Evergreening, circumventing, no corrective action: Why RBI slapped curbs on Edelweiss firms

The Reserve Bank of India has imposed business restrictions on two Edelweiss group entities, including its asset reconstruction company, after supervisory examinations unearthed several malpractices.

RBI has ordered ECL Finance Ltd and Edelweiss Asset Reconstruction Co. Ltd to cease and desist from undertaking fresh activity with immediate effect.

The two firms had acted in concert “by entering into a series of structured transactions for evergreening stressed exposures of ECL, using the platform of EARCL and connected (alternative investment funds), thereby circumventing applicable regulations,” RBI said in a statement on Wednesday.

The regulator said it had also found incorrect valuations of security receipts in both ECL and EARCL.

ECL had submitted incorrect details of its eligible book debts, RBI stated, adding that the non-bank lender had also not complied with its loan-to-value rules for lending against shares and had reported incorrectly to the regulator’s credit registry system.

The regulator also cited non-adherence to know-your-customer rules.

Also read | Evergreening of loans still remains a bane of banking

“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,” said RBI.

No corrective action yet

RBI added that EARCL did not place before its board the regulator's supervisory letter issued after its previous inspection for 2021-22, and that it had shared non-public information of its clients with group entities.

“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.

Also read | No carrot, only stick: Why RBI has gone beyond moral suasion and fines

The regulator said it had been engaging with the senior management of the two Edelweiss firms and their statutory auditors, but no meaningful corrective action has been evidenced so far, necessitating the imposition of business restrictions.

ECL Finance and Edelweiss Asset Reconstruction Co. didn't immediately respond to Mint's queries

RBI's compliance overdrive

RBI has been on an overdrive imposing several stringent measures against banks and non-banking financial companies to ensure compliance. In March, RBI imposed curbs on IIFL Finance and JM Financial Products Ltd for non-compliance.

The regulator barred IIFL Finance from sanctioning or disbursing gold loans after certain material supervisory concerns were observed in its gold loan portfolio. 

As for JM Financial, the central bank barred the NBFC from providing any kind of financing against shares and debentures, including sanction and disbursal of loans against initial public offering of shares and subscription to debentures.

Also read | Why are RBI and Sebi spooked about JM Financial Products?

RBI has directed both ECL Finance and Edelweiss Asset Reconstruction Co. to strengthen their assurance functions to ensure full regulatory compliance. It will review its business restrictions on the two Edelweiss Group entities upon satisfactory rectification of the supervisory observations, RBI said. 

These measures are in addition to any other regulatory or supervisory actions that RBI may initiate against ECL and EARCL.