Key takeaway: Media reports raised 3 issues around IIB’s MFI loans covering governance, evergreening & lapses in lending flagged by the outgoing vice chairman. Management clarified that lending conformed with norms with no evergreening.
It admitted to a tech glitch in May-21 on 84k loans, but this wasn’t done to regularise loans & o/s is 0.1% of MFI loans. It may conduct independent audit to assuage concerns. Managing top-level attrition can be a challenge. No change in ests; BUY.
The issues raised: A media report (Economic Times, 5 November 2021) pointed out 3 key issues: (1) acting as whistleblowers, senior employees at IIB’s micro-financing arm (BFIL) alerted RBI about evergreening of loans after Covid-19, (2) lapses in risk management and absence of audit committees for BFIL/ MFI loans, and (3) concern raised by Mr. MR Rao (who recently quit as Non-Exec Chairman to be an advisor to the company) that in May-21 c.84k loans were offered without consent of customers and possibly done to shore up repayment rates.
Management’s clarification: Mgt. clarified that loans managed by BFIL are approved by IIB and compliant with regulations. BFIL has an executive Risk Management Committee that meets every month. Also, the bank has not been permitting evergreening of loans and during Covid-19 offered 3 options to borrowers: (1) liquidity up to 20% of loans under Govt’s ECLGS – Rs 6bn or 2% of MFI loans, (2) restructured loans – 3% of MFI loans, and (3) loans with longer tenor / lower EMI to borrowers who pre-paid dues (after 3-7 days’ cooling period) of Rs 7bn (2.5% of MFI loans).
It clarified that in May-21, there was a technical glitch on the disbursal of c.84k loans whereby a bug over-rode OTP-based verification of borrower before disbursal. There was no definite pattern here and it happened on a pan-India basis; behaviour of these loans is similar to overall loans.
This has since been corrected & only 26k clients remain active with loans of Rs 340m (0.12% of MFI loans). Mgt. is conducting an internal audit & may appoint independent/ external auditors for review — which should assuage investor concerns. Collections & overdues of MFI loans are improving, so there is no change in credit cost guidance for this segment (6-8%) or overall book (2.4-2.5% in FY22E incl. provision for Voda-Idea).
BFIL senior mgt on the move? Succession planning key to BFIL/ IIB: BFIL is seeing changes in senior positions: (1) recently, Non-Executive Chairman Mr. MR Rao moved to an advisory role, and (2) media reports (eg, CNBC TV-18, 6 November 2021) indicated that its MD & CEO (Mr. Shalabh Saxena) and CFO (Ashish Damani) might be joining another listed MFI, Spandana Sphoorty.
Mgt. clarified that while the bank has not received any resignations, it has a succession plan and sufficient talent within the company. We believe that management/ team changes will be a key issue to be managed, especially in case of multiple exits.
BUY stays: While we watch out for developments here and quality of portfolio in the MFI segment, we retain our earnings estimates. We maintain our Buy call and price target of Rs 1,400 based on 1.9x Sep-23E adjusted PB.
