IndoStar Capital to provide up to Rs 677 crore as review reveals lapses in CV lending operations

IndoStar Capital Finance said on Friday it would make additional provisions of up to Rs 677 crore to account for operational defaults in its commercial vehicle (CV) loan book. The lapses related to loan sanctioning to existing customers, loan documentation and shortcomings in policy implementation, according to the findings of a board-commissioned review conducted by E&Y.

While the review is still ongoing, E&Y briefed IndoStar’s audit committee on Friday on its preliminary findings. The agency found deviations from the company’s credit policy in loan approval processes for existing customers and waivers in foreclosure cases for some loans. In addition, for the restructured loans, it was found that the company had not followed the steps described in the description of the control.

In this regard, it is likely that the company will be required to make an additional provision for estimated credit loss (ECL) of between Rs 557 crore and Rs 677 crore. The review of the loan portfolio is ongoing and the assessment of potential additional provisioning and relevant issues may undergo revisions,” IndoStar said in an exchange notification.

The loan portfolio review is expected to be completed upon finalization of IndoStar’s FY22 audited financial statements and the impact of the review will be disclosed in the statements.

While the potential additional provisioning is expected to impact the company’s net worth and capital adequacy ratio, IndoStar will continue to be properly capitalized in accordance with capital adequacy standards and will have sufficient liquidity to meet its short and long-term commitments, the notification mentioned.

IndoStar’s capital adequacy ratio as of December 31, 2021 was 35.1%. Assuming the upper end of the potential additional provisioning range, the revised CAR as of December 31, 2021 would be approximately above 25%, the company said.

Further, the Audit Committee is initiating a review to undertake a root cause analysis of deviations from policies and deficiencies in internal financial controls and systems,” the notification reads.

The Audit Committee commissioned the review by E&Y after being informed by the Company’s management on March 31 of certain observations and control deficiencies during the interim statutory audit of the annual accounts. The shortfalls mainly concerned part of the CV loan portfolio and may have arisen as a result of liquidity problems on the client side caused by the onset of the pandemic.

The review should cover the company’s policies, procedures and practices relating to the sanctioning, disbursement and collection of the CV loan portfolio, as well as the assessment of the adequacy of the provision for expected credit loss. .

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