Risk assessment reports ignored by IL&FS, 13,000 crore worth of fishy deals: audit report

A forensic audit report of Infrastructure Leasing & Financial Services (IL&FS) has found serious lapses in the manner in which huge loans were extended to certain entities even after internal risk assessment clearly showed that the borrowers were under financial stress.

Further, various instances have been found wherein the committee of directors of the infrastructure financing company extended loans at a negative spread to borrowers facing liquidity issues.

(A negative spread occurs when interest rates charged on amounts lent are lower than interest rates paid on borrowed sums.)

In its interim report to the board of the embattled infrastructure financier, audit firm Grant Thornton India also identified 16 instances where, apparently, loans amounting to Rs 1,922 crore were sanctioned on a negative or limited spread for companies in financial distress.

In seven of these cases, the loans provided have either been written off or are related parties of the companies for whom loans were written off. In five out of these 16 cases, loans were approved even after negative assessments by the infrastructure financier’s risk team.

Separately, the audit found 29 instances of loans collectively worth over Rs 2,500 crore that was given to entities, whose group companies used the money to repay existing loans taken from IL&FS Financial Services, a 100 percent subsidiary of IL&FS and a Systemically Important Non-Deposit Taking Non- Banking Finance Company (NBFC).

IL&FS, subsidiaries can be declared NPAs only after nod, says NCLAT

In February, the National Company Law Appellate Tribunal (NCLAT) had ruled that lenders can’t treat loan exposures as non-performing assets (NPAs) without the appellate body’s permission.

The order came after the NCLAT on February 11 said subsidiaries of IL&FS would be divided into three categories — Green (companies that can meet all debt obligations), Amber (firms that can meet some debt obligations) and Red (companies that can’t meet any debt obligation).

What ails IL&FS?

As infrastructure became the central theme in the past two decades, IL&FS used its first mover advantage to lap up projects. In the process, it has built up a debt-to-equity ratio of 18.7. The group with at least 24 direct subsidiaries, 135 indirect subsidiaries, six joint ventures, and four associate companies is sitting on a debt of about Rs 91,000 crore. Of this, nearly Rs 60,000 crore of debt is at the project level, including road, power and water projects. A major reason behind the troubles of IL&FS is complications in land acquisition. The 2013 land acquisition law made many of its projects unviable. Cost escalation also led to many incomplete projects. Lack of timely action exacerbated the problems.

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Image credits: The Economic Times


Compiled by: Tanya Khandelwal
With inputs from The Hindu, Business Standard and The Economic Times