RBI bars Edelweiss ARC from acquiring financial asset with immediate effect
Bengaluru, May 29, 2024
The central bank also bans Edelweiss arm ECL Finance from undertaking any structured transactions
The Reserve Bank on Wednesday imposed business restrictions on Edelweiss Group's lending and asset reconstruction arms on concerns over evergreening of loans.
The central bank has asked ECL Finance Ltd (ECL) to cease and desist from undertaking any structured transactions in respect of its wholesale exposures, other than repayment and/or closure of accounts, an official statement said.
In the case of Edelweiss Asset Reconstruction Company Ltd (EARCL), the RBI has asked the entity to cease and desist from acquisition of financial assets, including security receipts (SRs) and reorganising the existing SRs, into senior and subordinate tranches.
Both the actions are with immediate effect, the RBI statement said.
"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, thereby circumventing applicable regulations," it said.
In the recent past, the RBI had flagged concerns around the alternative investment funds (AIFs) being used for evergreening of loans and asked financiers to set aside more money for such investments.
The central bank has also been resorting to imposing business restrictions on errant entities like barring IIFL Finance from extending gold loans and on J M Financial Products.
On the action against the Rashesh Shah-led Edelweiss Group entities, the central bank said incorrect valuation of SRs was also observed in both ECL and EARCL.
The RBI found that ECL had indulged in a slew of wrong practices, including 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.
There were also instances of incorrect reporting to the Central Repository for Information on Large Credits (CRILC) system and non-adherence to Know Your Customer (KYC) guidelines by ECL, it said.
"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 Reserve Bank'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, it said.
The Edelweiss group entities were "resorting to new ways to circumvent regulations" instead of taking remedial action on the deficiencies, the central bank said.
The business restrictions are necessitated because "no meaningful corrective action has been evidenced so far", it added.
"Both the companies have been directed to strengthen their assurance functions to ensure regulatory compliance in letter and spirit at all times," the RBI said.
The restrictions will be reviewed after the rectification of the supervisory observations by the group to the satisfaction of the Reserve Bank.
[Press Trust of India]
