SFIO Reveals How The Finance Arm Of IL&FS Managed To Delay The Group’s Eventual Default

The stress at IL&FS could have come to light at least three years earlier had its non-bank lending arm IL&FS Financial Services Ltd. chosen to restrict lending to group entities.

IFIN's modus operandi of evergreening loans to group entities, lending to a group entity via a third party and its non-disclosure of the Reserve Bank of India's observation pertaining to negative net owned fund showed a rosy picture of its financials, the Serious Fraud Investigation Office said in its report. BloombergQuint has reviewed a copy of the report.

Despite many of the group companies being in a stressed condition, IFIN kept lending to them and the percentage of exposure to the total loans and advances reached 37 percent in FY18 compared with just 9 percent in FY11. In monetary terms, IFIN's exposure to the group entities was Rs 5,523 crore in FY18, according to the SFIO report.

IL&FS declined to answer BloombergQuint's queries.

Evergreening of Loans

IFIN resorted to fresh lending to various group companies, either directly or through other group companies, to repay the earlier loans to prevent defaults and therefore classifying these as non-performing assets. In the three financial years ending March 2018, IFIN had lent Rs 2,985 crore to group companies to prevent them from defaulting on their due loans, as per the SFIO report.

The investigating agency also unearthed the money trail which clearly showed that the borrowing group entity was paying back almost all the borrowed proceeds on the same or in a few days back to IFIN as repayment of previous loans. This makes it clear that the sole motto of lending was evergreening.

The SFIO report mentioned that despite knowing that the group entities, most of whom were infrastructure special purpose vehicles, required funds for long-term use, IFIN resorted to showing that the lending was to meet their short-term needs. This could be one of the reasons why the NBFC arm had to evergreen loans.

Lending Via Third Party

Before November 2017 – via group arms

Since IFIN is an NBFC, the credit concentration norms of the RBI are applicable to it. These norms prescribe the limit to which an NBFC can lend to a borrower or borrower group. This provision hampered IFIN's ability to finance the group's infrastructure arm IL&FS Transportation Network Ltd., who was finding it difficult to raise funds. To tide over this, IFIN resorted to funding other group entities who would ultimately transfer funds to ITNL. Between November 2015 and October 2017, a total of Rs 2,797 crore was transferred to ITNL via other group entities, the SFIO report said.

After November 2017 – via third party

The RBI, in its inspection report for FY2015-16, had advised IFIN to reduce its exposure to group companies with no further lending to them. A letter dated July 20, 2018, signed by IFIN's former Managing Director and Chief Executive Officer Ramesh Bawa, stated that the company had not undertaken any fresh exposure to group entities post-November 2017, as per the report. But the SFIO revealed that instead of direct lending to group companies, the company was lending to third parties, who transferred monies to group companies, mainly ITNL in order to circumvent the RBI's direction.

BloombergQuint was unable to reach Ramesh Bawa for a comment.

As per the SFIO report, IFIN lent Rs 2,319.82 crore to third parties — mainly contractors of ITNL or IFIN's customers, who were informed by IFIN management to pass through these loans to ITNL and its subsidiaries/special purpose vehicles. These entities transferred funds to the group entities on the same day of its receipt from IFIN, the SFIO said.

To reiterate, IFIN's exposure to group entities reached 37 percent in FY18. But the company's exposure to group entities via third parties wasn't included in the calculations.

IFIN's exposure to group entities did not include Rs 2,700 crore, of which Rs 2,000 crore was given to group entities by routing it via a third party and rest was the advance given by IFIN which was not included in the exposure, the SFIO investigation revealed.

Adding these loans and advances takes IFIN's total exposure to group entities at 55.79 percent of its total loans and advances, as per BloombergQuint's calculations. In this context, it is worth noting, that 90 percent of the total loans advanced by IFIN has turned bad, as informed by IL&FS' management a couple of months back.

Negative NOF

To assess an NBFC's going concern status, the RBI has laid down the criteria of net owned funds. To determine the NOF, exposure to group entities needs to be taken into account.

The SFIO said IFIN's definition of “group” was at variance with what the RBI had laid down. And that it was calculating the NOF and capital to risk-weighted assets ratio as per its own definition. While the company's computation as per its definition of “group” reported positive NOF, the RBI's computation shows a negative NOF, said the SFIO report. The RBI's inspection report of IFIN's NOF in FY15, FY16 and FY17 was not disclosed by the company in its annual report, the SFIO said.

Continuous lending to avoid group entities' default, suppression of NPA and its non- provisioning further led to show a rosy picture of the financial statements of IFIN. And the fraudulent, fabricated financial statements were used for the purpose of accessing public funds, the SFIO report said.