RBI Crackdown On Edelweiss Group: What's At Stake?

The Reserve Bank of India announced severe business restrictions against two Edelweiss Group companies, owing to material supervisory concerns.

According to the banking sector regulator, ECL Finance Ltd. engaged in a series of structured transactions to "evergreen" its exposures. It also used Edelweiss Asset Reconstruction Co. and related alternative investment funds for this purpose.

RBI has barred ECL Finance from entering any further structured financing transactions for its wholesale exposures and limited its business to facilitating the repayment and closure of such loans. It also barred Edelweiss ARC from acquiring any fresh bad loans or entering into any reorganisation of such accounts.

Other violations include ECL Finance's 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 the central repository for information on the large credit system and non-adherence to know-your-customer guidelines.

"ECL, by taking over loans from non-lender entities of the group for ultimate sale to the group ARC, allowed itself to be used as a conduit to circumvent regulations that permit ARCs to acquire financial assets only from banks and financial institutions," the RBI said.

In Edelweiss ARC, other violations included not placing the Reserve Bank’s supervisory letter issued after the previous inspection for 2021–22 before the board, non-compliance with regulations pertaining to the settlement of loans and sharing non-public information about its clients with group entities.

The restrictions placed on the two businesses will have a significant financial impact on Edelweiss Group as a whole.

The value of the 100% equity held in the non-banking finance company stood at Rs 3,487 crore, while the 60% equity held in Edelweiss ARC was worth Rs 3,150 crore. The valuation of both of these entities is significantly higher than that of other group businesses such as alternative assets, mutual funds, housing finance, and general and life insurance.

The two companies account for a significant portion of the group's assets under management. According to details released by Edelweiss Financial Services Ltd., AUM under ECL Finance stood at Rs 6,924 crore, while that under the ARC business stood at Rs 31,590 crore as of March 31.

At ECL Finance, the company has been working towards bringing down its large wholesale lending portfolio through sales to ARCs and alternative investment funds. Sales also include those made to Edelweiss ARC.

"However, in respect of many of the assets and SRs sold, as the risk is retained by the group, GS3 (gross stage 3) assets on an overall basis (relative to the consolidated loan book and net worth) remain high," CARE Ratings said in a note in January.

As of March 31, the wholesale book stood at Rs 4,150 crore, down 42% year-on-year. The group aims to bring down the wholesale book to Rs 1,500 crore by March 2025. The gross non-performing asset ratio stood at 2.45%.

Edelweiss ARC is the largest reconstruction company in India, with a market share ranging between 35-40%.

Both companies continue to remain profitable, according to quarterly disclosures. For the quarter-ended March 31, Edelweiss ARC reported a Rs 99-crore profit after tax, while ECL Finance reported Rs 45 crore. Edelweiss Financial reported a consolidated net profit worth Rs 169 crore, post minority interest, for the quarter.

In a late evening notice to exchanges, ECL Finance said that its board had passed a resolution to close the wholesale lending business.

"The company, therefore, believes these directions will not materially impact its strategy and its business. Reduction of the wholesale exposure will continue as permitted, in the normal course of business," ECL Finance said in its statement.

Edelweiss ARC said that it is reviewing the RBI's order and will take remedial action immediately.

"We are dedicated to maintaining transparency and upholding highest standards of corporate governance and committed to compliance with regulatory requirements. There will not be any material impact on company’s resolution and recovery efforts which would continue normally," the ARC said.