RBI asks IL&FS Financial to reduce loans to group firms by March 2019

The Reserve Bank of India (RBI) has asked IL&FS Financial Services to reduce debt exposure in all IL&FS group entities by March 2019, in conformity with the regulations on group debt exposure for non-banking financial companies (NBFCs). 

The RBI asked IL&FS Financial Services, a 100 per cent subsidiary of IL&FS, to bring its exposure down within a year, after the inspection revealed norms on capital adequacy ratio (CAR) and group exposure limits were breached in March. 

As on March 31, the NBFC’s exposure to the top 10 group firms was around 26 per cent of total credit exposure and 208 per cent of its tangible net worth. According to the RBI’s norms, no NBFC can lend to any single borrower exceeding 15 per cent of its net owned fund; and to any single group of borrowers exceeding 25 per cent of its owned fund.  

The RBI directive assumes significance as the NBFC’s parent, IL&FS, is facing liquidity problems and has asked its promoters, led by Life Insurance Corporation, to infuse Rs 45 billion by a rights issue by the end of September. Beside, IL&FS has sought additional lines of credit worth Rs 35 billion from its promoters for meeting immediate requirements. 

RBI’s PRESCRIPTION

• IL&FS Financial Services’ debt exposure to group firms has crossed the regulator’s limits

• Firm to raise authorised capital to Rs 27.5 bn, from Rs 10.5 bn now

• To issue CCCPS (cumulative compulsory convertible preference shares) worth Rs 5 bn

According to a source, IL&FS Financial Services followed its own policy while reporting CAR in respect of the definition of ‘companies in the same group’ since October 2007. The NBFC treated each business vertical as separate group exposure for meeting the regulatory guidelines on prudential norms. 

But the RBI, after the inspection, asked it to report CAR and net owned funds requirements according to the regulator’s definition.

As the NBFC’s exposure to group firms was significantly higher than its tangible net worth, it was asked to either infuse more equity capital or significantly reduce its exposure.

An email sent to the NBFC did not elicit any response, but a source said the firm plans to reduce exposure by March 2019 and IL&FS group companies will repay their debt in time. The NBFC reported a CAR of 17.25 per cent, while its tier-1 CAR was 11.41 per cent in March. It posted a CAR of 21.08 per cent and tier-1 CAR of 13.1 per cent in March 2017.

Over the past three years, the NBFC’s overall gearing — the level of a company's debt related to its equity capital — has significantly increased due to increasing debt taken to support advances to group firms. As on March 2018, the company’s gearing levels stood at 9.31 times compared with 8.2 times reported in the previous financial year.

As a part of a deleveraging plan, the NBFC has decided to increase its authorised capital to Rs 27.5 billion from Rs 10.5 billion by way of increase in equity capital and plans to raise Rs 5 billion through issue of cumulative compulsory convertible preference shares.