DHFL write-offs will hit Indian Banks by Rs 36,000 crore.

India’s sudden takeover of a struggling Indian shadow bank will not stop its lenders’ troubles, faced with the risk of significant write-offs if a fraudulent account is reported to Dewan Housing Finance Corp.

If the KPMG report absolves Dewan of irregular lending, then only around Rs 5,500 crore of provisions would be needed.

Dewan has struggled to repay its loans as the spreading shadow banking crisis has shut down the industry’s new credit. So far this year, the company’s shares have fallen by more than 90%.

Lenders, driven by Union Bank of India, created a debt management project committee which would have to be reviewed by a qualified resolution once Dewan has been admitted to the bankruptcy court. In February, after Indian website Cobrapost alleged that the company had diverted funds to shell companies, they appointed KPMG to look into Dewan’s books.

The Preliminary Report of KPMG, which had been reviewed by Bloomberg News, stated that it had been determined, for the period between April 2015 and March 2019, to investigate Dewan’s accounts in an attempt to identify any “fund diversion/misuse of funds beyond the usage agreed on by lenders.”

It said that, over the course of the study, Dewan carried out loans and advances to “interconnected companies” and “persons in common with DHFL developers,” amounting to Rs 19,750 crore, with Rs 16,500 crore in outstanding amounts as of 31 March 2019.

As per the preliminary report, Dewan “could not provide a robust and well-defined tracking mechanism for monitoring the end-use of funds disbursed”. More than half of connected entities had minimum operations although further investigations were necessary as to whether they were related parties under the Indian Companies Act.

One way to mitigate Dewan consequences is for banks to request a special dispensation from the RBI to provide only for any amount that could be deemed to be fraud rather than for the entire exposure. According to the Indian Finance Ministry, in the six months ended September 30, banks registered Rs 95,760 crore of fraudulent accounts.

And while the results of total writ-off in Dewan would hurt other weak shadow banks, stronger banks could benefit, said Gaurang Shah, Vice President, Geojit Financial Services Ltd.

“Gaining greater market share and having better earnings could also be a benefit for large housing finance entities,” said Shah.

Source: Economic Times