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 downturn.
Last week, non-banking financial company (NBFC) Indostar Capital Finance and mortgage lender Can Fin Homes said they had detected some issues in their loanbooks. For Indostar, additional provisions to cover credit losses arising out of the affected exposure in the commercial vehicles segment is estimated between ₹557 crore and ₹677 crore, the lender said on 6 May. It cited preliminary findings of an EY review.
For Can Fin Homes, promoted by state-owned Canara Bank, 37 loan accounts of ₹3.93 crore were declared as fraud after it was found that fake income tax documents were used to obtain them. Although the amount of loan under question differs widely between the two entities, analysts said some of it would be the result of the aggressive loan-push during the pandemic.
Although Indostar has not disclosed the size of the affected loanbook, an analyst who spoke on condition of anonymity said it is estimated at ₹1,500 crore. The lender’s commercial vehicle finance book stood at ₹4,500 crore as of 31 December. “This does not necessarily mean that the entire ₹1,500 crore would have repayment problems,” the analyst clarified.
He said certain loans would have been evergreened with the assumption that once covid stress recedes, borrowers would bounce back and start repaying. It could be possible that some borrowers whose loans have been ever-greened or restructured are still not in a position to service debt, he added. Evergreening is the method of masking the true extent of bad loan by allowing stressed borrowers to take more loans to repay existing ones.
An email sent to the lender seeking comments remained unanswered.
For Indostar, the preliminary EY review has detected deviations from the credit policy for approving loans to existing customers and waivers and foreclosures in certain loans. It also found that for restructured loans, it did not follow all the necessary steps.
Analysts said it is possible that more non-banks could make such startling discoveries in their loanbooks, primarily owing to bad loan management techniques like evergreening and unrationed debt recast. Experts said some lenders would have used top-up loans, disbursed government-guaranteed loans to small businesses and offered a moratorium to temporarily aid stressed borrowers. Legal experts said NBFC boards need to be more vigilant to stop future lapses.India has already seen how audit lapses and inability to course-correct led to an array of defaults by Infrastructure Leasing & Financial Services (IL&FS) in 2018, creating a prolonged liquidity squeeze.
The Reserve Bank of India (RBI) has been trying to harmonise regulations between banks and non-banks. Last October, RBI announced scale-based regulations for NBFCs, with effect from October 2022. Since then, it has also aligned large exposure norms, among other measures. In 2012, RBI’s Fair Practices Code had laid down the practices required to be followed, including guidelines for disbursement of loans and important terms and conditions.
“The code has not been very successful in practice, the primary reason being it does not fix real accountability or hold anyone truly responsible for any irregularities in the disbursement process,” said Bharat Chugh, an advocate in the Supreme Court.