From ICICI to LVB, banks may make accelerated provisioning for Karvy Group

A banking source said Karvy has not defaulted as yet and the management has given comfort to banks that the group is adequately funded and there will be no default

Several banks and NBFCs, which have high exposure to Karvy Group entities, have started discussions with their lawyers and the group’s officials on how to recover funds from the beleaguered Hyderabad-based financial services provider. Banks are also toying with the idea to make accelerated provisioning for the account — in case, events take a turn for the worse.

The discussions are centered around the collateral kept by Karvy’s companies, which have taken close to Rs 2,900 crore from several banks, including ICICI Bank, HDFC Bank, and Lakshmi Vilas Bank. 

“The talks are on with lawyers to find out the nature and depth of the financial hole in Karvy,” said a source close to the development. “We are also finding out from Karvy what steps are it is taking to return our funds,” said a banker. 

A senior public sector bank executive said lenders are tightening exposure to group entities. Karvy as a registrar and transfer ( R&T) agent was doing well, but it went on expanding into many different areas. This has partly contributed to the challenge the group is facing today. Concern over the situation in the real estate business is having a domino effect on the way lenders are looking at the group, he said, adding lenders are yet to meet for discussions on Karvy Group.

A banking source said Karvy has not defaulted as yet and the management has given comfort to banks that the group is adequately funded. But banks are unwilling to take chances and will likely go for accelerated provisioning against the account, on a best practice basis, said a senior banker with a private bank having exposure to Karvy. 

The banker said a few loans are secured by adequate security and there is no cause for concern on that amount. “In the normal course, we may not have thought of provisioning, but RBI auditors may have a different idea. In case Karvy defaults with one bank, all the banks may have to show it as an NPA according to subjective interpretation. The Basel norms have lots of such subjective interpretations and banks don’t take many risks now,” said the banker. 

Bankers are also worried at the weakening of profile of Karvy on the account of increasing working capital requirements, primarily because of delays in the realisation of receivables and raising funds. 

“A delay in realisation of receivables, especially from the Andhra Pradesh government and increase in realisation period from large customers in the subsidiaries’ contact centre business, exerts pressure on the group’s liquidity,” said rating firm CRISIL on Monday.

Last Friday, Securities and Exchange Board of India (Sebi) barred Karvy Stock Broking (KSBL) from taking new clients over the alleged misuse of clients’ securities. In an order, Sebi’s whole-time member Ananta Barua said there was a “need for urgent regulatory intervention to prevent further misuse of clients’ securities”. Sebi said prima facie Rs 1,096 crore was transferred by KSBL to its group firm Karvy Realty between April 2016 and October 19, 2019. 

Further, Sebi said KSBL sold excess securities (securities not available in DP account) to the tune of Rs 485 crore through nine related clients until May 31, 2019. Karvy transferred excess securities to six of these nine related clients to the tune of Rs 162 crore until May 31, 2019. 

On subsequent verification, Sebi found that securities worth Rs 257 crore pledged on behalf of four of the nine clients were unpledged during June 1-August 22, 2019 and securities worth of Rs  217.85 crore were recovered by KSBL from four of these client accounts. KSBL also purchased securities in five such accounts amounting to Rs 228.07 crore during June 1- September 8, 2019. 

When contacted, an ICICI Bank official spokesperson declined to comment on client-specific queries. The bank has the highest exposure to Karvy Group entities at Rs 875 crore; an insider said the exposure is limited to Rs 600 crore. Aditya Birla Finance, which has an exposure of Rs 109 crore to Karvy, says it has collateral of Karvy’s prime property in Hyderabad.

In a bind

• Karvy’s weakening financial profile has been worrying banks
• CRISIL downgraded Karvy Data Management Services’ NCDs
• Bank exposure topped Rs 2,900 crore to Karvy entities
• Banks have not reported any default  by Karvy yet