The Reserve Bank on Wednesday imposed business restrictions on Edelweiss Group’s lending and asset reconstruction arms on concerns over the evergreening of loans.

The banking regulator has asked ECL Finance Ltd (ECL) to cease and desist from undertaking any structured transactions with regard to its wholesale exposures, other than repayment or closure of accounts in its normal course of business.

Edelweiss Asset Reconstruction Company Ltd (EARCL) has also been asked to stop the acquisition of financial assets, including security receipts (SRs), and reorganising the existing SRs into senior and subordinate tranches. SRs are instruments issued by ARCs to certain buyers who purchase financial assets.

The restrictions are applicable with immediate effect.

“The action is based on material concerns observed during the course of supervisory examinations, essentially arising out of the conduct of the group entities acting in concert, by entering into a series of structured transactions for evergreening stressed exposures of ECL, using the platform of EARCL and connected alternative investment funds (AIFs), thereby circumventing applicable regulations,” the RBI said.

Evergreening is the practice of granting more credit to firms that are on the verge of default so that they are able to repay their existing loans.

The RBI has earlier expressed its concern on AIFs being used for the evergreening of loans. In December, it barred banks and NBFCs from investing in AIFs which in turn has made downstream investment in companies that have taken loan from lenders.

Evergreening of stressed exposures of ECL was not the sole violation which the RBI came across: the platform of EARCL and connected AIFs were used by the group entities, thereby circumventing applicable regulations.

Further, incorrect valuation of SRs was also observed in both ECL and EARCL. It added that in the case of ECL, supervisory observations included non-compliance with loan-to-value — the ratio of loan to the value of asset purchased or mortgaged — norms for lending against shares, incorrect reporting to Central Repository for Information on Large Credits system (CRILC) and non-adherence to Know Your Customer (KYC) guidelines.

"ECL, by taking over loans from non-lender entities of the group for ultimate sale to the group ARC, allowed itself to be used as a conduit to circumvent regulations which permit ARCs to acquire financial assets only from banks and financial institutions,’’ it said.

On EARCL, other violations included not placing the Reserve Bank’s supervisory letter issued after the previous inspection for 2021-22 before the board.