RBI Slaps Business Restrictions On ECL Finance And Edelweiss ARC Citing Supervisory Concerns

The RBI's actions on ECL Finance and Edelweiss Asset Reconstruction Company stem from significant issues identified during supervisory examinations

The RBI directed both the companies to enhance their assurance functions to ensure full regulatory compliance at all times.

The Reserve Bank of India (RBI) has announced immediate supervisory actions against ECL Finance Limited (ECL) and Edelweiss Asset Reconstruction Company Limited (EARCL), citing significant supervisory concerns. The central bank has instructed ECL Finance Ltd to immediately cease all structured transactions related to its wholesale exposures, except for the repayment or closure of accounts as part of its normal business operations.

Similarly, Edelweiss Asset Reconstruction Company Limited has been directed to halt the acquisition of financial assets, including security receipts (SRs), and to stop reorganising existing SRs into senior and subordinate tranches. The RBI stated that these directives are effective immediately.

The RBI's actions stem from significant issues identified during supervisory examinations. These concerns involve the conduct of group entities acting in concert by engaging in a series of structured transactions designed to evergreen stressed exposures of ECL using EARCL and associated Alternative Investment Funds (AIFs), thereby circumventing regulatory requirements.

The Reserve Bank of India has today, in the exercise of its powers under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and the Reserve Bank of India Act, 1934 imposed business restrictions on the following…

— ANI (@ANI) May 29, 2024

The RBI also noted incorrect valuation of security receipts in both ECL and EARCL.

Further supervisory observations for ECL included:

Submission of incorrect details of eligible book debts to lenders for drawing power calculations.

Non-compliance with loan-to-value norms for lending against shares.

Incorrect reporting to the Central Repository for Information on Large Credits (CRILC).

Non-adherence to Know Your Customer (KYC) guidelines.

ECL was also found to have taken over loans from non-lender entities within the group for ultimate sale to the group’s Asset Reconstruction Company (ARC), thereby acting as a conduit to circumvent regulations that allow ARCs to acquire financial assets only from banks and financial institutions.

For EARCL, additional violations included:

Failure to present the RBI's supervisory letter from the 2021-22 inspection to the Board.

Non-compliance with loan settlement regulations.

Sharing non-public client information with group entities.

The RBI noted that despite engagement with senior management and statutory auditors over the past few months, no meaningful corrective action had been taken, necessitating the imposition of these business restrictions.

Both companies have been directed to enhance their assurance functions to ensure full regulatory compliance at all times. The RBI stated that these restrictions will be reviewed once the group rectifies the supervisory observations to the RBI's satisfaction. The current restrictions do not preclude the possibility of further regulatory or supervisory actions against the entities.