The Sintex loan behind the events at RBL Bank

An analysis of data from financial information services provider Probe42 and Registrar of Companies (RoC) databases indicates RBL Bank granted a ₹140 crore loan facility to Sintex-BAPL, ignoring its deteriorating credit metrics. Group firm Sintex Industries then borrowed the funds from Sintex-BAPL to repay a ₹280 crore loan from the bank, a case of so-called evergreening of loans, where banks provide credit simply to help pay old debt. Sintex-BAPL and Sintex Industries have since been referred to bankruptcy courts for resolution.

According to the bank’s disclosure to the exchanges on 11 February, RBL is among creditors who are seeking to recover dues from Sintex Industries. The bank is still to recover ₹148 crore, more than half of the ₹280 crore sanctioned to the company.

Amit D. Patel, a former chairman and managing director of Sintex-BAPL, didn’t immediately respond to a message on Linkedin website and his last known email address.

The mountain of bad loans, which Indian banks have been grappling with for the past few years, was partly caused by lenders sanctioning loans to delinquent borrowers to pay or roll over old debt. Hiding the bad loans allowed banks to report healthy balance sheets and profits.

A clampdown on such practices by former Reserve Bank governor Raghuram Rajan showed the extent of the rot in the banking system.

The events that led to violations of lending practices started with the ₹280 crore loan facility to Sintex Industries on 1 June 2017. Two years later, on 11 June 2019, RBL sanctioned the ₹140 crore loan to Sintex-BAPL. A day after the loan was sanctioned, Sintex Industries was downgraded to default by both Care Ratings and Brickwork Ratings for delays in servicing its interest and instalment obligations on bank loans.

On the same day, Sintex Industries defaulted on non-convertible debentures (NCDs) worth ₹86 crore. On 13 June 2019, according to disclosures uploaded with the RoC, RBL issued a no-dues certificate to Sintex Industries.

“The bank has sanctioned a facility of ₹140 crore on 11 June 2019, when the signed financial statement of 30 May 2019 show debt-to-equity ratio at 10.5. This shows extremely poor credit appraisal system and appalling risk management processes at the bank," said Hemindra Hazari, an independent banking analyst.

The alleged evergreening of loans becomes evident if one looks at the annual report of Sintex-BAPL for fiscal 2020.

In the notes to account, the auditor for Sintex-BAPL highlighted an inter-corporate deposit given to Sintex Industries.

“We draw your attention to note 54 of consolidated financial statements, which states that the group had obtained an additional working capital loan of ₹130 crore from a lender of which ₹98 crore has been placed as an inter-corporate deposit with Sintex Industries Ltd on which interest has been accrued and recovery is pending," said the Sintex-BAPL annual report for 2019-20.

According to the charge details of Sintex-BAPL during that fiscal, only one new charge (loan) was created in favour of RBL Bank. “Sintex-BAPL and Sintex Industries were long standing relationships with the bank. All of these were consortium lending," said a person familiar with the matter.

“While we will not comment on individual client-specific information, we would like to clarify that in July and October 2019, the bank had proactively made disclosures regarding credit issues with a few corporate groups which had a longstanding relationship with the bank. The bank, as guided, had wholesale slippages, which have been substantially provided for. Also, we have made additional disclosures in the form of commentary on these accounts throughout the various media/analyst interactions over the last two-and-a-half years," a spokesperson for RBL said in an emailed statement.

The bank has been assuring investors that its financial health remains stable. The share price of the bank plunged as much as 25% a day after the central bank named its chief general manager, Yogesh Dayal, on its board as an additional director and chief executive Vishwavir Ahuja abruptly went on medical leave.

But the sequence of events related to Sintex accounts raises questions as to why a fresh loan was extended to Sintex-BAPL just a day after a group company defaulted.

Further, on 10 May 2019, Care Ratings assigned an issuer not cooperating (INC) tag to Sintex-BAPL.

“The revision in ratings of the bank facilities and instruments of Sintex-BAPL is on account of lack of clarity on the liquidity profile of Sintex-BAPL due to non-sharing of requisite information by the company related to latest available free cash and bank balance, working capital utilization and bank statements, etc.,which has hindered the assessment of the company’s latest liquidity position which was one of the critical drivers in the credit analysis of Sintex-BAPL, considering its large scheduled debt repayments falling due in FY20-FY22," said Care Ratings in a press statement issued on 10 May 2019.

For FY19, auditor BSR and Co. had given a qualified opinion on Sintex-BAPL’s accounts; subsequently, the auditor resigned. The opinion was given on the basis of material weaknesses in internal controls of the company.

In the same fiscal, the firm started reporting (standalone) losses and the account had disclosed a delay in making repayments to Deutsche Bank—which are red flags for any lender.