MUMBAI: Continuing its scrutiny of banks and other financial entities, and the imposition of restrictions, the Reserve Bank of India (RBI) on Wednesday barred Edelweiss Asset Reconstruction Company (EARCL) from acquiring financial assets. It also directed ECL Finance not to undertake any structured transactions for its wholesale exposures.
The actions followed errant behavior by group entities that had entered into a series of transactions by which stressed exposures of ECL Finance were being evergreened using the EARCL platform and connected alternative investment funds (AIFs). The central bank noted in a release that the transactions were “circumventing applicable regulations”. The strictures against the Edelweiss Group companies follow similar measures taken by the RBI against JM Financial Products and IIFL Finance.
The RBI also observed that security receipts (SRs) in the case of both ECL and EARCL had been incorrectly valued. Moreover, it found that ECL had indulged in a slew of wrong practices. These included the submission of incorrect details of its eligible book debts, to its lenders, for computing drawing power. Moreover, loan to value norms for lending against shares had not been complied with.
The central bank also came across instances of incorrect reporting to the Central Repository for Information on Large Credits (CRILC) system. Besides, the entities had not adhered to the know your customer (KYC) guidelines by ECL, the RBI observed.
“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,” it said.
In the case of EARCL, the violations included not placing the RBI’s supervisory letter issued after the previous inspection for 2021-22 before the company’s board, non-compliance with regulations pertaining to settlement of loans and sharing of non-public information of its clients with group entities, the central bank observed.
“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,” said RBI. “Over the last few months, the RBI has been engaging with the senior management of the captioned entities and their statutory auditors, but no meaningful corrective action has been evidenced so far, necessitating the imposition of business restrictions,” it added. The RBI has flagged concerns around AIFs being used to evergreen loans and has directed financiers to make bigger provisions or set aside more money for such investments.
Earlier this month, Kotak Mahindra Bank was barred from taking on new customers through its online and mobile banking channels and issuing fresh credit cards due to deficiencies in its IT systems. Restrictions were also imposed on Bank of Baroda and Paytm Payments Bank.
The central bank has directed both EARCL and ECL to strengthen their assurance functions to ensure regulatory compliance in letter and spirit at all times. Both the actions are with immediate effect, the RBI statement said.
Source: The Financial Express