given the loans of a relatively longer tenor. So just wanted to understand the structure of that. So was it purely the payment of the arrears and the old loans not getting repaid? And what would be the quantum maybe in terms of the arrears, which were paid and the new loans that were given out?

So let me, Kunal -- let me answer these questions in 2. Why did we give the loans? So there were clients who reached out to us asking us for lowering of the equated weekly installments. And we offered them the option of closing the existing loan and clearing all the dues before we can grant them a loan. And I think that is what -- and so we gave them a little bit of liquidity, give them a view to say that you close these loans, and we will give you a new loan, and this was granted after a cooling off period, and we gave them a new loan. And I think that's the loans which we have done. If you look at the performance of the portfolio, I think our portfolio of collection efficiency is 94.6%. And we have stopped giving these loans in the month of July or August. And if these loans would have stopped by now, I think they would have come into the delinquencies. The beauty about our business is the X plus structuring budget. Portfolio is still consistent. And so we are seeing a stability in the flows. And I believe that the nature of the MFI business is that you got to support them during these crises and you give them -- provided they are current, give them an additional loan or give them an additional tenor to take care of these outstandings at that point -- to take care of the crisis at that point of time. So I think that is what we've done. I don't think we've restructured any loan. This was a new loan provided the client paid off this loan.

So the old one was entirely repaid and this was altogether a new loan. So there were no 2 names existing at any point in time?

No, no. Absolutely not. There was -- no, no. Let me also tell you, in some cases, we did the top up. In some cases, we did. The average loan outstanding per client has remained at 1.51. So it has changed from 1.51 to 1.57. So our average loan outstanding per client has remained the same during this time. So it's not that we've gone ahead and started giving multiple loans to the clients. It's not like that.

Okay. And what would be the quantum of this? Maybe if we have to look at it and no doubt it stopped since July, August, but what would have been the quantum wherein this longer tenor loans would have been given in place of the existing loans after having been repaid?

Not so much. Not so much. I say -- I don't have the numbers with me, but I can give you -- tell you the numbers, and I'll put it as a data point. But I can tell you, not so much. We'll give you the data point.

The next question is from the line of Jai Mundhra from B&K Securities.

I think this is -- it may be a bit of a repetitive, but let me just ask it. So these allegations are coming -- looks gray, and you have also clarified with the press release and also with this call. But these allegations are coming probably at a time when there is a change in the management at the BFIL. So maybe if you can highlight if this could have any bearing on the asset quality situation? And in case there is an indeed a change in the management, what is the kind of sequential planning that we have?

So I have just said that we remain committed to our credit estimates which -- credit cost estimates, which we have given in our investor call. We have said that we will be between 160 to 190 basis points, plus 50 basis points for the Vodafone exposure, that is about 240 -- 50 to 70 basis points, which is about 240 to 260 basis points. That's the range which we have given to the analyst -- investor community. Second is, I've just answered that question. There are no such resignations received by the bank or the Basel Board. In case we receive a resignation. We already have a succession planning in place, and I can assure you there will be no disruption to the business. And we remain committed to our credit guidance as of now. Unless and until, our review throws up something which is extraordinary, I do not think that our credit guidance will change.

Right, sir. And just last thing, just a small clarification. So just to understand the slippages that we report at the entire bank level and maybe individual business level, is this -- do you net inter-quarter recovery from the reporting slippages or once an account slips and it get recovered, does it get clubbed in both slippages and recovery? Or you sort of net it out if the account has been upgraded subsequently?

No, no, no. You never net it out. Your gross slippages, if you see our investor presentation, and there in the investor portfolio quality section, and I think you will see that the gross slippages are gross slippages. And I think what you show as the write-off, deductions, which was write-off, upgrades and recoveries to compute the gross NPA number, please.

Right. No. So just to highlight, I mean, if you recall, State Bank had -- then some of the other banks have also -- maybe they were following this consistently, but I just want to double check...

We report gross slippages separately and we report write-offs, upgrades and recovery separately to compute the gross NPA number. So we do report the gross slippages. It is very important for the market to see the gross slippages.

The next question is from the line of Suresh Ganapathy from Macquarie.

I have some series of questions. So let me begin by asking one thing is M.R. Rao part of the firm or has he left the firm? Has he submitted his resignation?

