IndusInd Bank has taken the decision to halt its microfinance business, suspending new loan disbursals to microfinance institutions (MFIs) since January. This comes as a result of an investigation by Ernst & Young (EY) into the bank’s microfinance business practices and accounting lapses. The Reserve Bank of India (RBI) has also given feedback, urging the bank to address issues before proceeding with any future plans for this sector.

Key Reasons Behind the Halt

1. Investigation by EY: The primary reason for halting the microfinance operations is an ongoing audit by Ernst & Young (EY). The audit focuses on accounting discrepancies, particularly around interest income reversal, expenses accounting, and the pricing of loans. Such lapses might have contributed to the evergreening of loans in the bank’s MFI portfolio.

2. RBI Feedback: The feedback from the Reserve Bank of India (RBI) to IndusInd Bank's plan to rebrand its MFI unit as an affordable lending business was critical. The RBI has asked the bank to first conduct a thorough investigation into its existing microfinance business, rectify the lapses, and take the necessary provisioning steps before it can move forward with any new plans.

3. Resignation of Key Personnel: The decision to halt the onboarding of new customers also led to the resignation of Vikas Muttoo, the COO and head of member services of Bharat Financial Inclusion Ltd (BIFL), the bank’s MFI unit. This departure marks a significant shift in leadership at a time when the bank is facing increased scrutiny.

The Impact on IndusInd Bank's Financial Standing

The microfinance business of IndusInd Bank has been significant, comprising 9% of the bank's total loan book. As of December 2024, the MFI book was valued at Rs 32,564 crore. The potential impact of the ongoing investigation could lead to a one-time financial hit for the bank, with provisions likely to be made for any discrepancies discovered during the audit.

As of now, the bank has recognized Rs 6,679 crore of MFI loans as non-performing assets (NPAs), indicating that there may be further clean-up required to address legacy issues.

The Future of IndusInd Bank's MFI Unit

IndusInd Bank had already proposed a realignment of its MFI unit to focus on affordable lending under the name Bharat Banking, which would include products like two-wheeler loans, affordable housing, and low-ticket gold loans. This strategy was approved by the bank’s board but has yet to be ratified by the RBI. The regulator’s feedback is essential, and they have emphasized the importance of first resolving the existing issues before implementing any new strategies.

Challenges and Uncertainties Ahead

The bank is currently in a position of uncertainty, given the scrutiny on the MFI portfolio and the audit by EY. The audit’s final report is expected to be submitted by June, but a preliminary version might be available earlier to provide an estimate of the necessary provisioning.

The rebranding plans for Bharat Banking are on hold until the issues with the MFI business are fully addressed. This delay might affect the bank’s ability to execute its long-term growth strategy in the affordable lending segment.

Conclusion

IndusInd Bank’s decision to halt its microfinance business underscores the banking sector’s need for rigorous oversight and accountability. As the investigation by EY continues and the RBI reviews the situation, the bank's leadership is focused on addressing these gaps to ensure its future success in the affordable lending market. While the situation remains fluid, the bank’s actions will likely set a precedent for how other banks handle similar issues in their microfinance operations moving forward.

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