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IndusInd Bank, a prominent player in the Indian financial sector, has initiated a comprehensive forensic audit of its microfinance portfolio. This move comes in response to a significant discrepancy amounting to approximately ₹600 crore, as revealed by sources familiar with the matter. The bank has engaged the services of Ernst & Young (EY), a globally recognized professional services firm, to conduct the audit and thoroughly investigate the issue. The Economic Times was the first to report on this developing situation, highlighting the growing concerns surrounding the bank's microfinance operations. The discrepancy is reportedly connected to the accrual of interest income within the bank's microfinance portfolio, with the irregularities believed to have occurred during the second and third quarters of the current financial year (Q2 and Q3 of FY25). This revelation raises questions about the bank's internal controls and accounting practices within its microfinance division. As a proactive measure, IndusInd Bank is understood to have already begun making provisions to mitigate the potential financial impact of the discrepancy. The bank has reportedly utilized contingent provisions in Q3 FY25 to manage the situation, indicating a commitment to addressing the issue transparently and responsibly. According to available data, IndusInd Bank held ₹1,325 crore in contingent provisions at the end of Q3 FY25, a decrease from ₹1,525 crore in the previous quarter. This suggests that the bank has already allocated a significant portion of its reserves to address the potential losses associated with the microfinance discrepancy. The bank's micro loan book stood at ₹32,564 crore as of Q3 FY25, underscoring the scale and importance of its microfinance operations. During the same quarter, the bank reported ₹305 crore in new stress formation in the microfinance segment, and wrote off ₹344 crore in microfinance loans, as revealed in its disclosures. These figures indicate the inherent risks and challenges associated with microfinance lending, particularly in the context of economic uncertainty. The forensic audit will aim to identify the underlying causes of the discrepancy, assess the effectiveness of internal controls, and pinpoint any potential lapses in governance. This comprehensive investigation will provide valuable insights into the bank's operations and help to prevent similar incidents from occurring in the future. The situation spells fresh trouble for IndusInd Bank, which is already grappling with a ₹1,979 crore hit stemming from discrepancies in its derivatives portfolio. This earlier issue, which has been the subject of scrutiny, further complicates the bank's financial standing and reputation. While PricewaterhouseCoopers (PWC) has submitted its findings on the derivatives book, the forensic audit of the book by Grant Thornton is still ongoing, adding another layer of complexity to the situation. This ongoing investigation highlights the challenges faced by the bank in managing its complex financial instruments and the need for improved risk management practices. CNBC-TV18 has reached out to IndusInd Bank for its comments on the new discrepancies relating to its microfinance book. However, at the time of publication, IndusInd Bank had not issued an official statement regarding the matter. This lack of official communication raises questions about the bank's transparency and its willingness to address the concerns publicly. Shares of IndusInd Bank Ltd are trading 4.46% lower on Tuesday at ₹791.25, reflecting the market's negative reaction to the news. On a year-to-date basis, the stock is down 18%, highlighting the challenges faced by the bank in recent months. The drop in share price underscores the potential impact of the discrepancies on investor confidence and the bank's overall financial performance.
