IFIN group lending: BSR says it had sought clarity from RBI

MUMBAI: The KPMG network firm, which on Wednesday resigned as the auditor of IL&FS Financial Services (IFIN), said it had written to the Reserve Bank of India (RBI), seeking clarity on lending within the IL&FS Group about a month after its debt crisis came to the fore.

BSR & Associates stated this in its replies filed before the National Company Law Tribunal, in a case where the ministry of corporate affairs is seeking a five-year ban on the auditors of Infrastructure Leasing & Financial Services and its group firms for allegedly helping conceal bad loans.

An RBI inspection report of November 2017 showed that IFIN had advanced loans to group companies in violation of regulations and the regulator had asked the company to clean up its books by 2019, BSR said.


It also said the investigators had made false allegations against the auditors without understanding accounting principles and regulations. “Conclusions drawn by the SFIO (Serious Fraud Investigation Office) are based on a completely incorrect understanding of the role of auditors. An auditor is not an investigator or a detective,” reads its statement.

The tribunal is set to hear the case against BSR and Deloitte Haskins & Sells on Friday.

BSR & Associates said it had filed an “exception report” to RBI on September 10, 2018.

In a letter to the RBI, BSR had said maintaining accounting records and preparing accounts were the responsibility of the management, not the auditor. “The company (IFIN) has adopted a policy with respect to the definition of companies in the same group approved by the board of directors in October 2007. The policy has been constantly followed for the purpose of disclosures and computation of various ratios per RBI directions … including capital to risk asset ratio (CRAR) for March 2018,” the letter reads.

ET has seen the documents that the auditor said it had also sent to the ministry.

“The RBI regulations on NPA are subject to differing interpretations and even the central bank’s own applications of these regulations are inconsistent from one organisation to another and at different points in time,” a person close to the investigators said.

According to the auditor’s statement, the RBI was aware of the stressed loans but did not refer to them as evergreening. The same loans were then referred to as evergreened in the SFIO charge sheet.

In its charge sheet filed in a Mumbai court in the IFIN case, the SFIO said that timely intervention by the RBI could have led to earlier detection of the crisis. It said some of the issues were raised as late as during the 2017 quarterly RBI review.

According to the documents, the auditor said the RBI was aware of the loans and liquidity situation of IFIN as the NBFC was constantly in touch with the central bank.

“Regarding issues related to nonperforming assets (NPA) classification and evergreening, it is important to note that discussions between the RBI and IFIN were already on when the auditor signed the financial statements. While some transactions were highlighted in RBI’s draft inspection report for the financial year ended March 2017, the company was in discussions with the RBI on alleged evergreening issues highlighted by the RBI in draft inspection report,” the statement read.

In the final inspection report for FY17, the RBI had commented that the group company loans would not become NPA because of the backing of the IL&FS Group, BSR’s statement to the corporate affairs ministry reads.

ET was the first to report on June 4 that the RBI had asked IFIN to clean up its books by 2019.