DHFL shares: Indian banks set to take a hit of Rs 36,000 crore from DHFL writeoff

India’s surprise seizure of a troubled Indian shadow bank won’t end the woes of its lenders, faced with the risk of heavy writeoffs if Dewan Housing Finance Corp. is declared a fraudulent account.

Only about Rs 5,500 crore of provisions would be required if the KPMG report absolves Dewan of irregular lending, Budhbhatti said.

Dewan has been struggling to repay its loans as the spreading shadow banking crisis has shut off new credit to the sector. The company’s shares are down more than 90 per cent so far this year.

Lenders, headed by Union Bank of India, have formed a committee to discuss a debt resolution plan, which will have to be reviewed by a resolution professional once Dewan is admitted to the bankruptcy court. In February, they appointed KPMG to look into Dewan’s books following allegations by Indian website Cobrapost that the company had diverted funds to shell companies.

KPMG’s preliminary report, a summary of which was reviewed by Bloomberg News, said it was selected to look into Dewan’s accounts for the period between April 2015 and March 2019 to identify any “diversion of funds/misuse of funds outside the business/beyond the uses approved by lenders.”

It said Dewan disbursed loans and advances to “inter-connected entities” and “individuals having commonality with DHFL promoter entities” amounting to Rs 19,750 crore over the period of the study, with a total outstanding amount of Rs 16,500 crore on March 31, 2019.

The preliminary report said Dewan “could not provide a robust and well-defined tracking mechanism for end use monitoring of funds disbursed.” More than half of the connected entities had minimal operations, the report said, though it added that further research was needed as to whether they constituted related parties under the Indian Companies Act.

Representatives for Dewan and KPMG declined to comment.

One way of mitigating the fallout from Dewan, if irregularities are confirmed, is for banks to request special dispensation from the RBI to allow them to provide only for any amounts potentially earmarked as fraud, as opposed to the entire exposure. Banks reported Rs 95,760 crore of fraudulent accounts in the six months ended Sept. 30, according to India’s Finance Ministry.

And while other weak shadow banks would be hurt by the fallout from a total write-off at Dewan, the stronger ones might benefit, according to Gaurang Shah, vice president at Geojit Financial Services Ltd.

“It could also be an advantage for strong housing finance companies to garner larger market share and have better earnings,” Shah said.