RBI probe found liabilities swelling, but capital eroding rapidly at RCap

The Reserve Bank of India’s (RBI’s) action on Reliance Capital (RCL) stems from several factors that were long in the making.

Defaults apart, the central bank’s inspection found that the firm had liabilities more than three times the permissible limit. Its capital, in terms of a certain benchmark, had reduced to about one-third of the regulatory requirement. This came as the firm became negative in terms of net worth, according to people familiar with the matter.
 

RCL defaulted on its local debt obligations from October 2019. As of March 31, 2021, outstanding overdue towards the lenders and debenture holders stood at Rs 20,103 crore. The RBI had kept the firm in constant watch as part of its informal asset quality review, and carried out regular inspections. 

Sources say inspections concerning financial position as of March 31, 2020, revealed that RCL was not meeting the minimum regulatory capital ratio, measured in terms of adjusted net worth torisk-weighted assets. Also, it had a high leverage ratio measured in terms of outside liabilities to adjusted net worth.
 

Sources reveal RCL’s regulatory capital ratio was found at 10.75 per cent, lower than the minimum requirement of 30 per cent. Its outside liabilities were assessed at 8.42 times its adjusted net worth against the maximum permissible limit of 2.5 times. 

By March 31, 2021, the position further deteriorated to a negative net worth of Rs 7,610 crore, and a negative capital ratio of 45 per cent, according to the audited financials results as of March 31, this year. 
 

Sources say the RBI had, during past inspections, communicated with the management of RCL several times, both via letters and in meetings, about several regulatory and supervisory concerns. They include those related to non-compliance with IRACP norms, which govern how to report on asset classification and provisioning. 
 

The company was found lending to borrowers with negative net worth or inadequate repayment capacity, weak corporate governance practices, inadequate internal systems and controls as well as poor compliance standards. These were not addressed satisfactorily by the board of directors, despite RBI’s warnings. 
 

Sources say the audit committee of the board also failed to address the concerns raised by the statutory auditors regarding lending to group companies with poor track records or inadequate repayment capacity and lending to poorly performing group companies through “circuitous routes.”

RBI inspection intensified after statutory auditor Price Waterhouse & Co resigned from both Reliance Capital and Reliance Home Finance, sources say. 
 

The auditor had resigned, with effect from June 11, 2019, citing unsatisfactory response to “certain observations” made by it as a part of the ongoing audit for FY19, the companies had said in their regulatory filings to stock exchanges. The companies had said they “did not agree with the reasons given by PWC.” 
 

Welcoming the RBI move, Reliance Capital said it will cooperate fully with the administrator appointed by the RBI for expeditious resolution of its debt in the best interests of all stakeholders. 
 

“Complexity of litigation initiated by certain secured and unsecured lenders, resulting in the pendency of over 10 cases in various fora, including the Supreme Court, Mumbai High Court, Delhi High Court and DRT, effectively stalled the resolution of the company’s debt, despite its best efforts for the past over two years,” Reliance Capital said in a statement.
 

The company said it has no outstanding loans from banks and around 95 per cent of its debt is in the form of debentures. It looks forward to expeditious resolution of its debt and continuation as a well-capitalised going concern through the IBC process, in the overall interests of all its stakeholders.

(With inputs from Dev Chatterjee)