Poorly assessed loan to Jaypee caused over Rs 10-bn NPA: CAG raps IIFCL

An ill-timed and loosely assessed loan of Rs 9 billion to Jaypee Infratech Ltd hit the Yamuna Expressway Project over a period of time, causing a build-up of bad assets worth over Rs 10 billion on the books of IIFCL, a CAG report observed.

IIFCL sanctioned and disbursed the loan at a time when the real estate industry was in strain and real estate development of the project was stalled due to restrictions imposed by the National Green Tribunal (NGT) on construction activities around 10 km radius of Okhla Bird Sanctuary, the CAG said in a report tabled in Parliament today.

"IIFCL failed to realistically assess the expected revenue from real estate development of 2,500 hectares of land along the 165 km expressway between Noida and Agra even though the real estate component in the project was critical for its viability," it said.

It also unduly relaxed pre-commitment condition of obtaining second credit rating of the project and disbursed the loan amount despite the project company facing severe financial crunch, said the report from the Comptroller and Auditor General (CAG).

"These led to doubtful recovery of dues of Rs 10.89 billion," CAG said in its 'Compliance Audit Observations, Union Government (Commercial)'.

The loan was given to Jaypee Infratech in June 2015 and remained un-serviced to become a non-performing asset (NPA) in December 2016 while the interest accruals on the same stood at Rs 1.89 billion by December 2017.

The project is presently under resolution as per Insolvency and Bankruptcy Code 2016.

"As such, the recovery of dues against this loan account is doubtful," CAG said.

Amongst its key observations, CAG said IIFCL sanctioned the loan to Jaypee Infra despite knowing the project was critically dependent on income from real estate development and any delay in completion or reduction in expected revenue would "significantly impact" the project viability and debt service ability.

As the restrictions by NGT were imposed in October 2013, the loan was sanctioned in March 2015 and disbursed about a year later, CAG said it would have been prudent to assess the effect of the NGT restrictions on the real estate development component before sanction/ disbursement of the loan.

The real estate sector was under strain during this period and Jaypee Infra was reporting its decline in its real estate business that fell from 67 per cent in 2010-11 to 43 per cent in 2013-14, CAG rapped IIFCL for being "un-realistic" and adopting un-realistically high real estate revenue leading to poor pre-loan assessment.

CAG also pulled-up the Chairman and Managing Director of IIFCL (at the time of loan sanctioning) for relaxing pre-commitment conditions in giving loan by keeping its Management and Investment Committee (MIC), which has the power of easing such conditions, unaware of the leeway given to Jaypee Infra.

The audit also found that the long-term infrastructure lender disbursed loans of Rs 764.6 million to four special purpose vehicles (SPVs) during September 2012 to December 2014 which were to be written-off as on March 2016.

CAG said there were short-comings in company's credit appraisal as it sanctioned loans to technically and financially weak promoter by giving loans to four special purpose vehicles (SPVs) which were to be written-off as on March 2016.

"Disbursement of loan without adhering to RBI guidelines led to release of funds disproportionate to the actual progress of the projects. Eventually, the projects were terminated and loan disbursals of Rs 764.6 million had to be written-off."

In respect of state-owned the Oriental Insurance Company, CAG said it did not adhered to the guidelines issued by the Ministry of Finance in respect of appropriate pricing while underwriting the group health insurance policies.

"Consequently, the Company under charged the premium by Rs 1.45 billion during 2014-15 to 2016-17," said the audit.

On its observations on IFCI Infrastructure Development, CAG said the company proceeded with construction of housing project '21st Milestone Residency' at Ghaziabad with floor area ratio (FAR) of 2.5 without analysing the profitability of the project, against FAR of 1.5 permitted by Ghaziabad Development Authority.

"Further, delay in initiating action for obtaining additional FAR through compounding procedure led to loss of Rs 113.6 million."

With respect to Cent Home Finance Ltd, the auditor said there was non-adherence to credit policy and failure of credit appraisal system in sanctioning loans and disbursements which led to some loan accounts becoming NPAs and subsequently were written-off.