He is now an adviser with IndusInd Bank. And he's no more an -- he was a Nonexecutive Vice Chairman, which he's resigned and he is now only an adviser to the bank.

Sumant, why was this not disclosed in the quarterly conference call held on October 26 or 27? Because this happened in September, right? There was no such intimation to the analyst community about M.R. Rao leaving.

Please understand that M.R. Rao is still an adviser and he was a Nonexecutive Vice Chairman. And this is a company which is not listed. So this is a BFIL company, and I don't think it was necessary for us to inform that. Please understand, he continues to be part of the bank, and he continues to guide me on microfinance.

But Sumant the press reports are saying that he is also expressed reservations about evergreening despite being an adviser, that's what the press reports are saying. So would like...

No, no, no. You are absolutely right he has expressed a report on the process quality on the 84,000 loans. He's never expressed on evergreening and did not comment on it, please. He has expressed a reservation on the 84,000 loans, which I have admitted that there was an issue and a technical issue, Suresh, and I have said that in the meeting, and we've corrected that issue.

Okay. Sumant, again, I'm just going by the press report. They said that between October 17 to 24 this whistleblower complaint was sent to you, to the Board and to the Reserve Bank of India. Again, your results conference call was on October 26 or 27, why was it not informed that there is such a whistleblower allegation at that point in time?

First of all, this is not a whistleblower. It is called a whistleblower, but it is an anonymous complaint. And on anonymous complaint, you don't classify it as a whistleblower. There are no names of the people who've written the complaint. It is very important as per the whistleblower policy of the bank that the name of the people should appear. But having said that, we took it very seriously, and we started the investigation, and that is where we are. And if you look at the quarter 2 results, I've always said that the gross -- we have taken all the gross flows into account. If you look at the restructuring book and this, we took about INR 1,970 crores of flows in the sense restructured and gross NPAs into account. And I think that's what we did. And if there was any such thing. I don't think the review is happening independently, and we will assess it. There is nothing that we've hidden from the stakeholders and that was not the intent, if you -- that's what I can answer. So it was nothing which was hidden.

Okay. Sumant sorry, so one more question here, assuming the CEO and the CFO are also going to quit, that what's the press is quoting, obviously, you have not received any communication from them. But then if that's the case, let's hypothetically assume in a matter of 2, 3 months, we have the Vice Chairman has designed, the CEO and CFO could possibly move to a competitor. All of that has happened in the last 3 months or -- so what exactly -- yes, sorry...

No, no, you're absolutely right. And you're -- please understand M.R. Rao continues to be an adviser to me. So it's not that he's not involved. He is involved in everything which I do, number one. Number two, though he does not want to be on the Board of Directors of Bharat Financial, which is fine. This second, on the -- what you call, on the succession planning, we always -- already have the identified resources and there are internal candidates who will be given escalation -- elevation in the job. And I think we have a structure in place. It can happen any time. The organizations are much bigger than individuals. And we have a very strong structure in place to take care of it.

Okay. And the M.R. Rao didn't express any reservation as to why he wanted to resign? I mean why you wanted to be an adviser and be off the Board?

No, no, no. First of all, there was an agreement between M.R. Rao and the bank that he would retire as of March 21. So there was an agreement, which was in place. And we had to honor that he had expressed. Second, he was upset with this 84,000 loans, and I want to be honest that he said, "why was the process?" And I think we have taken into -- taken action against certain people against this action, and he was very upset about it.

Okay. And finally, to as investor concerns or analyst concerns, do you plan for an independent forensic audit here? Because irrespective of what the internal audit states, maybe an external auditor could give more sanctity to the entire process? So what is your thought process on that? Do you want to go for an external...

You are absolutely right. We will validate. We will have the review process completed. We will have a committee, which will have external process and an external auditor validating the results. And we'll have an independent process going on to give comfort to the investor that everything is right in the -- in Bharat Financial. We will not be happy with only the internal audit.

The next question is from the line of Mahesh M.B. (sic) [ M.B. Mahesh ] from Kotak Securities.

Two questions from my side. Just the first question is see, when a customer is in default and they choose to ask for a top-up loan or an extension of the loan or a fresh loan, how long does it take before the existing overdues has to be finished and a new loan has to be disbursed?

So I think we've given a cooling period of 3 to 7 days, right now during COVID time. And otherwise, the cooling period was 30 days earlier. So in COVID times, we've reduced it to 3 to 7 days.

