India lenders face possible $5b shadow bank writeoff

Bloomberg

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.
That’s because the Reserve Bank of India (RBI) 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 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.
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 197.5b rupees over the period of the study.