IndusInd Bank Freezes New MFI Loans as Regulatory Scrutiny Mounts

IndusInd Bank has pressed the pause button on onboarding new microfinance institution (MFI) customers, a decision reportedly influenced by critical feedback from the Reserve Bank of India (RBI) and growing concerns over operational practices within its MFI arm. The Mumbai-headquartered lender has refrained from underwriting fresh MFI loans since January, particularly those sourced through Bharat Financial Inclusion Ltd (BIFL), its wholly owned MFI subsidiary.

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IndusInd Bank Freezes New MFI Loans as Regulatory Scrutiny Mounts EY’s Forensic Review Targets Financial and Operational Lapses at BIFL Strategic Overhaul of MFI Business Faces Regulatory Hurdles Broader Implications for IndusInd Bank’s Risk and Compliance Strategy

According to sources familiar with the matter, the bank’s board reached the decision in late January, prompted by RBI observations regarding inconsistencies in the functioning of its MFI business. The move marks a significant step for the lender, considering that BIFL accounted for nearly 9 percent of its total loan book in the first nine months of FY25. This abrupt halt is part of a larger internal reassessment and follows the resignation of Vikas Muttoo, the then COO and head of member services at BIFL, who also served as the business head of the MFI vertical.

Highlights:

New Onboarding Paused: IndusInd has not approved fresh MFI loans since January.
RBI Feedback Crucial: Decision based on regulatory scrutiny.
Leadership Exit: BIFL business head Vikas Muttoo steps down amid internal turbulence.
Business Impact: MFI contributed 9% to the loan book in 9M FY25.

EY’s Forensic Review Targets Financial and Operational Lapses at BIFL

Global audit and advisory giant Ernst & Young (EY) has been engaged by IndusInd Bank to conduct an extensive forensic investigation into the operational and accounting practices of BIFL. The scope of the audit includes suspected irregularities in interest income reversals, expense accounting, loan pricing strategies, and potential evergreening of loans—practices that can distort asset quality and misrepresent non-performing assets (NPAs).

As per the sources, the entire MFI loan book, which stood at Rs 32,564 crore as of December 2024, is under EY’s review. During the first nine months of FY25, the bank made provisions worth Rs 4,614 crore for potential loan losses in the segment. Furthermore, it has already classified Rs 6,679 crore of MFI loans as NPAs in the same period. There remains uncertainty regarding the full extent of provisioning that may follow once EY submits its final report.

This marks the second time the MFI business has come under serious scrutiny under MD & CEO Sumant Kathpalia’s leadership. A prior investigation was launched in November 2021 following whistleblower allegations and was conducted by Deloitte.

Highlights:

EY Audit Underway: Focus on income recognition, loan pricing, and provisioning.
Full Book Under Review: MFI portfolio of Rs 32,564 crore being audited.
NPA Spike: Rs 6,679 crore of MFI loans already recognised as NPAs in 9M FY25.
Repeat Offense: MFI arm under scrutiny for the second time in five years.

Strategic Overhaul of MFI Business Faces Regulatory Hurdles

IndusInd Bank’s plans to rebrand and reposition its MFI business under the name “Bharat Banking” as part of a broader affordable lending initiative have hit a regulatory roadblock. The new proposal, which aimed to diversify into two-wheeler loans, low-cost housing, and small-ticket gold loans, was greenlit by the board earlier this year. However, it is pending approval from the RBI, which has called for a comprehensive resolution of existing issues before greenlighting any structural changes.

As part of its long-term strategy, IndusInd had presented a detailed realignment plan to the RBI in its triennial business roadmap. According to insiders, the central bank advised the bank to first conduct a full audit of its MFI operations, rectify the identified discrepancies, take necessary provisioning, and only then proceed with the new initiative.

EY’s audit findings are expected to serve as a basis for this clean-up. The investigation is slated for completion by June 2025, with preliminary findings expected to be submitted to the board in the form of a pro forma report ahead of the final audit closure.

Highlights:

Rebranding Plans Paused: “Bharat Banking” initiative on hold.
Board-Approved Proposal: Focus on affordable housing, gold loans, and vehicle loans.
RBI’s Conditional Clearance: Regulator insists on rectification before expansion.
Audit Timeline: EY’s final report expected by June 2025.

Broader Implications for IndusInd Bank’s Risk and Compliance Strategy

The unfolding situation underscores broader governance and risk management challenges facing IndusInd Bank. Repeated lapses in its MFI portfolio reflect underlying deficiencies in internal controls and raise questions about the bank’s ability to manage scale in high-risk segments such as microfinance. The RBI’s intensified oversight and the involvement of EY point to regulatory determination to enforce higher standards of compliance.

Investor sentiment may also be impacted if the bank is required to make additional provisions or if the final audit reveals deeper structural weaknesses in the MFI vertical. Analysts are closely watching the outcome of the investigation and the bank’s subsequent actions to shore up its internal systems and regain regulatory confidence.

Highlights: