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Analysts go cautious on NBFCs after irregularities come up

A shadow of doubt has been cast over the NBFC sector after recent disclosures of irregularities in some accounts, particularly post the Covid-led restructuring.

Late on Friday, Brookfield-backed Indostar Capital said preliminary findings of consultancy firm EY have found deviations in the loan approval, foreclosure and restructuring in the company’s commercial vehicle loan accounts.

On Monday,

Homes, the NBFC arm of disclosed that it had unearthed 37 accounts with fake income-tax returns and declared them as fraud and non-performing assets (NPAs). Though the company clarified that the total amount impacted was less than ₹4 crore, the fact that had sent a team to support Can Fin Homes in risk, audit and general admin after this discovery has raised eyebrows.

Analysts say it is expected that some loan accounts will turn sour after restructuring and though it is too early to say whether this is a systemic problem, fiscal 2023 for non-banking finance companies (NBFCs) will most likely be a year of cautious optimism.

“The accounts that have undergone a restructuring process are bound to be a weak credit. Also, these things take time to resurface after restructuring. But there is still no cause for alarm because the newly originated loans are also good quality, collection efficiencies are better than before and margins are strong. So, it’s more of a cautious optimism,” said Sanjay Agarwal, senior director, CARE Ratings.

In its notice to the stock exchanges on Friday, Indostar said it will have to take a provision of between ₹557 crore to ₹677 crore based on its preliminary findings.

Though the initial amount talked about in the Can Fin case is low, analysts say the cases need to be watched closely.

“Only time will tell whether these are temporary shocks or surprises. Can Fin has clarified that the amount in question is too small but if this is bigger than what it is disclosed, then it could be an issue. We need to keep a close eye on it,” said

Agarwal, head – financial institutions at India Ratings & Research.

The Can Fin stock price lost 14% of its value intraday after news of these suspect accounts but then recovered to end at ₹520 apiece, down 5% from its close on Friday.

Indostar said it expects the review of its accounts to be completed by the time of finalisation of the audited financial statements for the year ended 31 March 2022.

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