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Refutes whistleblower claims but needs to strengthen risk management/communication

IIB on 6th November 2021 held a concall to address the allegations made by an anonymous whistleblower regarding corporate governance issues and evergreening of MFI loans. Here are the key takeaways from the call:

* Management termed the allegations about governance and evergreening of loans as inaccurate and baseless. However, it admitted that due to a technical glitch in May’21, ~84,000 loans were disbursed without customer consent. Out of those loans, only 26,073 clients are active now with loans o/s of Rs340mn (0.12% of MFI loans). IIB carries necessary provisions against this portfolio and the SOP has since been revised to ensure compulsory biometric authorization.

* Management claims that all the loans follow a weekly repayment model and any instance of default is recorded as a missed instalment. In view of the weekly repayment model, evergreening is difficult. IIB has a practice of giving top-up loans, but it never allows 2 core loans to run simultaneously.

* IIB has an executive-level Risk Management Committee to strengthen the governance framework and to ensure a cross-functional review of the activities of BFIL. However, an independent review has been initiated by the bank to see if there is any procedural lapse or accounting failure at BFIL. If needed, it will also have an external auditor to validate the results.

* The delinquent bucket as of Oct’21 stood at Rs50.5bn (Rs26bn is 1-30 dpd, Rs11.6bn is 30- 60 dpd, Rs8.26bn is 60-90dpd and Rs4.64bn is 90+ dpd). According to management, past legacy as well as bad loans issues are now behind, including Vodafone, where IIB carries 100% provision on the FB exposure.

* IIB has been following a conservative provisioning approach and reiterates that there is no change in the guidance given in its Q2 call. Elevated restructuring and continued stress in MFI/CV remain a concern, but the bank reiterates 160-190bps LLP (ex- 50bps for Vodafone) guidance. It carries contingent provisions (ex-RSA) of Rs17.4bn/0.8% of loans, which can be utilized, if required.

* On the news flow around current CEO Mr Shalabh Saxena moving to another MFI - Spandana Sphoorthy, the bank claims that it has not received any resignations at the top management level in BFIL and should the need arise, there is apt succession planning in place. Mr. M R Rao (Ex MD & CEO from erstwhile SKS MFI) who had later taken up a NonExecutive Chairman position is now serving as an Advisor. We will still keep a tab on the management change, if any.

* Business momentum was strong in Oct’21 and management remains confident that growth should pick up in the coming quarters. It expects a 16-18% CAGR over the next 2 years. On the MFI front, collections are progressing well, except in Kerala and West Bengal.

* Our view: We believe that IIB made 3 mistakes in the ILFS case – first being in a denial mode about the underlying problem, then miscommunication and under-provisioning. As far as provisioning is concerned, IIB has come a long way and carries adequate contingent provisions over & above specific PCR. But it could have done better in terms of communicating about management changes in BFIL and a technical glitch in the MFI book, which led to allegations of evergreening in the MFI book (which otherwise has always been an area of suspicion). We believe that the bank’s turnaround story remains intact, but it needs to work more on strengthening credit underwriting/risk management and communication with stakeholders to sustain the long-term rerating. Retain Buy with a TP of Rs1,460 (2x Dec’23E ABV).

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