Indostar informs about credit process lapses and hence need for additional provisions. Fixing of accountability awaited.

In a surprise development, Indostar Capital Finance Limited (ICFL) informed the following –

  • On March 31, 2022, the management had informed Audit Committee of certain control deficiencies observed during the interim statutory audit
    • Observations specifically related to the CV loan portfolio
    • They were in respect of sanctioning of loans to existing customers, loan documentation and policy implementation gaps.
    • The lapses may have arisen pursuant to the liquidity concerns with the customers due to Covid-19
  • Audit Committee in the same meeting appointed Ernst & Young (E&Y) to conduct an independent review on the issue.
  • While the review is still ongoing, on May 6, 2022, the Audit Committee was informed by E&Y of the following –
    • there are deviations from the credit policy of the Company in approval processes for loans to existing customers and waivers in foreclosure cases in cases of certain loans;
    • for restructured loans the Company did not follow the steps as detailed in the control description.
  • In this regard, it is likely that the Company may be required to make an additional estimated credit loss (ECL) provisioning between Rs 557 crores to Rs 677 crores. However, this number may revise on completion of the review, which is expected to conclude by the time financial statements for FY 22 are finalised.
  • Based on the current estimates, Capital Adequacy Ratio (CAR) of the Company may decline from 35.1% to 25% due to the above.

My opinion on the above

  • Why the issue was not highlighted before?
    • E&Y was appointed on March 31, 2022 so why no information before?
  • Though management may seem proactive in taking the corrective action, I am more keen on understanding the origin of lapses and who was responsible for it?
    • If this was done extensively (which the large additional ECL quantum is infact indicating), very unlikely that management was not aware before. So may be it was more of a push from the statutory auditor on the issue and not any proactiveness by the management.
    • In that case many senior people are answerable and board needs to take some strict actions.
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