Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Thematic (Sector/Industry)

*New Regulation, New Loopholes: The Reserve Bank of India (RBI) has finalized rules for non-bank financial company (NBFC) dividend payout ratios at a maximum of 50%. The methodology is predicated on the net NPL ratio and CAR. The new proposal is riddled with loopholes, as NBFCs can easily manipulate these ratios; and*Well-Placed NBFCs: Excluding LIC Housing Finance (LICHF.IN) and Shriram Transport (SHTF.IN), most large NBFCs are well placed to meet the proposed dividend cap if the guidelines are made applicable from the previous year.

*New Regulation, New Loopholes: The Reserve Bank of India (RBI) has finalized rules for non-bank financial company (NBFC) dividend payout ratios at a maximum of 50%. The methodology is predicated on the net NPL ratio and CAR. The new proposal is riddled with loopholes, as NBFCs can easily manipulate these ratios; and*Well-Placed NBFCs: Excluding LIC Housing Finance (LICHF.IN) and Shriram Transport (SHTF.IN), most large NBFCs are well placed to meet the proposed dividend cap if the guidelines are made applicable from the previous year.

Reserve Bank of India – Wrong Rule At Wrong Time

Specialist in Indian Banking and Economic Research

Hemindra Hazari

In a major scoop, ET Prime on June 9, 2021 <a href="https://economictimes.indiatimes.com/prime/corporate-governance/how-a-usd40-million-loan-to-cg-power-arm-in-gift-city-put-indusind-bank-under-sebi-glare/primearticleshow/83342665.cms" target="_blank" rel="noopener">revealed</a> the contents of the Securities and Exchange Board of India (SEBI)’s ongoing investigation into <a href="https://www.smartkarma.com/entities/indusind-bank-ltd" target="_blank" data-smartkarma-citation="entities:1558:1" rel="noopener">Indusind Bank (IIB IN)</a> ’s October 2017 US$ 40 mn loan to CG Middle East FZE (CG ME), a step down subsidiary of CG Power and Industrial Solutions (CG Power). SEBI’s investigation highlights how Indusind Bank structured a transaction wherein the loan given to an unlisted company (<a href="http://www.avanthapower.com/bs-jpl-overview.asp?links=jpl" target="_blank" rel="noopener">Jhabua Power</a>) part of the Avantha group (then founders of CG Power) became stressed, and was shifted to CG Power, adversely impacting the minority shareholders of the company. Subsequently, Tube Investments (part of Muruguppa group) in November 2020 <a href="https://www.bseindia.com/xml-data/corpfiling/AttachHis/9df637e2-de97-468e-bc77-182b0bba7ea4.pdf" target="_blank" rel="noopener">acquired</a> the controlling interest in CG Power, thereby providing some relief to the company’s creditors.This episode poses a significant embarrassment for Indusind Bank. If the bank were to accept SEBI’s contention that it facilitated the shifting of liabilities from the unlisted company of the then promoters/founders of CG Power to the listed company, it would incur the severe displeasure of SEBI as well as the Reserve Bank of India (RBI). No doubt such a transaction, of providing a foreign exchange loan to a step-down subsidiary of CG Power, routed to various companies in the Avantha group, ultimately led to Jhabua Power repaying its rupee loan to Indusind Bank, enhancing the quality of the security on paper for the bank. However, the banking regulator will investigate whether in October 2017 it was <a href="https://rbidocs.rbi.org.in/rdocs/notification/PDFs/15MDC8CEB9A7BDE64745B9BE1DCEC3293CA1.PDF" target="_blank" rel="noopener">permissible</a> to raise foreign borrowings for working capital, to repay rupee loans, and whether the bank engaged in ‘evergreening’. If, on the other hand, Indusind Bank sticks to the official version that the foreign exchange loan was provided to CG ME, and the bank was unable to monitor how the company deployed the funds, then shareholders of the bank should be extremely concerned about the bank’s poor credit appraisal, abysmal documentation, weak risk management, lack of compliance and complete absence of monitoring end-use of funds. This would indicate that the bank in general has very poor corporate credit lending systems which easily permit it to lend funds to a company which resembles a mere sales office, with negligible assets and income, on the sole basis of a corporate guarantee from its immediate parent. The checks and balances system of risk management, compliance and internal audit, the bedrock of banking had apparently been disabled in Indusind Bank. This analyst was one of the first in <a href="https://hemindrahazari.com/2020/03/30/indusind-bank-fiasco-and-the-sleeping-sentinels/" target="_blank" rel="noopener">April 2017</a> (prior to the CG Power transaction) to raise and continued waving a red flag regarding Indusind Bank’s poor credit and risk management expertise under Ramesh Sobti, the then CEO.  Responding to a query sent by this analyst, Indusind Bank’s spokesperson stated,  <blockquote>The Bank strictly follows all applicable regulatory guidelines, corporate governance norms and Bank’s approved policies and procedures, in conduct of its business including sanction and disbursement of loans. Further, all necessary due diligence is done prior to all sanctions and disbursements.</blockquote>For Indusind Bank shareholders it is revealing how senior officials in the bank appraise, evaluate and monitor loans given to companies. It would be a matter of concern to shareholders that these officials, far from being punished, are instead rewarded through promotions. This conduct indicts the corporate credit and risk management in the bank and betrays extreme incompetence prevailing at the highest levels of corporate banking, risk management, compliance and internal audit. That Indusind Bank’s <a href="https://www.indusind.com/in/en/about-us/board-of-director.html" target="_blank" rel="noopener">board of directors</a> have rewarded such individuals by either promotion or permitting them to retain their positions speaks volumes of the corporate governance culture prevalent in the bank.

