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 Rs.120 billion & Rs.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 non-performing asset (NPA) divergence twice — in FY16 and FY17. It essentially meant the bank was under-reporting 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 Rs.1,490, it had hit a 52-week low of Rs.1,190 in October 2019. Exposure to Zee, DHFL and Reliance Group has caused pain to the bank. These entities account for around Rs.21 billion or 1.1% of the bank’s loan book of Rs.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 th