Resume loan screening loopholes weigh heavily on IndoStar Capital

IndoStar Capital Finance Ltd, a non-bank finance company backed by private equity firms, found some shortcomings such as deviations from loan sanctioning policies and control gaps in the commercial vehicle loan book. The potential provisioning burden for this is pegged at between Rs 557 crore and Rs 677 crore.

The ESB filing company said on March 31, 2022 that its management had informed the board’s audit committee that certain observations and control deficiencies had been observed during the interim statutory audit of the annual financial statements specifically in the CV loan segment.

NBFC has appointed Ernst & Young LLP (E&Y) to conduct the loan portfolio review. The scope of work covered by the review of policies, procedures and practices relating to the sanctioning, disbursement and collection of E&Y CV loans was also to assess the adequacy of the provision for expected credit loss.

Some preliminary findings from the loan portfolio review focus on certain control deficiencies. The E&Y review found deviations from credit policy in existing customer loan approval processes and foreclosure waivers for some loans.

The company did not follow the steps outlined in the description of control for restructured loans, the review observed.

NBFC said the company may be required to make additional estimated credit loss (ECL) provisioning between Rs 557 crore and Rs 677 crore. The loan portfolio review is ongoing and the assessment of potential additional provisioning and relevant issues may be subject to revisions.

The potential additional provisioning is expected to impact the company’s net worth and capital adequacy ratio. However, the company should continue to be adequately capitalized, meet capital adequacy standards and have sufficient liquidity to meet its short and long-term commitments.

The Company’s capital adequacy ratio (CAR) was 35.1% as of December 31, 2021. Assuming the upper end of the potential additional provisioning range, the revised CAR as of December 31, 2021 would be approximately higher than 25%, says IndoStar.

These estimates are based on the potential additional provision and are subject to the finalization of the company’s audited financial statements for the year ended March 31, 2022, he added.

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