SFIO probe shows IFIN's exposure to AAA borrowers dropped to zero by 2017

The Serious Fraud Investigation Office (SFIO) has found that IL&FS Financial Services (IFIN), a subsidiary of crisis-hit Infrastructure Leasing & Financial Services (IL&FS), did not have a single AAA borrower by 2017, even as its exposure to unrated borrowers rose to 25 per cent of the asset book. Since 2017, the company has not given the details with regard to the rating of the credit portfolio, categorisation of the exposure in infrastructure, promoter funding, real estate, corporate loans and others.

There was an overall drop in the quality of the credit portfolio. In FY13-15, the gross exposure to AAA+ to AAA- borrowers stood at 6 per cent and AA+ to AA- and A+ to A- stood at 8 per cent and 34 per cent, respectively. In FY15-17, the exposure to these higher quality papers stood at nil, 3.20 per cent and 8.09 per cent, respectively. Conversely, the exposure to lower-rated papers rose sharply (see table). Interestingly, IFIN enjoyed AAA rating from some rating agencies till August 2018 despite not having assets of this quality in its portfolio.

In its first charge sheet filed against the group, the SFIO found gross violations by the company while doing credit appraisal and monitoring.

“The company had an elaborate end-use policy, which stipulated the form and manner in which the borrower had to submit the substantive proof regarding the usage of the funds borrowed from the firm. The probe team found that the end-use of the funds had to be as defined in the Credit Approval Memorandum and as per a format enclosed, by the statutory auditor of the borrower,” the charge sheet said. However, on analysis of the end-user certificates, it was found that the certificates gave a very general usage. “Accordingly, it is concluded that the loans were not monitored for their proper end use,” added the charge sheet. 

In addition, the company did not follow its own elaborate policy of security classification of loans. For example, a movable property was considered to be secured only after an ‘instrument of hypothecation’ was created. And a loan was considered to be secured only if the ‘instrument of hypothecation’ was created in the favour was IL&FS.

However, the investigation has found that in most of the cases where accounts have been classified as NPAs in September-October 2018 and accounts that were repaid from new lending (evergreening), there was no deed of hypothecation for any movable property. Even when the loan was not securitised within six months, the same was continued to be considered as secured.

In the case of assignment of receivables/future cash flows, the loan is considered secure if the predictability and sustainability of the cash flows have been established in the process of credit evaluation. When the securitisation was done on account of receivables/future cash flows, the predictability and sustainability of the cash flows were never established in credit evaluation. The above process led to a misrepresentation of the firm’sbook of account.