Evergreening concerns: RBI puts business restrictions on Edelweiss ARC, ECL Finance

The regulator asked ECL to immediately stop undertaking any structured transactions in respect of its wholesale exposures, other than repayment and/ or closure of accounts in its normal course of business. While EARCL is in the business of acquiring non-performing assets (NPAs) from banks and financial institutions and resolving them, ECL is into lending to the micro, small and medium enterprises (MSME) sector.

“The action is based on material concerns observed during the course of supervisory examinations, essentially arising out of conduct of the group entities acting in concert, by entering into a series of structured transactions for evergreening stressed exposures of ECL, using the platform of EARCL and connected AIFs (Alternate Investment Funds), thereby circumventing applicable regulations,” the RBI said.

Incorrect valuation of SRs was also observed in both ECL and EARCL, it said. A security receipt (SR) means a receipt or other security issued by an asset reconstruction company (ARC) to any qualified buyer as consideration for their purchase or acquisition of distressed assets from banks/ non-banking financial companies (NBFCs).

Evergreening of loans is a process whereby a lender tries to revive a loan that is on the verge of default by extending more loans to the same borrower. The process of evergreening of loans is typically a temporary fix for a bank. It could be noted that in May 2023, RBI Governor Shaktikanta Das had raised concerns over banks adopting innovative methods for evergreening of loans.

In case of ECL, RBI said, supervisory observations included submission of incorrect details of its eligible book debts to its lenders for computation of drawing power, non-compliance with loan to value norms for lending against shares, incorrect reporting to Central Repository for Information on Large Credits system (CRILC) and non-adherence to Know Your Customer (KYC) guidelines. ECL, by taking over loans from non-lender entities of the group for ultimate sale to the group ARC, allowed itself to be used as a conduit to circumvent regulations which permit ARCs to acquire financial assets only from banks and financial institutions.

In EARCL, other violations included not placing the RBI’s supervisory letter issued after the previous inspection for 2021-22 before the Board, non-compliance with regulations pertaining to settlement of loans and sharing of non-public information of its clients with group entities, the regulator said.

“Instead of taking meaningful remedial action to rectify the said deficiencies, it was observed that the group entities were resorting to new ways to circumvent regulations,” the RBI said.

In a late night filing to exchanges, EARCL said it is reviewing the order and will address the observations mentioned in the RBI order. There will not be any material impact on the company’s resolution and recovery efforts which would continue normally.

In a separate filing, ECL said the RBI order is with reference to its wholesale exposure, but in the last financial year, the company passed a board resolution to discontinue this business. The company said the RBI directions will not materially impact its strategy and its business.

Over the last few months, the RBI has been engaging with the senior management of both the entities and their statutory auditors, but no meaningful corrective action has been evidenced so far, necessitating the imposition of business restrictions.

Further, both the companies have been directed to strengthen their assurance functions to ensure regulatory compliance in letter and spirit at all times.

In the recent past, the RBI has taken action on some of the banks, non-banking finance companies and a payment bank for violation of various regulatory norms.

In April, the RBI had asked Kotak Mahindra Bank to issue fresh credit cards and stop onboarding of new customers through its online and mobile banking channels. It also banned JM Financial Products Ltd (JMFPL) from financing against shares and debentures, including sanction and disbursal of loans against initial public offering (IPO) of shares as well as against subscription to debentures.

IIFL Finance was also directed to stop sanctioning or disbursing gold loans or assigning, securitising or selling any of its gold loans in the wake of several regulatory violations.

Paytm Payments Bank was barred from accepting deposits or top-ups in any customer account, prepaid instruments, wallets in the wake of persistent non-compliances and material supervisory concerns.