Non-bank financiers report failures in credit portfolios

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Bombay : Non-bank financiers are reporting startling lapses in their credit portfolios that have come to light amid the ongoing withdrawal of covid-era liquidity measures introduced to counter a pandemic-induced slowdown.

Last week, non-banking finance company (NBFC) Indostar Capital Finance and mortgage lender Can Fin Homes said they detected problems in their loan books. For Indostar, additional provisions to cover credit losses resulting from the affected exposure in the commercial vehicle segment are estimated between 557 crores and 677 crore, the lender said on May 6. He cited preliminary findings from an EY review.

For Can Fin Homes, promoted by state-owned Canara Bank, 37 loan accounts from 3.93 crores was declared fraudulent after it was discovered that fake tax documents had been used to obtain them. Although the amount of the loan in question differs significantly between the two entities, analysts have said that part of it will be the result of the aggressive lending surge during the pandemic.

Although Indostar did not disclose the size of the affected loan portfolio, an analyst who spoke on condition of anonymity said it is estimated at 1,500 crore. The lender’s commercial vehicle financing portfolio amounted to 4,500 crores as of December 31. This does not necessarily mean that all 1,500 crores would have repayment issues,” the analyst clarified.

He said some loans would have been rolled over on the assumption that once covid stress subsides borrowers will bounce back and start repaying. Some borrowers whose loans have been reviewed or restructured may still not be able to repay their debt, he added. Evergreening is the method of hiding the true extent of bad debts by allowing stressed borrowers to take out more loans to pay off existing loans.

An email sent to the lender seeking comment went unanswered.

For Indostar, EY’s preliminary review found deviations from credit policy for existing customer loan approvals and certain loan waivers and foreclosures. She also found that for restructured loans, she had not followed all the necessary steps.

Analysts said it’s possible that more non-banks will make such startling discoveries in their loan portfolios, largely due to bad debt management techniques such as recasting in perpetuity and non-rationed debt. Experts said some lenders reportedly used top-up loans, disbursed government-backed loans to small businesses and offered a moratorium to temporarily help struggling borrowers. Legal experts said NBFC boards need to be more vigilant to prevent future defaults. squeeze.

The Reserve Bank of India (RBI) has attempted to harmonize regulations between banks and non-banks. Last October, RBI announced ladder-based regulations for NBFCs, with effect from October 2022. Since then, it has also aligned significant exposure standards, among other measures. In 2012, the RBI’s Code of Fair Practices had established the practices to be followed, including guidelines for loan disbursement and important terms and conditions.

“The code hasn’t had much success in practice, the main reason being that it doesn’t lay down real liability or hold anyone really accountable for any irregularities in the disbursement process,” said Bharat Chugh, a lawyer. to the Supreme Court.

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