In a major scoop, ET Prime on June 9, 2021 revealed the contents of the Securities and Exchange Board of India (SEBI)’s ongoing investigation into Indusind Bank (IIB IN) ’s October 2017 US$ 40 mn loan to CG Middle East FZE (CG ME), a step down subsidiary of CG Power and Industrial Solutions (CG Power). SEBI’s investigation highlights how Indusind Bank structured a transaction wherein the loan given to an unlisted company (Jhabua Power) part of the Avantha group (then founders of CG Power) became stressed, and was shifted to CG Power, adversely impacting the minority shareholders of the company. Subsequently, Tube Investments (part of Muruguppa group) in November 2020 acquired the controlling interest in CG Power, thereby providing some relief to the company’s creditors.This episode poses a significant embarrassment for Indusind Bank. If the bank were to accept SEBI’s contention that it facilitated the shifting of liabilities from the unlisted company of the then promoters/founders of CG Power to the listed company, it would incur the severe displeasure of SEBI as well as the Reserve Bank of India (RBI). No doubt such a transaction, of providing a foreign exchange loan to a step-down subsidiary of CG Power, routed to various companies in the Avantha group, ultimately led to Jhabua Power repaying its rupee loan to Indusind Bank, enhancing the quality of the security on paper for the bank. However, the banking regulator will investigate whether in October 2017 it was permissible to raise foreign borrowings for working capital, to repay rupee loans, and whether the bank engaged in ‘evergreening’. If, on the other hand, Indusind Bank sticks to the official version that the foreign exchange loan was provided to CG ME, and the bank was unable to monitor how the company deployed the funds, then shareholders of the bank should be extremely concerned about the bank’s poor credit appraisal, abysmal documentation, weak risk management, lack of compliance and complete absence of monitoring end-use of funds. This would indicate that the bank in general has very poor corporate credit lending systems which easily permit it to lend funds to a company which resembles a mere sales office, with negligible assets and income, on the sole basis of a corporate guarantee from its immediate parent. The checks and balances system of risk management, compliance and internal audit, the bedrock of banking had apparently been disabled in Indusind Bank. This analyst was one of the first in April 2017 (prior to the CG Power transaction) to raise and continued waving a red flag regarding Indusind Bank’s poor credit and risk management expertise under Ramesh Sobti, the then CEO.  Responding to a query sent by this analyst, Indusind Bank’s spokesperson stated,  The Bank strictly follows all applicable regulatory guidelines, corporate governance norms and Bank’s approved policies and procedures, in conduct of its business including sanction and disbursement of loans. Further, all necessary due diligence is done prior to all sanctions and disbursements.For Indusind Bank shareholders it is revealing how senior officials in the bank appraise, evaluate and monitor loans given to companies. It would be a matter of concern to shareholders that these officials, far from being punished, are instead rewarded through promotions. This conduct indicts the corporate credit and risk management in the bank and betrays extreme incompetence prevailing at the highest levels of corporate banking, risk management, compliance and internal audit. That Indusind Bank’s board of directors have rewarded such individuals by either promotion or permitting them to retain their positions speaks volumes of the corporate governance culture prevalent in the bank.

