DHFL crisis: Banks stare at huge provision burden if fraud is established

KPMG did a forensic audit on DHFL. Its draft report has startling findings and says DHFL could have diverted funds to promoter-led entities.

Banks which have loaned to beleaguered mortgage lender DHFL might have to provide for the exposure within weeks, if the account is treated as a fraudulent one after accountancy entity KPMG’s finding.

KPMG did a forensic audit on DHFL. Its draft report has startling findings and says DHFL could have diverted funds to promoter-led entities.

Banks have combined exposure of Rs 38,342 crore to DHFL, in the form of term loans, non-convertible debentures and commercial paper, according to the draft debt resolution plan.

A senior executive with a South-based public sector bank said: "While activity relating to restructuring of DHFL is still in a work-in-progress state, banks have to take a call on whether to get the Wadhawans (promoter family) to cooperate, and begin recoveries, or declare the account as fraud if diversion is established. Declaration of the account as fraud would create a burden of provisioning as early as the third quarter (October-December) of the current financial year.” A senior banker with a Mumbai-based public sector bank said the draft resolution plan itself envisaged a provision for haircuts (loan writeoffs), of about Rs 16,000 crore. Thus the burden is anticipated. But, if the account is declared as fraud, the provisioning might go up and be spread over four quarters. It will largely depend on how the Reserve Bank of India looks at the resolution plan and fund diversion issue.

The DHFL board of directors met on Wednesday and took cognisance of key observations from the draft report. KPMG's services were commisisoned by Union Bank of India, lead banker of the consortium, on behalf all its members.

“The board has directed the company to review the key observations,” the company said in an exchange filing.

DHFL's debt dues were Rs 83,873 crore as of July 6. Its loan assets were Rs 89,476 crore — the retail book being Rs 35,233 crore, the rest being wholesale loans.

Business Standard