MUMBAI: The RBI has placed restrictions on two companies of the Edelweiss group – ECL Finance and Edelweiss Asset Reconstruction Company (EARCL) – over ‘evergreening‘ stressed loans.
Evergreening of loans is the practice where lenders extend additional credit to borrowers who cannot repay their existing loans. ECL Finance offers corporate finance, loans against property and securities, MSME lending among others.EARCL is among the largest companies dealing with the purchase and recovery of bad loans from lenders.
RBI has asked ECL Finance to “cease and desist, with immediate effect, from undertaking any structured transactions in respect of its wholesale exposures, other than repayment and/or closure of accounts in its normal course of business”. EARCL has received similar orders preventing it from acquiring any new bad loans or restructuring security receipts. Security receipts are units issued to investors in bad debts, entitling the investor to a share in the recovery.
RBI said that the decision to take action on ECL was based on concerns identified during supervisory examinations. This action was prompted by the coordinated conduct of Edelweiss group entities, which engaged in a series of structured transactions to artificially improve the financial health of stressed exposures of ECL. They did this by using EARCL’s platform and connected alternate investment funds to bypass relevant regulations.
Incorrect valuation of security receipts was observed in both ECL and EARCL. Additionally, in ECL, RBI found several issues like providing incorrect details of eligible debts to lenders for calculating borrowing limits, not following rules for loan-to-value ratios when lending against shares, incorrect reporting to the Central Repository for Information on Large Credits and not following KYC guidelines. ECL also took over loans from non-lender entities within its group to eventually sell them to the group’s ARC, using this process to bypass regulations that allow ARCs to acquire financial assets only from banks and financial institutions.
RBI action comes a few days after deputy governor Swaminathan J warned ARCs against circumventing rules and asked them to maintain regulatory integrity.
Evergreening of loans is the practice where lenders extend additional credit to borrowers who cannot repay their existing loans. ECL Finance offers corporate finance, loans against property and securities, MSME lending among others.EARCL is among the largest companies dealing with the purchase and recovery of bad loans from lenders.
RBI has asked ECL Finance to “cease and desist, with immediate effect, from undertaking any structured transactions in respect of its wholesale exposures, other than repayment and/or closure of accounts in its normal course of business”. EARCL has received similar orders preventing it from acquiring any new bad loans or restructuring security receipts. Security receipts are units issued to investors in bad debts, entitling the investor to a share in the recovery.
RBI said that the decision to take action on ECL was based on concerns identified during supervisory examinations. This action was prompted by the coordinated conduct of Edelweiss group entities, which engaged in a series of structured transactions to artificially improve the financial health of stressed exposures of ECL. They did this by using EARCL’s platform and connected alternate investment funds to bypass relevant regulations.
Incorrect valuation of security receipts was observed in both ECL and EARCL. Additionally, in ECL, RBI found several issues like providing incorrect details of eligible debts to lenders for calculating borrowing limits, not following rules for loan-to-value ratios when lending against shares, incorrect reporting to the Central Repository for Information on Large Credits and not following KYC guidelines. ECL also took over loans from non-lender entities within its group to eventually sell them to the group’s ARC, using this process to bypass regulations that allow ARCs to acquire financial assets only from banks and financial institutions.
RBI action comes a few days after deputy governor Swaminathan J warned ARCs against circumventing rules and asked them to maintain regulatory integrity.
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