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Last Updated : Sep 27, 2018 01:17 PM IST | Source:

RBI had warned of IL&FS Financial Services' negative net-owned funds 3 years ago: Report

The company's top management had reportedly refuted RBI's observation and refused to take corrective measures

Moneycontrol News @moneycontrolcom

The Reserve Bank of India (RBI) had observed in its FY15 annual inspection report that IL&FS Financial Services' net-owned funds had been wiped out and that it was over-leveraged, The Economic Times reported.

"The annual inspection report for the year 2014-15 has observed that net owned funds of the company turned negative and a similar observation was made in the subsequent year too," a senior banking official told the paper.

The official added that the top management of the financial services company had refuted RBI's observation and refused to take corrective measures.

The report comes to light at a time when the company's parent Infrastructure Leasing & Financial Services (IL&FS) has been facing liquidity challenges for almost a month.

The company's credit rating has been downgraded from AAA to a defaulting status after it failed to repay a Rs 1,000 crore short-term loan from Small Industries Development Bank of India (SIDBI).

Read: SIDBI may file a case against IL&FS for defaulting on its term repayment

Also, IL&FS has defaulted on interest payments on its commercial papers thrice in a span of one month.

According to data from Value Research, the company was due to pay Rs 197.29 crore to LIC Mutual Fund, and make 5 more payments to Principal Mutual Fund totalling Rs 73.97 crore. One of its subsidiaries too defaulted on dues worth Rs 500 crore.

As on March 31, IL&FS' total outstanding debt stood at Rs 91,091.31 crore at the group level, with most operating assets owned by its subsidiaries. Around Rs 5,756 crore worth of debt is due for repayment in the next 1 year.

Read:  Lenders, shareholders may come to the rescue of debt-laden IL&FS

These defaults have stoked speculation that most non-banking finance companies (NBFCs) have a liquidity problem. As a result, panicky investors are dumping NBFC stocks, and many see IL&FS’s problem as a contagion.

To allay investors’ concerns, State Bank of India (SBI) Chairman Rajnish Kumar said his bank would continue to fund NBFCs.

Life Insurance Corporation (LIC) Chairman VK Sharma also stated that the company would not allow IL&FS to collapse. LIC owns over 25 percent of IL&FS.

Also read: Opinion | IL&FS mess highlights the rot in infrastructure financing space

IL&FS Financial Services had posted a net profit of Rs 208 crore for FY17. It had reported non-performing assets worth Rs 409 crore, which came down to Rs 290 crore (2.3 percent of net loans) after provisioning.

RBI officials, however, felt that the provisioning requirement should have been higher as they believe the share of bad loans was more than what was disclosed in the company's annual report.

IL&FS had said in its FY17 annual report that it had found a few procedural gaps while reviewing its risk management and that they had been remedied. However, the company's auditor Deloitte Haskins & Sells LLP had not reported any concerns or made any adverse remarks about it.

In FY18, IL&FS' net profit fell 50 percent year on year to Rs 99.6 crore.
First Published on Sep 26, 2018 10:12 am
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