The appointment of EY for the forensic audit signifies the seriousness with which IndusInd Bank is treating the matter. EY's expertise in forensic accounting and investigations will provide the bank with a thorough and independent assessment of the situation. The audit will likely involve a detailed examination of the bank's financial records, internal controls, and operational processes. This will help to identify the root causes of the discrepancy and determine whether any fraudulent or negligent activities were involved. The scope of the forensic audit is expected to cover a wide range of areas, including the origination, disbursement, and collection of microfinance loans. The audit will also examine the bank's accounting practices and the procedures used to calculate and accrue interest income. In addition, the audit will assess the bank's internal controls and risk management systems to determine whether they were adequate to prevent or detect the discrepancy. The findings of the forensic audit will be crucial in determining the appropriate course of action for IndusInd Bank. If the audit reveals evidence of fraud or negligence, the bank may be required to take disciplinary action against those responsible. The bank may also be required to restate its financial statements and make additional provisions for potential losses. The outcome of the audit will also have implications for the bank's regulatory compliance. The Reserve Bank of India (RBI) may launch its own investigation into the matter and could impose penalties on the bank if it finds that it has violated any regulations. The ongoing investigation into the derivatives portfolio adds to the pressure on IndusInd Bank to address the microfinance discrepancy quickly and effectively. The bank needs to demonstrate to investors and regulators that it is taking the necessary steps to strengthen its internal controls and risk management practices. The fall in the bank's share price reflects the market's concerns about the potential financial and reputational damage that could result from the discrepancies. The bank needs to regain investor confidence by providing clear and transparent communication about the progress of the forensic audit and the steps it is taking to address the issues. The microfinance sector in India has been growing rapidly in recent years, but it also faces a number of challenges, including high levels of indebtedness among borrowers and the risk of over-lending. Banks operating in the microfinance sector need to have strong risk management practices in place to ensure that they are lending responsibly and protecting the interests of their borrowers. The IndusInd Bank case highlights the importance of independent audits and effective oversight in the microfinance sector. Regulators need to be vigilant in monitoring the activities of microfinance institutions and taking action when necessary to protect borrowers and maintain the stability of the financial system.
The timing of the discovery of the discrepancy, during the second and third quarters of FY25, is also significant. This period coincides with a time of economic uncertainty and volatility, which may have contributed to the issues within the microfinance portfolio. The bank's decision to utilize contingent provisions to manage the potential financial impact is a prudent step. Contingent provisions are reserves set aside to cover potential losses that may arise from uncertain events. By utilizing these provisions, the bank is demonstrating its preparedness to absorb the financial impact of the discrepancy and minimize the disruption to its operations. The fact that IndusInd Bank had ₹1,325 crore in contingent provisions at the end of Q3 FY25 suggests that it had anticipated the possibility of losses in its microfinance portfolio. However, the decrease from ₹1,525 crore in the previous quarter indicates that the bank has already begun to utilize these reserves to address the issue. The bank's micro loan book of ₹32,564 crore as of Q3 FY25 is a substantial portion of its overall lending portfolio. This highlights the importance of the microfinance sector to the bank's business and the need for effective management of this portfolio. The reported ₹305 crore in new stress formation in the microfinance segment during the same quarter underscores the challenges faced by the bank in managing credit risk in this sector. Stress formation refers to the deterioration in the quality of loans, which can lead to increased delinquencies and defaults. The ₹344 crore in microfinance loans written off during the quarter further emphasizes the losses that the bank is incurring in this sector. Loan write-offs occur when a bank determines that a loan is uncollectible and removes it from its books. The forensic audit will seek to determine the root causes of these issues and identify ways to improve the bank's credit risk management practices. The fact that IndusInd Bank is already facing a ₹1,979 crore hit from discrepancies in its derivatives portfolio adds to the pressure on the bank. Derivatives are complex financial instruments that can be used to hedge risk or speculate on future market movements. However, they can also be a source of significant losses if not managed properly. The ongoing forensic audit of the derivatives book by Grant Thornton suggests that the bank is still working to resolve the issues in this area. The combination of the microfinance discrepancy and the derivatives issues raises questions about the bank's overall risk management capabilities. The bank needs to take decisive action to address these issues and restore investor confidence. The market's negative reaction to the news, as reflected in the drop in the bank's share price, underscores the importance of transparency and accountability in the financial sector. Investors need to have confidence in the integrity of a bank's financial reporting and its ability to manage risk effectively. The IndusInd Bank case serves as a reminder of the importance of strong internal controls, effective oversight, and prudent risk management practices in the banking industry.
Source: IndusInd Bank appoints EY for forensic audit into ₹600 crore microfinance discrepancy