RBI clamps down on Edelweiss group; imposes restrictions on ECL Finance, ARC

In the latest instance of strict actions against non-banking lenders, the Reserve Bank of India (RBI) on May 29 announced supervisory actions against ECL Finance Limited and Edelweiss Asset Reconstruction Company Limited citing material supervisory concerns.

As per a statement, the Reserve Bank has directed ECL Finance Ltd (ECL) 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.

Also, the central bank asked Edelweiss Asset Reconstruction Company Limited (EARCL) to cease and desist from acquisition of financial assets including security receipts (SRs) and reorganising the existing SRs into senior and subordinate tranches.

The above directions will have immediate effect, the RBI said.

Announcing the action on Edelweiss group entities, the RBI 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,

This was done 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, the RBI said.

Incorrect valuation of security receipts was also observed in both ECL and EARCL., the RBI added.

“Apart from the above, in ECL, supervisory observations included 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, incorrect reporting to Central Repository for Information on Large Credits system (CRILC) and non-adherence to Know Your Customer (KYC) guidelines,” the RBI said.

ECL flouted regultions

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, the RBI said.

Further, in the case of EARCL, other violations included not placing the Reserve Bank’s supervisory letter issued after the previous inspection for 2021-22 before the Board, non-compliance with regulations pertaining to settlement of loans and sharing of non-public information of its clients with group entities, the central bank said.

“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. 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,” the RBI added.

Further, 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 business restrictions being placed now shall be reviewed after the rectification of the supervisory observations by the group to the satisfaction of the Reserve Bank. These restrictions are without prejudice to any other regulatory or supervisory action against the captioned entities, that may be initiated by the RBI,” the RBI added.

Past actions

On March 11, Moneycontrol had reported that more shadow banks may come under the glare of the central bank as the regulator tries to curb sensitive sector lending.

Early this year, the RBI had acted against two non-banking finance companies (NBFCs) – JM Financial Products Ltd (JMFPL) and IIFL Finance – after observing irregularities in lending across certain categories such as gold loans and equity market-related lending.

On March 5, the RBI barred JM Financial Products Ltd (JMFPL) from giving loans against shares and debentures, including sanction and disbursal of loans against Initial Public Offering (IPO) of shares, with immediate effect, citing certain serious deficiencies in loans sanctioned by the company for IPO financing as well as NCD subscriptions.

Also, the central bank highlighted that there are serious concerns on the governance issues in the company, apart from violation of regulatory guidelines.

On March 4, the central bank asked IIFL Finance to stop sanctioning or disbursing gold loans with immediate effect after observing certain material supervisory concerns in the company’s gold loan portfolio.

The central bank said an inspection of the IIFL Finance was carried out with reference to its financial position as of March 31, 2023, which revealed certain material supervisory concerns in its gold loan portfolio.

Before that, on January 31, the RBI had imposed business restrictions on Paytm Payments Bank, including a ban on accepting fresh deposits and undertaking credit transactions after February 29. On February 16, it extended the deadline to March 15. The regulator found major irregularities in KYC, which exposed the customers, depositors and wallet holders to serious risks.