RBI cracks down on Edelweiss ARC, group firm ECL Finance

Edelweiss is the fifth entity to be hit hard by serious punitive regulatory actions since January
Reserve Bank of India
Reserve Bank of India (Photo | PTI)

MUMBAI: Within a week of asking asset reconstruction companies to behave on their business practices, the Reserve Bank India Wednesday struck hard on one of them, Edelweiss Asset Reconstruction Company (EARCL), which used to be the largest till the national bank came to the picture, and also a group company ECL Finance.

The RBI has barred both the companies from acquiring new loans and financial assets as it has found them “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,” the regulator said in a statement.

Edelweiss is the fifth entity to be hit hard by serious punitive regulatory actions since January, when the RBI asked payments major Paytm Payments Bank to nearly shut shop from March 15. Then in March it struck hard first on the IIFL group asking its gold loan arm to stop immediately on-boarding customers. Next to face the regulatory axe was JM Financial, with JM Financial Products being debarred from doing any form of financing against shares and debentures.

And the biggest was of all was the more serious strictures on the fourth largest private sector lender Kotak Mahindra Bank which was ordered to stop all its online and mobile banking operations for new customers along with barring onboarding new credit card customers.

All these actions were carried out after these entities continued to flout regulatory demands for almost two years on the trot.

On Wednesday, the RBI directed EARCL “to cease and desist from acquisition of financial assets, including security receipts (SRs) and reorganising existing SRs into senior and subordinate tranches, with immediate effect,” the direction to the group firm ECL Finance is “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.”

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Security receipts are instruments issued by asset reconstruction companies (ARCs) as consideration for their purchase of distressed assets from banks/ NBFCs.

Calls and text messages to the Edelweiss group founder-chairman Rakshesh Shah and spokespersons did not elicit a response.

Incorrect valuation of SRs was also observed in both EARCL and ECL, the regulator said, adding 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 and non-adherence to KYC guidelines.

On ECL, it said it has been taking over loans from non-lender entities of the group for selling to EARCL, allowing 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 in its order 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 these entities and their statutory auditors, but no meaningful corrective action has been evidenced so far, necessitating the imposition of business restrictions.”

The business restrictions being placed now will be reviewed after the rectification of the supervisory observations by the group to the satisfaction of the Reserve Bank.

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The New Indian Express