How a potential $5 bn DHFL write-off can worsen the shadow bank crisis

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.

Business Standard

Realty debt could be next flash point in India's credit market: ICICI Pru

Indian shadow banks now face rising risks that weaker developers may struggle to repay those borrowings, as housing sales have failed to keep pace with debt expansion.

Business Standard : The next flash point in India’s credit markets could be real-estate debt.

That’s the view of ICICI Prudential Life Insurance Co., a major corporate bond buyer and one of India’s top life insurers. The firm avoided investing in debt of stressed companies before credit market strains spread last year.

That crisis was triggered by shock defaults by major infrastructure financier IL&FS Group, and its fallout pushed up financing costs for a range of borrowers including wealthy property tycoons struggling to roll over debt. The country hardly needs more stresses now just as credit markets regain some normalcy after policy makers took steps to inject more liquidity into the financial system.

“While most of the credit market is healthy, one needs to be cautious on NBFCs having large exposure to the real-estate sector,” said Chief Investment Officer Manish Kumar, who oversees Rs 1.1 trillion ($15.8 billion) at ICICI Prudential Life. Pressure may rise at non-bank firms, raising the need for lenders to liquidate assets or for stronger developers to buy up projects, he said.

Indian shadow banks lent heavily to the property industry in recent years, helping to fuel a construction boom.

They now face rising risks that weaker developers may struggle to repay those borrowings, as housing sales have failed to keep pace with debt expansion. Teetering economic activity also isn’t helping.

Earlier this year, troubles for mortgage lender Dewan Housing Finance Corp. were among factors that pushed up financing costs.

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An analysis of about 11,000 home builders by research firm Liases Foras in February showed that developers on average have to repay twice as much in debt each year as the income they generate that can be used to service it. Property prices in India’s biggest cities have been flagging -- home values in Mumbai sank 11 percent last year.

That all means property debt investors need to be extra cautious, but there are still pockets of opportunity, according to ICICI Prudential. The firm has raised corporate bond holdings to 33 per cent from 31 per cent since the IL&FS crisis, mainly by increasing investments in notes issued by top-rated housing finance firms and bonds that will be serviced by the government.