Srei Group Faces Uncertain Times With Rating Downgrade, RBI Audit

On Monday, Care Ratings Ltd. downgraded long-term bank borrowings of Srei Infrastructure Finance by one notch to BB+, while keeping it on a rating watch with negative implications. “The revision in the ratings assigned to SIFL takes into account the further deterioration in the liquidity position and fundraising ability which has substantially impacted the consolidated credit risk profile of the company with Srei Equipment Finance Ltd...,” the rating agency said in a note dated Dec.14.

It said that despite the regulatory moratorium on loan repayments ending in August, collections for the lender have remained at about 50% and a large number of Srei’s borrowers have sought restructuring, leading to stretched liquidity. “The recent developments could create further stress for the group if there is a delay in the realignment of liabilities with cash flows.”

Any restructuring of Srei’s liabilities, however, is yet to get the green signal.

Lenders met on Dec.16, but are yet to clear a proposal to convert about Rs 9,000 crore, which accounts for three-quarters of Srei’s total debt due to the secured creditors as on August 31, 2020, into five-year secured non-convertible debentures, according to a person familiar with the matter, who spoke on condition of anonymity.

Since the restructuring process has just started two weeks ago, it will take some time before lenders approve a mutually agreeable plan, a senior executive at Srei Infrastructure Finance told BloombergQuint on the condition of anonymity. There are various options being considered at this point, said this person, without further discussing those options.

A spokesperson for the company said the matter of restructuring is likely to be discussed in a meeting on Dec. 23.

Liquidity Position Deteriorates

According to the Care Ratings statement, between March-September, the company’s liquidity condition has worsened materially.

Its cash and cash equivalents fell over 80% to nearly Rs 25 crore as of the end of September, from about Rs 143 crore in the corresponding period last year, and about Rs 400 crore in fiscal ended March 31, 2020, according to its consolidated financial statement.

Against that, the company’s immediate debt servicing obligations, according to a Sept. 7 note by Acuité Ratings, were about Rs 1,400 crore between September 2020-March 2021.

Srei has also struggled to raise fresh funding and the RBI’s decision to conduct a special audit may have a bearing on its ability to borrow more from the markets and the banking system.

“The current development with respect to the special audit initiated by RBI for both SIFL (Srei Infrastructure Finance) and SEFL (Srei Equipment Finance) [as has been informed by SIFL to the stock exchanges] and concerns on the outcome of the same have impacted the fundraising ability,” Care Ratings said, adding SEFL hasn’t been able to raise funds in the current year.

Srei Infrastructure hasn’t accrued the interest on its outstanding perpetual debt for the fiscal year 2021 after taking consent of the investors for waiver of interest for the year, it said.

The company acknowledged it has faced trouble in fund-raising but blamed the broader environment for the same.

“Since the IL&FS episode in September 2018, many NBFCs have been facing a liquidity crunch as their resource raising capacity got affected. Most NBFCs depend on banks for their funding requirements and with banks being cautious in lending to the sector the liquidity conundrum has magnified,” a spokesperson said in response to a BloombergQuint emailed query. “The outbreak of Covid-19 has further heightened the stress and compounded the problem.”

Worsening Asset Quality

The 35-year old non-bank lender’s consolidated asset quality has also worsened during the year, as its gross non-performing assets, mostly loans given for infrastructure project financing and construction equipment, as a share of its advances rose to 11.61% as on Sept. 30, from 10.51% as on March 31, 2020.

“Furthermore, the consolidated loan portfolio includes large ticket size wholesale exposures in the infrastructure sector, which exposes the company to a higher risk of delinquencies along with higher time and effort in recovery and resolution of such exposures,” said Care Ratings.

Acuité Ratings also pointed out that the lender has large chunky exposures with the top 20 exposures accounting for 70% of NPAs. The company’s provisioning coverage ratio for these accounts in FY20 was about 34%, as against nearly 22% for FY19. “The ability to seek effective resolution of these large exposures will also play a major role in determining the future trajectory of credit cost,” the rating agency said.

An Audit and An Allegation

Amid persisting concerns about weak business conditions, the Srei group firms are also facing a special audit from the RBI. A special audit is typically undertaken if there is a sharp deterioration in the quality of the lender’s book.

In response to a query on the nature of this audit, a Srei spokesperson said: “the Reserve Bank of India in regular course conducts various inspections/audits from time to time. This, we believe, is also conducted in the regular course of their process”.

Earlier this week, the Australia-based media website scamsbreaking.com made unsubstantiated allegations against the group. BloombergQuint isn’t detailing the allegations since it could not independently verify them.

The lender denied all allegations and said that it has initiated legal action.

“We have filed a police complaint, alerted authorities in cyber cell department and are pursuing legal recourse against the individuals/group engaged in this criminal conspiracy of intentionally distorting facts,” the spokesperson said. “All readers/viewers are requested not to pay heed to these malafide articles, publications and videos.”