Perfect. So at no instance, can a borrower essentially take a new loan and kind of repay the older loan simultaneously?

No. There was a product which we did during COVID 2, which is a small product of INR 600 crore, INR 700 crores outstanding as of now, where we allowed this between 1 and 3 days also or same day, 3 days. We allowed that to happen, but there were some -- in some states, there was an emergency crisis, and we allowed the clients to take it within the lower time frame also.

Sorry, in the sense that even if it's 1 day. So for example, if I have -- let's say I'm 70 -- 60 days overdue...

So I've gone to -- so this is approved by the central authority that you can give loans to these guys basis is credit history and everything. And they offer these loans and say, "If you want to clear your dues, you can clear your dues, get us the clearer dues, you will be eligible." So they get the money, arrange the money. The first transaction is the payment of the loan and subsequent transaction is the loan disbursement.

Okay. Okay. And you say this quantum is approximately INR 600 crores?

INR 600 crores. Down to -- will be down to about INR 300 crores this quarter.

And then you did this check because you have a fairly accurate number here, you would have said that this could have potentially slipped into NPAs if the borrower had taken a longer time...

Mahesh, you're absolutely right. The important part to look at is up 2 vectors. Is my X plus stabilizes, my X plus has stabilized. Secondly, is my collection efficiency improving, my collection efficiency is improving. My X plus has stabilized, my collection efficiency. So if I keep on cleaning my 90-plus, my portfolio and X plus will go down at the maximum level. So that's what I'm looking at as a number. My X plus goes down, and hopefully, this quarter, we should be down to INR 3,500. We are through with this problem.

No, no. I think the problem is not that we are due with the -- we will be completing it nevertheless because once the economic comes back, we know that things will get normalized here. We just need to understand in how -- what could be the potential impact of it?

The potential impact is between 6% to 8% of the portfolio, and that's what I've said, and I continue to remain at that level.

Okay. Sorry, the second question is, when these approximately 80,000 loans had a technical glitch. Any reason why it was specifically for this 80,000...

Because I'll tell you, there was an indicator which was missed. And the program is created in such a way that it was not checking for that indicator. That had bypassed that indicator. And that is where these were 84,000 loans, which were -- which had this issue, and that is why it got. So it was a technical glitch where the program did not check for that, and that's where the problem came up. And the other issue, Mahesh, is that why should you use a supplementary process when biometric is the way you authorize a genuineness of a client? Why would you use OTP? So I stopped the OTP process completely, and we only follow the biometric process now.

Sir. I get this, sir. But I'm just trying to understand why did the glitch occur in the sense that what -- was it across 1 day, 2 days or did it happen over a period of time in the month of May? How did it happen?

So it happened on May 21. Yes, it was brought to the notice of the RMC immediately. OTP, yes, we -- so that was the issue, and it was done at that level. And I think that is what we -- it was -- it spread over 6, 7 days, and that's how 84,000 loans -- so it was intermittent. It was not for all loans disbursed. It was intermittent, and that's where the bug was. And that's what was fixed. So it was -- about 84,000 loans were disbursed during the 7- to 10-day period till the fix was received.

And just one final clarification that the set of accounts where overdues as well where they had a chance to default or you think that it was just a glitch, which was sitting there? When you look at those 80,000-odd accounts, do you see any pattern there? Or is just that it happened only on those few days?

No, no, I don't see any pattern of avoiding delinquencies. The delinquency in these accounts is exactly the same as replicates the actual performance of the portfolio.

This Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to Mr. Sumant Kathpalia for closing comments. Over to you, sir.

So as we -- I hope I've been able to give you the confidence on the management and give you the utmost belief that we will never hide anything for you. The bank will continue to be conservative. The intention is not to keep anything under the carpet. And Suresh, that goes to you, I don't think the intention was to hide anything from you or from the investor or any stakeholder. I think there is a process which we are following. And I hope, please understand the bank has a succession policy in place. And any sort of issue is addressed at a very swift and a fast pace in the organization. I can assure you that we will continue to be conservative and make provisions as and when required. I continue to believe that our credit costs will be range bound and we have utmost confidence that we will not [indiscernible] credit cost range. Thank you so much. And thank you for your time during this weekend. Thank you.

Thank you. Ladies and gentlemen, on behalf of IndusInd Bank Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.