What is Evergreening and why is it hurting IndusInd Bank’s investors today?

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What is Evergreening and why is it hurting IndusInd Bank’s investors today?
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  • The evergreening of loans is a term in which banks try to revive a loan that is on the verge of default by granting further loans to the same borrower.
  • A group of whistleblowers has written to the RBI, addressing their concerns over poor corporate governance at IndusInd Bank’s micro finance subsidiary allegedly practising evergreening of loans.
  • However, the lender has denied all the allegations and said it had disbursed 84,000 loans without customer consent in May 2021 due to technical glitch.
  • Following this, shares of the bank slipped over 11% on November 8.
Investors of IndusInd Bank seemed to be extremely disappointed at the lender on Monday morning as its shares were down more than 11% on concerns over the company’s handling of bad loans.

Between October 17 to October 24, a few whistleblowers had written to banking regulator, the Reserve Bank of India (RBI), addressing their concerns over poor corporate governance at IndusInd Bank’s micro finance subsidiary, which allegedly practised “evergreening” of loans.

Whistleblowers, including a group of senior employees at IndusInd Bank, alleged subsidiary Bharat Financial Inclusion of giving out evergreen loans worth thousands of crores since the outbreak of pandemic.

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Bharat Financial Inclusion is a non-banking financial company (NBFC) focused on providing loans to women to support their businesses. IndusInd took over the micro-finance lender in a stock deal in March 2019.

What is evergreening?

The evergreening of loans is a term in which banks try to revive a loan that is on the verge of default by granting further loans to the same borrower.

Basically, banks provide more loans to the borrowers to stop them from turning into huge non-performing assets (NPAs). When customers do not repay principal amount and interest for a certain period of time, then such loans are considered as non performing assets or NPA.
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This practice might put lenders at risk of huge amounts of defaults.

Besides, the RBI does not approve of evergreen loans and has set strict norms and potential penalties for banks committing this practice.

What did IndusInd do that has upset investors?

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While the bank denied allegations made by whistleblowers in a letter to the RBI and Chief Executive Officer (CEO) Sumant Kathpalia of evergreening of loans, it admitted it disbursed nearly 84,000 loans without customer consent due to ‘technical glitch’.

“Due to a technical glitch in May 2021, nearly 84,000 loans were disbursed without the customer consent getting recorded at the time of loan disbursement. This issue was highlighted by the field staff within two days and the technical glitch was rectified expeditiously. Out of the above, only 26,073 clients were active with the loan outstanding at ₹34 crore, which is 0.12% of the September-end portfolio,” said IndusInd Bank in an exchange filing on November 6.
What is Evergreening and why is it hurting IndusInd Bank’s investors today?
Flourish chart/BSE data

What are analysts saying?

Banking and finance analyst Hemindra Hazari told Business Insider that the bank has kind of actually admitted to the allegations made by the whistleblowers in a press release.
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“I have never seen any bank admitting to evergreening of loans. No bank will publicly ever admit to such loans because it will destroy their credibility. Although evergreening of loans is widely prevalent in the industry, no bank can publicly admit to doing it,” said Hazari.

While answering on why investors are selling the bank’s stock even as the lender clarified that it denies the allegations Hazari said, “It is the number of loans i.e 84,000 loans that is worrying, not the amount of ₹34 crore. The fact that the system allowed 84,000 loans to be given without any approval is a very serious charge. Actually they have admitted to the main point of whistleblowers. Today, market reaction is very clear that they don’t believe what the management has said and there is a much bigger problem,” he said.

Brokerage Emkay Global highlighted concerns over the bank not disclosing such glitches in loan books beforehand.
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“As far as provisioning is concerned, IndusInd Bank has come a long way and carries adequate contingent provisions over and above specific PCR (provisioning coverage ratio). But it could have done better in terms of communicating about management changes in Bharat Financial Inclusion and a technical glitch in the micro finance loans (MFI) book, which led to allegations of evergreening in the MFI book (which otherwise has always been an area of suspicion)," reportedly said brokerage Emkay Global in a report.

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