Mumbai: The directors of the embattled IL&FS Group ignored its own credit risk management team's advice and went on extending loans worth nearly Rs 2,000 crore to companies facing acute financial stress, an audit report has said.
In a damning interim report, audit firm Grant Thornton has found that group's financial sector subsidiary, IL&FS Financial Services Ltd (IFIN), gave loans to about 16 stressed entities in complete disregard of its own credit risk committee observations. This not only resulted in Rs 2,000 crore worth of loans turning bad but also forced IFIN to write off debts given to seven entities.
Interestingly, IFIN offered to clear loans to third parties even though its own financial condition was under stress.
"In spite of the financial stress in IFIN and negative assessment by the CRMG (Credit & Risk Management Group) team, loans were lent to these companies who were in financial stress themselves," the Thornton interim report said.
A quick study of list of beneficiary entities of IFIN largesse reveals that it includes who's who of stressed entities in the infrastructure and real estate space. They are Electrosteel Steels Ltd, Best and Crompton Engineering Ltd, Parsvnath Developers, Skil Infrastructure and Gayatri Projects. Some of these entities were also taken to bankruptcy courts and thus had also functioned under a changed management now.
Thornton was engaged by the new government-appointed Board of Directors (BoD) of IL&FS to conduct a special audit for all high-value transactions undertaken by IL&FS Ltd and few of its group companies for the period commencing from April 1, 2013 to September 30, 2018.
The report said that during the review period, loans sanctioned by the Committee of Directors (CoD) "appears to be unusual" as it was highlighted by the risk team of IL&FS that recipient companies were under stress.
The CRMG team provided negatives remarks or recommendations in the credit approval memorandum (CAM) based on their assessment of the risk profile of the borrowers. "However, even after the negative remarks or recommendations, the loans were sanctioned to the said parties, basis the approval provided by the CoD," it said.
Regarding the loans provided to Dev Rishabh Real Estate Pvt Ltd (Era Group), the report quoted the CAM for the realty player that said the recipient was facing liquidity issues. Further, there were various legal cases and winding up petitions against the group, it added.
Similarly, Shiva Shelters and Construction Pvt Ltd (Siva Group) was "going through tough times which has resulted in liquidity constraints and impacted the servicing of its outstanding".
On top of it, as per an RBI report, it had been recommended to provide 100 per cent provisioning to Siva Group's exposure.
The extent of the callousness could be understood from the fact that IL&FS had written off seven out of 18 cases mentioned in the report. This at a time when the IFIN itself faced financial stress has surprised many. An earlier, Serious Fraud Investigation Office (SFIO) report had pointed fingers on the then management of IL&FS for the mess that the group funds itself now.
The mess at IL&FS came to light last year when a sudden default by few group companies enlivened threat of a complete collapse of the infrastructure conglomerate.
Last year, the Central government superseded the management of the beleaguered company via a National Company Law Tribunal (NCLT) order and appointed a six-member board led by Uday Kotak, MD & CEO of Kotak Mahindra Bank, to restore its financial solvency.
Key public sector lenders and undertakings, such as the LIC and the SBI have a 25.34 per cent and 6.42 per cent stake, respectively, in the firm which has around Rs 91,000 crore in long-term debt. The credit crunch has led a few of the company's subsidiaries to default in servicing some inter-corporate deposits.
Consequent to defaults, significant impact was felt in the capital market. This also triggered what is now known as the NBFC crisis.