CG Power Loan Scandal: IndusInd Bank Pioneers Lending Without Documents to a Firm with No Assets

Consumer Analyst / Channel Surveillance Specialist, Trudence Capital Advisors

Pranav Bhavsar

Consumer Analyst / Channel Surveillance Specialist

Trudence Capital Advisors

Trudence Capital Advisors Private Limited is a SEBI-registered Research Analyst, holding SEBI registration number INH000015747. Our firm is dedicated to providing independent and unbiased research on Indian mid to large-cap companies. Trudence Capital is known for its counter-consensus views, with a focus on forensic research and on-ground primary investigations. Our research approach is thorough, involving detailed analysis of accounting practices and governance, alongside extensive channel checks.

Independent & Unbiased Research

Equity Bottom-Up

Cholamandalam Investment and Finance / Equity Bottom-Up

In this Insight, we present our takeaways from interaction with transport operators, recovery agents and collection heads across Bihar, Uttar Pradesh, Maharashtra, Tamil Nadu and Punjab.  Our focus companies are <a href="https://www.smartkarma.com/entities/cholamandalam-investment-and-finance" target="_blank" data-smartkarma-citation="entities:17583:1" rel="noopener">Cholamandalam Investment and Finance (CIFC IN)</a> / <a href="https://www.smartkarma.com/entities/shriram-transport-finance" target="_blank" data-smartkarma-citation="entities:253:1" rel="noopener">Shriram Transport Finance (SHTF IN)</a> / <a href="https://www.smartkarma.com/entities/indusind-bank-ltd" target="_blank" data-smartkarma-citation="entities:1558:1" rel="noopener">Indusind Bank (IIB IN)</a> 
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We have also included our notes in this insight, for those who want to have a deeper look at how we go about doing our checks.
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<h2>About India Channel Insight</h2>
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Our objective with India Channel Insight is to share snippets from our channel interactions that are part of our research process. These snippets can potentially be signals for larger themes/ideas emerging out of these interactions.  
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In this Insight, we present our takeaways from interaction with transport operators, recovery agents and collection heads across Bihar, Uttar Pradesh, Maharashtra, Tamil Nadu and Punjab.  Our focus companies are Cholamandalam Investment and Finance (CIFC IN) / Shriram Transport Finance (SHTF IN) / Indusind Bank (IIB IN) 

We have also included our notes in this insight, for those who want to have a deeper look at how we go about doing our checks.


About India Channel Insight


Our objective with India Channel Insight is to share snippets from our channel interactions that are part of our research process. These snippets can potentially be signals for larger themes/ideas emerging out of these interactions.  


India Channel Insight | Chola, Shriram, Indusind - Borrower Health Update

*Another Awful Result: Punjab National Bank (PNB.IN) [PNB] reported FY 4Q21 net income of INR 5.9 bn, increasing INR 803 mn  (15.9%) linked quarter. Excluding the gains in the consecutive quarters, PNB’s core operating results would have been a negative INR 3.9 bn in FY 4Q21 and negative INR 7.4 bn in FY 3Q21. Not good, but operating losses did moderately decline – or did they? Bizarrely, as gross stated NPLs increased 10.5% linked quarter, PNB in its infinite wisdom decided to cut loss provisions INR 7.5 bn (13.7%) linked quarter which was substantially additive to what appears to be an overstated bottom-line; and*Accelerating Credit Risk Leads to Technical Insolvency: Inclusive of the INR 68 bn NCO, we find that PNB’s level of net new NPLs actually increased INR 167 bn or 70.7% on an annualized basis. While we have very little confidence in PNB’s reporting of problem assets at this stage, we take their word for current NPLs and find that loss reserves are now light by at minimum of INR 1.1 bn  - or approximately 124% of stated book value. This is without accounting for the delayed or backlog provisions associated fraud accounts and ageing provisions.

