Shadow banks or Non-banking financial corporations (NBFCs) are a crucial part of the Indian economy- a source of finance for the unorganized sector as well as a support for the banking sector. Since last year, however, they have been facing a liquidity crunch post the IL&FS scam which created an air of distrust towards the entire shadow banking sector. The Dewan Housing Financial Corporation (DHFL) only worsened the plight of NBFCs.
Cobrapost
They first came under the spotlight in January 2019 when Cobrapost, an investigative journalism company reported that the primary promoters, the Wadhwan family -Kapil Wadhawan, Aruna Wadhawan, and Dheeraj Wadhawan, had siphoned off over Rs 31,000 crore by providing loans to shell companies that were routed back to the Wadhawans themselves through several associates and related companies. The 31,000 crores were a part of 96,000 crore loans drawn from other banks. The loans provided to these companies were provided without collateral which was a clear violation of the rules. Although DHFL denied these allegations their share prices fell by 11 percent post the Cobrapost press conference.
Downgrading by credit agencies
In June, credit rating agency CRISIL Ltd. and ICRA Ltd downgraded DFHL’s commercial papers to a ‘D’ or Default due to liquidity concerns. The downrating was done following non-payment of interest on Rs 900 crore bonds as a result of inadequate liquidity. As they had already defaulted on interest payments, commercial papers to the tune of Rs 850 crore was downrated even before the interest was due. This, in turn, made it more difficult for DHFL to raise new funds from debt funds.
In August, the company had defaulted on repayment obligations amounting to Rs 1,571 crore the breakup of which was
Rs 46.92 crore interest on secured Non-Convertible Debentures (NCDs)
Interest in multiple tenors NCDs of Rs 363. 77 crores and the principal amount of Rs 1059.91 crores.
Default to the tune of Rs 100 crores on commercial papers
By the end of August, the debt of DHFL was estimated to be over Rs 90,000 crore.
KPMG Audit
In October, the special forensic audit conducted by KPMG as instructed by Union Bank of India unearthed proof of misappropriation of funds by DFHL. It was found that several of their loans and advances amounting to Rs 12,541 crore were provided to inter-connected entities that were linked to their promoters and the repayments were also not traceable. Loans and advances of Rs 24,594 crore were disbursed to 65 entities without adequate documentation. The value of land mortgaged as collateral for loans of twenty-one entities was not available. The auditors could also not review eight entities due to the lack of proper paperwork. Post the revelation the government ordered an SFIO (Serious Fraud Investigation Office) probe.
Future of DHFL
In September, DHFL had come up with a revival plan consisting of converting debt to equity after which the lenders would acquire a 51 percent stake in the company while the existing shareholders would continue to hold a minority stake. Post the commencement of SFIO probe however the restructuring process was halted which would deter potential investors. While the NBFC is looking at an uncertain future the plight of their customers is much worse. More than 100,000 fixed deposit (FD)holders stand to lose their savings amidst the allegations of fraud. Most of the FD holders are retirees and while some have been repaid there are still customers whose money is tied up with the NBFCs who have no option but to wait till they can withdraw their FDs.
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