New Delhi: Such was the smokescreen
behind which the IFIN (IL&FS Financial Services) management was
operating that the closed user group got away with blue murder. The
cornerstone of its architecture was abusive funding to non-group
entities. This was done with gay abandon with the management riding
roughshod over rules, regulations, filters, best practices and what have
The construct was so opaque that the gatekeepers were indulging in open and naked display of jigger pokery. What begs a question is: how did it operate under the radar for so long before the warts and wrinkles were finally bared? Here are the answers provided by MCA.
The IFIN being an NBFC was in the business of lending. As part of its lending to external parties (other than its group companies), IFIN extended loans to companies of ABG, A2Z, Parsvnath, Flemingo and other groups. A number of these borrowers were not servicing their debt obligation in a timely manner. The top management of IFIN was aware of the potential problem accounts which were getting stressed in the succeeding months of the reports generated through the MIS of the company.
Thereafter in order not to classify the loan/credit facility as a Non Performing Asset (NPA) as required under the RBI Directions, and not provisioning for such NPAs/defaulting loan facilities which otherwise would have adversely impacted the financial statements, lend to other companies belonging to the borrowing group for repaying the principal and/or interest of the defaulting borrower company.
This process was repeated multiple times with the earlier loan facility getting closed and a new facility being created which was again funded, on their default, through another cycle of funding through the same or another group company.
Such manner of debt servicing led to ballooning up of the outstanding liabilities against a group, which were funded from the borrowings from market. It was a vicious cycle of deceit and chicanery.
Ultimately, the final loan facility was declared NPA or written off or is still outstanding in most of these cases resulting in delayed recognition of NPAs, ballooning of debt and ultimate higher loss to IFIN and its stakeholders.
The approving authorities were fully aware of the stressed condition, not only of the company but also of the borrowing group, in many cases the flagship company of the group was already under Corporate Debt Restructuring. Fresh loans were approved despite IFIN's internal documents and CAM highlighting issues with the group including liquidity issues, deterioration of security cover below the limits laid down for such lending by the company and without taking fresh cover.
In many cases, loans have been given against the company policy of lending within a minimum spread of 2 per cent.
These malafide practices left an adverse impact of abusive funding to non group companies. The scathing and caustic Ministry of Corporate Affairs report corroborated by an SFIO investigation reveals that IFIN had funded the defaulting borrowers regularly for repayment of principal amounts and payment of interest amounts.
In this manner, IFIN had systematically avoided creation of provisioning by repayment of existing outstanding lendings. The impact on the profit and loss statements was largely because of two factors:
* Avoidance of creation of provisions on NPA loans as required under the RBI provisions as the defaulting borrowers were advanced loans to other related companies to pay off the over-dues of existing facilities.
* Recognizing the interest income on the loans that were repaid with the proceeds of new fraudulently given loans i.e. self funding of interest.
An assessment of the impact of ever-greening of loans on the financial statements based on the identified instances has been done during the investigation, only for the purposes of reaching an indicative figure of misstatement.
The asset classification norms are given in the RBI Directions for NBFCs. Assets are classified as Standard Assets, Non Performing Assets (NPAs), Sub-Standard Assets, Doubtful Assets and Loss Assets. The provisioning requirements in respect of loans, advances and advances and other credit facilities is also laid down in RBI Directions.
The impact has been computed by taking into consideration the basic provisioning norms of RBI, writing back of interest income, and fictitious charges earned through the proceeds of new loans.
The investigation team has taken the most conservative impact by considering the minimum provisioning requirement of 10 per cent for a sub-standard assets on the principal amount that was repaid through fresh loans by IFIN. Further, the 10 per cent provisioning has been done only for the first year.
The cascading effect of the loans that have been ever-greened will increase the provisioning requirements even further.