RBI raises concerns about loan disparities and power concentration at PTC India Financial

RBI raises concerns about loan disparities and power concentration at PTC India Financial

The regulator expressed concerns about the company’s risk management processes and the soundness of its governance framework.

The Reserve Bank of India said in a study that PTC India Financial Services (PFS) strayed from loan sanction criteria and granted “excessive discretionary power” to a former top employee, raising concerns about risk management methods and the soundness of its governance framework.

The RBI’s Risk Assessment Report (RAR) and Inspection Report (IR) on PFS as of March 31, 2022, given to the business on August 17, 2023, comes at a time when the corporation is already under regulatory scrutiny for suspected corporate governance failures. Moneycontrol looked over the reports.

According to Moneycontrol, PFS has yet to examine the report with its board and return to the RBI with a board-approved, time-bound plan on how it intends to manage risk and address the issues expressed in the study, as requested by the central bank.

PFS, PTC India’s non-banking financial arm primarily controlled by state-run power firms, has been embroiled in controversy since January 2022, when three independent directors resigned, citing corporate governance failures.

The RBI audit revealed deeper operational difficulties at the company, in addition to the corporate governance failures being investigated by the central bank, the Securities and Exchange Board of India (SEBI), and the Ministry of Corporate Affairs (MCA).

The anomalies were discovered in a sample of 15 files examined by the RBI. They included instances of the organization failing to follow proper procedures in loan sanctioning and/or disbursement, noncompliance with credit terms, and mismatches between PAN and Aadhaar in several client validation documents.

According to the RBI, there were variances in operational policies, benchmark rates, loan tenures, benchmark rate spread, and minimum security coverage.

Moneycontrol addressed comprehensive email inquiries to PFS and the RBI, seeking their thoughts on the situation. Neither one of them responded.

The Document

From December 7 to 21, 2022, the RBI performed an offsite assessment and inspection for Supervisory Evaluation (ISE) on PFS under Section 45N of the RBI Act, 1934. On that basis, the RAR and IR were delivered to the firm on August 17.

The central bank requested that the report be presented to the company’s board of directors within 60 days. Based on risk assessment, the report identifies important supervisory issues. The RBI asked PFS to develop a time-bound risk reduction strategy.

“The company is expected to discuss and finalize a board-approved plan for risk mitigation and redressal of observations as detailed in the reports.” “The plan may also list specific and auditable milestones, and it may be furnished to RBI, when requested, along with a progress report on its implementation,” it stated in the report’s covering letter.

According to PFS sources, the board has yet to consider the report.

The RBI commented on the company’s credit risk, saying, “Deviations from original sanction terms and conditions exhibit the company’s inability to adhere to its own policies and functions as per norms, the level of credit risk was assessed as’medium,’ and the direction as ‘increasing.'”

The Differences

One instance of inconsistency revealed was the approval of a Rs 250 crore revolving corporate loan on June 21, 2021. The loan is meant to be used for temporary refinancing of current debts as well as addressing the funding needs of under-construction projects.

The loan was disbursed in three Rs 250 crore tranches. While the borrower was supposed to provide a certificate of utilisation of funds, this was noticeably absent in two of the loans examined by the RBI.

PFS has changed the timeline for establishing security charges on borrower-offered assets. The RBI stated that this was done in response to borrower demands, despite a lack of clarity in the company’s operational guideline about the acceptable time for such extensions. As a result, these lending facilities may have remained unsecured for an extended length of time.

In one of the tested loan accounts, the RBI discovered a mismatch in ‘know your customer’ (KYC) documentation between PAN (Permanent Account Number) and Aadhaar, raising concerns regarding sufficient documentation and compliance.

Disagreements were not limited to operational difficulties. PFS’s financing to state-run utilities was also scrutinized. Despite low yearly integrated ratings and insufficient security or collateral, PFS approved loans to state power distribution utilities.

The RBI was also concerned about PFS’s failure to conform to exposure restrictions for state power utilities. The required limit should not exceed 25% of all state power utilities’ net outstanding loan book. However, this restriction has been exceeded by as much as 38.9 percent in some cases.

Concerns were raised about a loan sanction letter issued by PFS on March 11, 2021. The interest rate was initially established at 10.5 percent, but it was quickly reduced to 10.25 percent. The RBI noticed that the adjustment was accepted by the MD and CEO despite the absence of supporting evidence such as the date of application, agenda notes, and an analysis of Annual Recurring Revenue.

The RBI inquiry showed instances where PFS failed to meet the requirement for borrowers’ credit ratings. In one case, the necessary criterion was not met within the six-month period following payout.

Furthermore, the RBI saw a paucity of progress reports from borrowers, indicating that the corporation was not adequately monitoring their execution, a significant mistake.

The RBI mentioned a case of three loans totaling Rs 450 crore that were reviewed at a board meeting on September 18, 2022, and which deviated significantly from policy. Members of the board voted to support it despite misgivings from the chairman of the board’s audit committee.

The borrower had suffered losses since 2015-16, and its long-term borrowings’ external credit rating remained non-investment grade.

“This demonstrates that, despite the borrower’s losses, the board approved the loan proposal,” the RBI said.

The RBI discovered one incident of fraud involving consortium financing of Rs 264.87 crore. It claimed that the corporation did not perform a quarterly review of frauds by the board of directors and audit committee as required by the guidelines. According to the RBI, PFS was deemed to be weak in monitoring fraud.

Power concentration

The RBI emphasized operational risks associated with frequent changes in the PFS board of directors, key management staff, and committee composition, particularly the nominating and pay committee. There were about 20 changes to the board’s composition between 2021-22 and the conclusion of the audit.

Another source of worry was the over-delegation of authority to then-MD and CEO Pawan Singh over day-to-day operations. This included the authority to change loan terms and conditions unilaterally as well as approve disbursements.

“Such independent changes in critical sanction conditions without the approval of the board or credit committee provide an individual with excessive discretionary power, which may exacerbate into higher credit and operation risk.” Furthermore, no collective accountability was articulated in the sanctioning procedure,” the RBI stated.

Governance flaws

The RBI also noted governance breaches and oversights at PFS relating to director appointment, irregularities in the selection process, and other matters that have previously been raised by departing independent directors and are being investigated by regulators.

Prior to the RBI findings, SEBI filed a show cause notice to PTC India chairman Rajib Mishra (also chairman of PFS) and Pawan Singh on May 8 for alleged corporate governance irregularities at PFS. These included choices made without the permission of the board and changes to loan terms and conditions. Due to their influence within PFS, SEBI held Mishra and Singh accountable for corporate governance failure.

On June 27, the Registrar of Companies said that PFS and Singh had violated the Companies Act, 2013, and that both had been penalized in three separate adjudication orders.

Singh was placed on leave by the RBI at the end of June. Despite regulatory scrutiny, Mishra’s appointment as CMD of parent firm PTC was accepted, backed by state-run shareholders.

These disclosures, together with instances of loan agreement delays and anomalies in data handling, provide a disturbing picture of PFS’s operations. The RBI’s findings raise serious concerns about the organization’s policy adherence, risk management processes, and the robustness of its governance system.

PTC was founded in 1999 as a government-initiated public-private partnership, and its stakeholders include state-run NTPC, Power Grid Corporation of India, Power Finance Corporation, NHPC, Life Insurance Corporation, and Damodar Valley Corporation, with varied ownership percentages.

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