The potential write-off would place an additional burden on Indian banks already struggling with $130 billion of bad loans, one of the highest levels in the world.
India’s
surprise seizure of a troubled 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.
That’s
because the Reserve Bank of India requires banks to provision fully
for their entire exposure over four quarters if they decide a loan
account involves fraud. The decision on Dewan will be based on a
final report by the international accountancy firm KPMG on the firm’s
lending practices, which is due to be submitted soon, according to
bankers with knowledge of the matter, who asked not to be identified
further.
An
interim KPMG study of Dewan’s books earlier this year cited
anomalies including 165 billion rupees of loans to entities connected
to the company’s founders, equivalent to just under half of the
banks’ total exposure of 380 billion rupees ($5.3 billion) to the
shadow lender.
“If
Dewan is tagged as a fraud account that will create significant
additional provisioning requirement and will further dent the profits
of banks,” said Mitul Budhbhatti, the head of financial
institutions at CARE Ratings Ltd.
A
total writeoff would counter some of the optimism about efforts to
contain the shadow
banking crisis sparked by the Reserve Bank of India’s Wednesday
move to remove Dewan’s management and initiate bankruptcy
procedures. It would place an additional burden on Indian banks
already struggling with $130 billion of bad loans, one of the highest
levels in the world.
Only
about 55 billion rupees 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% so far this year.
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