SREI Group: RBI Flagged Under-Provisioning, Probable Related-Party Lending

The Reserve Bank of India had detected under-provisioning against stress on the balance sheet of SREI Group entities, while also flagging-off lending to probable related and connected parties way back in 2019-20, showed disclosures made by the lender as part of its quarterly earnings released on Thursday.

The lender said the RBI had identified certain borrowers with loans worth Rs 8,576 crore, as "probable" connected or related parties. These loans represent nearly 30% of the group's consolidated loan assets worth Rs 28,794 crore.

The RBI had directed the company to reassess and factor in the impact of this reassessment during the finalisation of the balance sheet for FY21. The regulator also asked the company to ensure that appropriate disclosures are made.

Under the directions of the central bank, SREI Infrastructure Finance Ltd. sought a legal view on its relationship with these borrowers, it said.

After considering the legal view, the company has "come to conclusion that the parent company or SEFL (SREI Equipment Finance) have no direct or indirect control or significant influence over such parties and are not under common control and accordingly, are not a related party or the parent company or SEFL," it said.

However, the group is still renegotiating terms with these borrowers.

The subsidiary firm is now in the process of reassessment and renegotiations of terms with these borrowers and all the others who have availed moratorium on their repayments last year. Necessary disclosures and accounting adjustments will be done after the reassessment and renegotiation are completed, it said

In November last year, the central bank had initiated an inspection of the SREI Group's lending arms. SREI Equipment Finance is a 100% subsidiary of SREI Infrastructure Finance.

Credit Loss Provisions

In the last financial year, the company made expected credit loss provisions worth Rs 4,685 crore. Over and above this, as per directions from the RBI, the company made additional provisions worth Rs 4,475 crore under the Income Recognition & Asset Classification Norms.

Typically, the central bank seeks additional provisioning when it feels that asset classification standards of the lender do not meet its guidelines or if it believes a lender is under-provisioned.

According to SREI Infrastructure Finance, the company has adequate collateral against the borrowers where additional provisioning has been made. The company is "hopeful" of making significant recoveries in due course of time, it said.

Q4 Net Loss

During the quarter ended March 31, SREI Infrastructure Finance reported a consolidated net loss of Rs 3,555 crore, compared with a net loss of Rs 69 crore a year ago. Total income fell 63% year-on-year to Rs 594 crore.

In the third quarter, SREI had posted a loss of a consolidated net loss of Rs 3,810 crore.

According to SREI Infrastructure Finance, its ability to repay its lenders is dependent on the outcome of the various schemes of arrangements it is working on. These schemes, while under discussion, have not yet been implemented.

"The group is also exploring the infusion of equity capital and has received expressions of interest from certain potential investors with some of whom, non-disclosure agreements have also been signed," it said.

On Wednesday BloombergQuint had reported that SREI Group was in talks with at least seven international investors to infuse equity into SREI Equipment Finance.

SREI Infrastructure Finance's board approved a proposal to raise Rs 2,500 crore.

In a separate release, the lender disclosed that it has received interest from multiple international investors for its capital infusion plan. This includes Makara Capital and Arena Investors. Further, the group has also received expressions of interest from investors including Cerberus Global Investments, Charlestown Capital, CarVal Investors, Varde Partners and Maystone Capital, the group said.

The board also approved a proposal to sell up to 20% of assets held by SREI Equipment Finance to raise funds.