RBI imposes curbs on two Edelweiss companies for 'evergreening' stressed loans

MUMBAI: The Reserve Bank of India (RBI) has imposed stiff business curbs on two Edelweiss Group entities - ECL Finance (ECL) and Edelweiss Asset Reconstruction (EARCL) - for what it described as 'material' transgressions that allegedly involved 'evergreening of stressed assets'.

The regulator has asked EARCL to stop acquiring financial assets, including security receipts (SRs), and to stop reorganising existing SRs into different tranches.

In the case of ECL Finance, the RBI has asked the company to immediately stop all structured transactions related to its wholesale exposures, except for account repayments or closures in the normal course of business.


"The action is based on material concerns observed during the course of supervisory examinations, essentially arising out of the 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. Incorrect valuation of SRs was also observed in both ECL and EARC," the RBI said.

The group entities engaged in structured transactions to allegedly evergreen stressed exposures of ECL, using EARCL and connected Alternative Investment Funds (AIFs), which circumvented regulations.

"Over the last few months, the Reserve Bank 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," said RBI. "Further, both the companies have been directed to strengthen their assurance functions to ensure regulatory compliance in letter and spirit at all times."

At ECL Finance, the regulator found that the lender submitted incorrect details of its eligible book debts to lenders "for computation of drawing power", violated loan-to-value norms for lending against shares, and incorrectly reported to the Central Repository for Information on Large Credits (CRILC). It also failed to adhere to Know Your Customer 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," said RBI.

In a statement Edelweiss ARC said that it is reviewing the RBI order and will address the observations.

"We are dedicated to maintaining transparency and upholding the highest standards of corporate governance and committed to compliance with regulatory requirements. There will not be any material impact on the company's resolution and recovery efforts.... We assure all our stakeholders that we are taking immediate steps to address the concerns raised by the RBI and to align our operations with regulatory expectations," Edelweiss ARC said.

RBI will reevaluate the restrictions after the group rectifies the supervisory observations to its satisfaction.