Outlook Business|January 31, 2020
It’s now an accepted fact that Indian banks leave too much to be desired in terms of maintaining clean books. One of the most high-profile bankers fell from grace due to his willingness to take on risky exposure for quick profit. Not just that, even public sector banks such as SBI and PNB have been flagged for under-reporting FY19 bad loans by 120 billion & 62 billion, respectively. However, not much hue and cry is made about the lack of accountability, sleight of hand and poor governance at PSU banks. NPAs at private banks, on the other hand, attract more attention and scrutiny due to their premium valuation. Hence, investors were alarmed, in April 2018, when the RBI announced that IndusInd Bank had reported nonperforming asset (NPA) divergence twice — in FY16 and FY17. It essentially meant the bank was underreporting risky exposure and rising bad loans.
QUALITY IN QUESTION
The bank has made money for investors hand over fist for the past few years, but since the RBI disclosure the stock has been volatile over the past 18 months. Along with the divergence in bad loans, the other reasons are the bank’s exposure to three big defaulters and the new incoming CEO. While the stock price is currently around ₹1,490, it had hit a 52-week low of ₹1,190 in October 2019. Exposure to Zee, DHFL and Reliance Group has caused pain to the bank. These entities account for around ₹21 billion or 1.1% of the bank’s loan book of ₹1,971 billion.
The lender’s asset quality has deteriorated as gross NPA increased to 2.19% from 1.09% in September 2018. Net NPA has also doubled from 0.48% to 1.12% during the same period. According to Nitin Aggarwal, research analyst, Motilal Oswal Securities (MOS), there is one silver lining for the bank — its exposure to stressed accounts fell from 1.9% in Q4FY19 to 1.1% in Q2FY20 through a combination of recoveries and provisioning. The management expects it to further drop to 0.8% by Q3FY20 and also claims that it “holds significant collaterals for these exposures”.
However, there’s one account that IndusInd would rather not want investors to focus on — IL&FS. The bank, like some of its peers, had lent around 30 billion to the defaulter and its special purpose vehicle (SPV), making up for 1.6% of the bank’s total loan book at the end of FY19. “IL&FS account has been recognised as an NPA and the bank wrote off10 billion, but 20 billion is still part of gross bad loans. That means credit cost will rise as the bank will have to make certain provisioning for it,” says an analyst with a reputed brokerage. IndusInd is among the top five creditors of IL&FS and since September 2018, the bank has faced drastic de-rating.
While it has provided 70% provisioning for the parent company and 25% for the SPV, analysts believe it won’t be enough. “They will have to provide full provisioning for their exposure to IL&FS. At least for the parent company, IndusInd Bank will have to write off the full loan as it was unsecured,” says Hemindra Hazari, an independent banking analyst. That means the borrower did not offer any collateral for the loan. Experts have also questioned the bank’s decision to lend to an entity with negative networth in the first place. “If they would have just analysed IL&FS’ annual report, they would have realised that they are lending to a firm with negative networth,” asserts Hazari.
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January 31, 2020