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Questions Raised By KPMG On DHFL’s Transactions

Here are some of the key findings of KPMG’s preliminary report submitted to the DHFL board on Wednesday...

The signage for Dewan Housing Finance Corporation Ltd. (DHFL) atop a building in Mumbai, India. (Photo: BloombergQuint)
The signage for Dewan Housing Finance Corporation Ltd. (DHFL) atop a building in Mumbai, India. (Photo: BloombergQuint)

A special review conducted by KPMG into some of the loan accounts of Dewan Housing Finance Corporation Ltd. has left unanswered questions about loans worth about Rs 20,000 crore. The questions, some of which were first raised by news agency Cobrapost in January this year, could complicate the resolution process for the non-bank lender which is in default of its dues.

Some of the key findings of KPMG’s preliminary report submitted to the DHFL board on Wednesday are below. BloombergQuint has reviewed parts of the report. A senior company official acknowledged that the report has been received by the lender’s board. In a statement to the stock exchanges, DHFL said, “The Board has directed the Company to review the aforesaid key observations and also present a detailed response to the said key observations before the Audit Committee.”

The findings of the report were first reported by Moneylife.

Key Observations

  • Loans worth Rs 14,631 crore have been given to 25 entities with minimal operations. The net worth, income or profit after tax, of these entities is less than Rs 1 lakh.
  • Based on the commonalities, it appears these entities may be working with DHFL. “These entities may not qualify as related parties under the Companies Act 2013 and hence such transactions may not have required approval from the audit committee. However, this aspect should be further examined,” the summary of findings said.
  • DHFL could not provide a robust and well-defined tracking mechanism for end-use monitoring of funds disbursed.
  • Financial statements of certain borrowers indicated that twelve entities had utilised loan amounts to purchase preference shares and debentures amounting to Rs 4,010 crore in other entities having commonalities with DHFL promoter entities.
  • Seventeen entities had provided loans and advances amounting to Rs 4,128 crore after disbursal of loans from DHFL and disclosed as “advances given for joint ventures under negotiation” in audited financial statements. Names of such entities were not disclosed.
  • Preferential disbursal terms were offered to 13 entities with disbursements of Rs 7,491 crore, with 100 percent of sanctioned amount being disbursed within a month. The outstanding amount on these loans is at Rs 5,549 crore.
  • Preferential repayment terms for principal moratorium (ranging from 12 to 48 months) were offered to 21 entities with disbursements of Rs 11,313 crore. The outstanding amount on these loans is Rs 9,318 crore.
  • Loan account statements showed that 15 entities had defaulted in re-payment for more than 90 days. However, these assets were classified as standard as of Dec. 31, 2018. The outstanding amount on these loans was at Rs 7,639 crore.

The new findings come at a time when lenders are still trying to finalise a resolution plan for the non-bank lender. In a letter dated Sept. 19, 2019, State Bank of India had proposed a three-pronged resolution plan, BloombergQuint reported earlier this week.

As per the proposed plan, the lenders to DHFL intend to split the housing financier’s debt into a sustainable and unsustainable part. Liabilities aggregating to Rs 48,826 crore have been identified as sustainable, State Bank of India wrote in its letter to the Reserve Bank of India. This debt will continue to be serviced by cash flows from DHFL’s retail loan book.

The Rs 32,622-crore in liabilities identified as unsustainable will be converted into debt instruments with a zero coupon and a tenor of up to 26 years. Some part of the unsustainable liabilities will also be converted to equity, the plan suggested.

The plan is yet to be approved by lenders.