From Hidden Bad Loans To Misreported Capital Adequacy: All That The RBI Detected At IL&FS

The Reserve Bank of India found a series of grave violations by the Infrastructure Leasing & Financial Services Group when it conducted a special audit into the conglomerate’s operations soon after it defaulted on inter-corporate deposits last year.

The violations ranged from under-reporting of bad loans to over-reporting of the group’s capital adequacy ratio and a poor compliance culture across the group, show details of the RBI’s inspection report. Findings of the report, detailed in a letter dated March 22, 2019 sent by the RBI to the IL&FS management, were made public on Aug. 13 as part of the ‘Progress Report’ filed by the new board of IL&FS before the Mumbai bench of the National Company Law Tribunal.

Misreporting Of Capital Position

The RBI found that IL&FS had misrepresented its capital position for the financial year ended March 2018.

The regulator found that the infrastructure conglomerate had a negative networth of Rs 1,632 crore for financial year 2017-18, as opposed to the Rs 6,676 crore that the conglomerate had reported.

The company’s actual adjusted networth to risk-weighted assets ratio was at (-) 12.56 percent, as compared with 32.66 percent that the company had reported.

Loans & Investments

The infrastructure financing firm’s gross non-performing asset ratio was in excess of 70 percent as on March 31, 2018, the RBI said. The company had not disclosed its asset quality position for four consecutive financial years, the regulator added in its observations.

The RBI noted that there were serious deficiencies in the credit appraisal process at IL&FS. The company was extending loans to borrowers whose credit worthiness was not established. In a number of cases, the borrowers were either poorly rated or not rated at all. IL&FS also indulged in evergreening, where the company extended fresh loans to borrowers to settle older loans.

The RBI pointed to specific instances where IL&FS gave loans to special purpose vehicles without accounting for credit risk, repayment capability and future cash flow. It also noted that there was no monitoring of end use of funds in cases where IL&FS was funding special purpose vehicles.

IL&FS also did not have a board approved investment policy, the regulator said. IL&FS reported additional provisions worth Rs 158.55 crore owing to dimunition in investments for FY18. However, according to the RBI’s assessment, these provisions should have been close to Rs 3,491 crore. Total investments as on March 31, 2018 stood at Rs 1.27 lakh crore.

Asset-Liability Management

The group ignored the mismatch in assets and liabilities that eventually led to a default in repayment of inter-corporate deposits and debt securities.

IL&FS’ asset-liability returns showed that in the 14 days-1 month bucket, the negative mismatch was very high at -79.36 percent. The negative mismatch reflects a far higher proportion of short-term liabilities coming due than the company could pay.

The negative mismatches continued for upto the five year maturity. “This shows that the company did not have access to liquidity, which was a major concern and resulted in default in commitment,” the RBI said.

Cash flow mismatches were being addressed by additional borrowings, the RBI said. Moreover, the board did not adequately deliberate the findings of the asset liability committee, the report added.

Management Functioning & Conduct Of Board

The RBI said that the IL&FS board failed to discharge its duties properly.

Concentration of decision making process was vested with a few individuals and discretionary powers in many cases where conflict of interest lay. The independent directors, according to the RBI, did not ensure that the board exercise proper oversight on the strategy adopted by the management to fund IL&FS Transportation Networks Ltd.

The risk management committee of the IL&FS board had not met for three years, the RBI said.