In a regulatory disclosure made by Srei today, the lender revealed that the Reserve Bank of India (RBI) had detected under-provisioning against stress and had also (in FY 2019-2020) flagged off lending to probable related and connected parties by the Srei group.
The RBI had initiated an audit of its books in November 2020 and RBI had identified certain borrowers with loans worth Rs 8576 crore as “probable” connected or related parties. This corresponds to almost 30% of the group’s total loan assets amounting to Rs 28794 crore.
“RBI, in its inspection report and risk assessment report for the year ended 31 March 2020 has identified •certain parties as probable connected/related companies," Srei said.
The RBI had directed Srei Infrastructure Finance Ltd, the parent company and Srei Equipment Finance Ltd (SEFL), the subsidiary, to reassess and factor the impact of certain parties during the finalisation of the balance sheet for FY21 and to ensure that relevant accounting treatment. The banking regulator also directed the company to ensure that appropriate disclosures are made.
Srei Equipment Finance is a 100% subsidiary of Srei Infrastructure Finance.
“In view of the observations and directions of RBI as stated in the inspection report and risk assessment report, the parent company and SEFL have been advised to reassess and re-evaluate the relationship with the said parties to assess whether they are related parties to the parent company or to SEFL and also whether these are on arm's length basis," it said.
The group said it has taken a legal view (under directions of the RBI) to determine whether such parties are related parties and based on the legal view, they have come to the conclusion that the two companies have no direct or indirect control or significant influence over such parties.
After considering the legal view, the company has “come to the 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. The group is still renegotiating with these borrowers.
“Further, in view or the directions, in line with arm's length principles, SEFL is in the process of reassessing and renegotiating terms and conditions with the borrowers and all other borrowers, who have been granted loans with moratorium period and at an interest rate which is linked with the cashflows of the project while ensuring that the overall yield is maintained," the statement said.
In FY 2020-21, the company made expected credit loss provisions worth Rs 4685 crore. As per the RBI’s directions, over and above this, the company made additional provisions worth Rs 4475 crore under the Income Recognition and Asset Classification Norms.
The regulator generally seeks additional provisioning when it feels that asset classification standards of the company do not meet its expectations or if it believes the company is under-provisioned.
While on one side, the company claims that its ability to repay its lenders is dependent on the outcome of the various schemes of arrangements it is working on, it also says on the other side that it has adequate collateral against borrowers and additional provisioning has been made and is ‘hopeful’ of making significant recoveries in due course of time.
The group said it is in talks with a number of international investors to infuse equity into Srei Equipment Finance and on Thursday the board has approved a proposal to raise Rs 2,500 crore. The board has also approved a proposal to sell up to 20% of assets held by Srei Equipment Finance to raise funds.