Indostar Capital says auditor found lapses in CV book, firm may make up to Rs 677 crore ECL provisions

Non-banking finance company (NBFC) Indostar Capital Finance Ltd on May 6 said it may be required to make additional expected credit loss (ECL) provisions between Rs 557 crore-Rs 677 crore due to “certain observations and control deficiencies” noted by an external auditor in its commercial vehicle loan portfolio.

In an exchange notice, the NBFC said it appointed E&Y on March 31 to conduct a loan portfolio review. While the review is ongoing, preliminary findings showed deficiencies in terms of deviations from the set credit policy for approval of loans to existing customers and waivers in foreclosure cases in certain loans.
The NBFC also did not follow detailed steps for restructuring loans, as per the audit.

“In this regard, it is likely that the Company may be required to make an additional estimated credit loss (ECL) provisioning between INR 557 crores to INR 677 crores ("Potential Additional Provisioning"). The Loan Portfolio Review is ongoing, and the assessment of the Potential Additional Provisioning and relevant issues may undergo revisions,” the notice said.

The audit is expected to be completed by the time of finalisation of the audited financial statements of the NBFC, it said, adding that the impact of the review will also be disclosed in the audited financial statements.

Further, while the estimated additional provisions are expected to hurt the NBFC’s net worth and capital adequacy ratio, the NBFC said it will continue to remain adequately capitalized and have sufficient liquidity to satisfy its short-term and long-term liabilities.

“The capital adequacy ratio ("CAR") of the Company as of 31 December 2021 was 35.1%. Assuming the higher end of the range of Potential Additional Provisioning, the revised CAR as on 31 December 2021 would be approximately above 25%. These estimates are based on the Potential Additional Provisioning and are subject to finalisation of audited financial statements of the Company for the year ended 31 March 2022,” it said.

Separately, the NBFC is also initiating a review for undertaking root cause analysis of deviations to credit policies and check on the gaps in the internal financial controls and systems.

“The Company is committed to continuing to operate at the highest standard of compliance and governance,” it said.