RBI had asked IFIN to clean up its books by 2019

MUMBAI: Loans advanced by IL&FS Financial Services Ltd (IFIN) to group companies in violation of regulations increased over a five-year period just prior to the default crisis, during which the Reserve Bank of India had given the company time till 2019 to clean up its books.Investigations revealed that IFIN’s lending percentage to group companies increased significantly from FY13 onwards and crossed 15% of total loans and advances, the Serious Fraud Investigation Office alleged in its chargesheet.“In the subsequent years, it continued increasing and more than doubled to around ?5,200 crore, or 37% of total loans and advances of 2017-18,” according to the chargesheet.The key reason for the increase in advances was that Infrastructure Leasing & Financial Services (IL&FS), as the holding company, had reached its lending limits and relied on IFIN to fund the requirements of the group entities, the SFIO said.The SFIO has said that timely intervention by the Reserve Bank of India (RBI) could have led to earlier detection of the crisis at IL&FS, ET reported in its edition on Monday. Its chargesheet specifically mentioned it was only during RBI’s 2017 quarterly review that some of the issues were raised.ET has reviewed a copy of the RBI’s inspection report of November 2017, which showed the central bank had found that IFIN advanced loans to group companies in violation of regulations.RBI Stopped Fresh LendingThe banking regulator had then directed the company to clean up its books in two years.“The RBI had given time till 2019 and a corrective action was underway. But before that could happen, the crisis hit the group,” said one person familiar with the matter. The RBI, in the report, had asked the board of directors to ensure that action in this regard be taken and that IFIN becomes compliant at the earliest. Emails sent to the central bank seeking comment on the matter on Monday did not elicit any response.In a confidential letter addressed to the chairman and CEO of IFIN, the RBI said that it had observed “major supervisory concerns” and had found that a lot of group lending was being conducted, which was against regulations.According to people familiar with the developments, IFIN officials had adopted a different definition of ‘companies in the same group’.“It was under this policy that IFIN could lend to some companies, which are now considered group companies,” the person said. IFIN continued to lend in this manner until the RBI, in its 2017 report, objected to the former’s definition of group companies.The central bank said in the inspection review that IFIN’s request to revisit the framework for assessing group exposure had been examined and “it is advised that the classification of group companies in order to arrive at the NOF (net owned funds) and CRAR (capital to risk asset ratio) needs to be done as specified in the RBI Act”.“The RBI, in this particular inspection, had named four companies that it considered as group companies,” another person said.The central bank said in the report that IFIN should lower its exposure to group companies and there should be no fresh lending to them. “The company should not distribute its profit until the minimum regulatory capital and CRAR is achieved,” the RBI report said.The RBI’s role has come into focus after the chargesheet submitted by the SFIO, an investigation arm of the Ministry of Corporate Affairs, alleged that the central bank could have done more and prevented the IL&FS crisis. No penalties were imposed during the period and IFIN continued operations without any corrective measures, the SFIO alleged.The SFIO said the RBI could hold an internal investigation for future policy changes.

from Economic Times http://bit.ly/2Ko36g9