*Another Awful Result: Punjab National Bank (PNB.IN) [PNB] reported FY 4Q21 net income of INR 5.9 bn, increasing INR 803 mn  (15.9%) linked quarter. Excluding the gains in the consecutive quarters, PNB’s core operating results would have been a negative INR 3.9 bn in FY 4Q21 and negative INR 7.4 bn in FY 3Q21. Not good, but operating losses did moderately decline – or did they? Bizarrely, as gross stated NPLs increased 10.5% linked quarter, PNB in its infinite wisdom decided to cut loss provisions INR 7.5 bn (13.7%) linked quarter which was substantially additive to what appears to be an overstated bottom-line; and*Accelerating Credit Risk Leads to Technical Insolvency: Inclusive of the INR 68 bn NCO, we find that PNB’s level of net new NPLs actually increased INR 167 bn or 70.7% on an annualized basis. While we have very little confidence in PNB’s reporting of problem assets at this stage, we take their word for current NPLs and find that loss reserves are now light by at minimum of INR 1.1 bn  - or approximately 124% of stated book value. This is without accounting for the delayed or backlog provisions associated fraud accounts and ageing provisions.  

SBI (State Bank of India) / Equity Bottom-Up

* Flummoxed: A competitor hosted a virtual conference with the management of the State Bank of India (SBIN.IN) [SBI]. To say the call was a disappointment would be an understatement. Nothing meaningful was stated on credit quality, and for some reason management is “comfortable” with capital; and *Reserve Challenges Should Lead To LARGE Capital Raise: Net new NPLs increased INR 193.2 bn or 65.9% on an annualized versus – accelerating over the awful FY 3Q21 result of INR 145.7 bn and 41.6%.  These figures are quite troublesome - even for an Indian SOE bank. Given the capital challenges even prior to the Yes Bank (YES.IN) risk, SBI needs to prepare for additional losses. By our calculation, we find that SBI’s reserves are short INR 1.2 tn - nearly four years of pre-tax results or 61% of market-cap.

* Flummoxed: A competitor hosted a virtual conference with the management of the State Bank of India (SBIN.IN) [SBI]. To say the call was a disappointment would be an understatement. Nothing meaningful was stated on credit quality, and for some reason management is “comfortable” with capital; and *Reserve Challenges Should Lead To LARGE Capital Raise: Net new NPLs increased INR 193.2 bn or 65.9% on an annualized versus – accelerating over the awful FY 3Q21 result of INR 145.7 bn and 41.6%.  These figures are quite troublesome - even for an Indian SOE bank. Given the capital challenges even prior to the Yes Bank (YES.IN) risk, SBI needs to prepare for additional losses. By our calculation, we find that SBI’s reserves are short INR 1.2 tn - nearly four years of pre-tax results or 61% of market-cap. 

State Bank of India – Lights On, No One Home

India

IndusInd Bank Limited is a Mumbai-based Indian new generation bank established in 1994. The Bank provides a range of banking and financial services including  wholesale banking, credit monitoring, risk management, tele-banking, investment banking and commercial lending. IndusInd Bank operates branches throughout India as well as an office in Dubai and London.

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Indusind Bank (IIB IN)

Reserve Bank of India – Wrong Rule At Wrong Time

RESERVE BANK OF INDIA: The RBI has finalized rules for NBFC dividend payout ratios at 50% - predicated on the net NPL ratio and CAR. The new...

Thomas J. Monaco

CG Power Loan Scandal: IndusInd Bank Pioneers Lending Without Documents to a Firm with No Assets

It is revealing how officials undertake dubious corporate loans in Indusind Bank. It is shocking that these officials, far from being punished,...

Hemindra Hazari

India Channel Insight | Chola, Shriram, Indusind - Borrower Health Update

In this Insight, we present our takeaways from interaction with transport operators, recovery agents and collection heads across Bihar, Utter...

Pranav Bhavsar

Punjab National Bank – Cipher

PUNJAB NATIONAL BANK: PNB's operating results were a negative INR 3.9 bn in FY 4Q21. Bizarrely, as gross stated NPLs increased 10.5% linked...

Thomas J. Monaco

State Bank of India – Lights On, No One Home

STATE BANK OF INDIA: A competitor hosted a disappointing call with management. By our calculation, we find that SBI’s reserves are short INR 1.2 tn...

Thomas J. Monaco

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