Mumbai: The Reserve Bank on Wednesday imposed business restrictions on the lending and asset reconstruction arms of the Edelweiss Group due to concerns over loan evergreening.

Evergreening of loans refers to the practice where banks or financial institutions extend new loans to help borrowers repay their existing loans.

The Central bank directed ECL Finance Ltd (ECL) to stop engaging in any structured transactions related to its wholesale exposures, except for the repayment and/or closure of accounts, according to an official statement.

For Edelweiss Asset Reconstruction Company Ltd (EARCL), the RBI has directed the entity to cease and desist from acquiring financial assets, including security receipts (SRs), and from reorganizing existing SRs into senior and subordinate tranches.

Both the actions are with immediate effect, the RBI statement said.

"The action is based on material concerns observed during the course of supervisory examinations, essentially arising out of 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 AIFs, thereby circumventing applicable regulations," it said.

Recently, the RBI had highlighted concerns around the alternative investment funds (AIFs) being used for evergreening of loans and asked financiers to set aside more money for such investments.

The central bank has also imposed business restrictions on other entities, such as barring IIFL Finance from extending gold loans and imposing limitations on J M Financial Products.

In the action against Rashesh Shah-led Edelweiss Group entities, the RBI noted incorrect valuation of security receipts (SRs) in both ECL and EARCL.

The RBI found that ECL engaged in several improper practices, including submitting incorrect details of its eligible book debts to lenders for the computation of drawing power and non-compliance with loan-to-value norms for lending against shares.

There were also instances of incorrect reporting to the Central Repository for Information on Large Credits (CRILC) system and non-adherence to Know Your Customer (KYC) guidelines by ECL, it said.

"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.

The steps against EARCL were taken over the violations, including not placing the Reserve Bank's supervisory letter issued after the previous inspection for 2021-22 before the company's board, non-compliance with regulations pertaining to settlement of loans and sharing of non-public information of its clients with group entities, it said.

The Edelweiss group entities were "resorting to new ways to circumvent regulations" instead of taking remedial action on the deficiencies, the central bank said.

The business restrictions are necessitated because "no meaningful corrective action has been evidenced so far," it added.

"Both the companies have been directed to strengthen their assurance functions to ensure regulatory compliance in letter and spirit at all times," the RBI said.

The restrictions will be reviewed once the group rectifies the supervisory observations to the satisfaction of the Reserve Bank.