The mega loan fraud by DHFL has underscored the urgency for transparency in loan sanctions and disbursal by both private as well as public sector lenders, writes Rakesh Kumar Singh
The Rs 34,615 crore DHFL scam, undoubtedly the biggest banking sector loot, has flagged a serious need for a rethink on the regulatory mechanism governing banking operations in the country.
In the absence of a fool proof mechanism, the Mumbai-based private lender allegedly cheated a consortium of 17 banks led by public sector Union Bank of India.
A time-bound investigation into the mega fraud that resulted in a whopping loss of over Rs 34,600 crore to the public exchequer is a sine qua non to instil a sense of trust in the public in general and the market investors in particular.
The mega loan fraud by DHFL underscores the urgency for transparency in loan sanctions and disbursal by both private as well as public sector lenders.
The DHFL availed Rs 42,871.42 crore in 2010, but the fraud could only be detected in 2019. This speaks volumes about the absence of a regulatory check and balance mechanism.
Then DHFL promoter and CMD Kapil Wadhawan and then director Sudhakar Shetty along with other accused persons entered into a criminal conspiracy to cheat the consortium of 17 banks led by the Union Bank of India. The Wadhawan gang convinced the consortium of banks to sanction huge loans aggregating to 42,871.42 crore and siphoned off a significant portion of the said funds by falsifying the books of the DHFL and dishonestly defaulted on repayment of the legitimate dues of the said consortium banks, thereby causing a wrongful loss of Rs 34,615 crore to the consortium lenders, the CBI has alleged in its FIR registered on June 20, 2022.
Besides, DHFL and its then CMD Kapil Wadhawan, the CBI has named 11 other individuals and entities including DHFL director Dheeraj Wadhawan and Sudhakar Shetty besides shell companies like Amaryllis Realtors LLP, Gulmarg Realtors LLP, Skylark Buildcon Pvt Ltd., Darshan Developers Pvt Ltd., Sigtia Constructions Pvt. Ltd.,Creatoz Builders Pvt. Ltd., Township Developers Pvt. Ltd., Shishir Realty Pvt. Ltd and Subblink Real Estate Pvt. Ltd. These entities were allegedly used for diversion of loan funds and subsequently siphoned off by the accused promoters of DHFL.
The fraud by DHFL was committed despite a consortium of lenders of DHFL was formed under the leadership of Union Bank of India on July 24, 2010 with 29 member banks. The member banks agreed for joint documentation of the facilities, pooling of securities for the aggregate facilities sanctioned by the DHFL Consortium Lenders to the borrower company.
If this was not enough, it is a matter of record that DHFL was availing credit facilities from the complainant bank Union Bank of India since 1984. The loan facilities availed by DHFL were renewed/reviewed /enhanced from time to time by the complainant bank as well as by e-Corporation Bank and e-Andhra Bank, which have since been amalgamated with the Union Bank of India.
The borrowers defaulted on the loans sanctioned by the DHFL Consortium Lenders and their accounts with consortium lenders have been classified as Non Performing Assets. The accounts have also been declared as fraud by each of the consortium lenders.
The loans by the consortium banks were sanctioned by the Management Committees of the DHFL Consortium Banks based all over the country including New Delhi, Mumbai, Ahmedabad, Kolkata, Kochi, Pune, Chennai, Hyderabad, Mangalore, and Bengaluru without raising any red flag at any level. This is only a pointer to the governance failure on part of the banks.
The entire loan amount was sanctioned relying on misrepresented documents and falsified accounts by the promoters of the DHFL.
The DHFL defaulted in its debt repayment obligations to the consortium lenders from May 2019 onwards followed by a sharp correction in the share price of DHFL after concerns surfaced about the financial health of the private lender.
On the queries raised by the consortium lenders, the DHFL directors and officers claimed that the fall in share price was on account of the sale of commercial papers by one of its investors,
As early as January 2019, media reports appeared wherein serious allegations of fraud by way of diversion, round-tripping, and siphoning of funds were made against DHFL and promoters/directors. Following this, a meeting of Consortium Lenders was held on February 1, 2019, wherein a Core Committee of the seven largest lenders comprising SBI, BoB, BoI, Canara Bank, Central Bank of India, Syndicate Bank, and Union Bank of India (lead bank and complainant bank) was formed. Consultancy firm KPMG was then appointed as Auditor to conduct a Special Review Audit of DHFL from April 1, 2015, to March 31, 2019.
In the meantime, DHFL and its directors continued to maintain that they were planning to de-stress the company through various means like securitization of a pool of housing loans, project loans, divestment of promoters' stake in the company, and other Group companies and bringing in a strategic investor. DHFL CMD Kapil Wadhawan continued to maintain that DHFL held strong liquidity equated to six months of cash and would remain in cash surplus even after considering all repayment obligations for the financial year 2018-19. However, having falsely assured the lenders that adequate steps were being taken to de-stress the company and maintain that the company had adequate liquidity, DHFL delayed its interest repayment obligations Towards Term Loans in May 2019, which continued thereafter, leading to the account turning into NPA.
Based on early warning signals like delay and default in payments to banks/market borrowings, invocation of Bank Guarantees, the resignation of key personnel, adverse market reports, downgrading of external rating to the default category, reporting of RFA (Red Flagged Account) by other banks, the complainant bank classified the account of DHFL as RFA on October 18, 2019, and a Look Out Circular was issued against Kapil and Dheeraj Wadhawan.
Subsequently, in view of cash flow constraints resulting in non-servicing interest and installments, the account of DHFL was classified as a substandard category (NPA) by the Union Bank on October 31, 2019, as per bank RBI guidelines.
Following a notification dated November 18, 2019, by the Ministry of Corporate Affairs allowing cases of NBFCs with asset size of Rs 500 crore and above to be sent to the National Company Law Tribunal for proceedings under the Insolvency and Bankruptcy Code, 2016.
The Reserve Bank of India (RBI) then issued a Press release on November 20, 2019, superseding the Board of DHFL and appointed R Subramaniakumar as the Administrator of DHFL under the RBI Act to take control of the Company.
The NCLT, through an order on June 7, 2021, approved a Resolution Plan through which the consortium banks recovered a meager Rs 5,977.93 crore and NCDs of 7,186.74 crore.
During the Special Review Audit/Forensic Audit, KPMG observed that large amounts were disbursed as loans and advances by the borrower company to several interconnected entities and individuals with commonalities to DHFL Promoter Entities, which were used for the purchase of shares/debentures.
According to the KPMG review, most of the transactions of such entities/individuals were like investments in land/properties.
The Forensic Audit also revealed significant financial irregularities, diversion of funds through related parties, fabrication of books to show fraudulent non-existent retail loans, round-tripping of funds, and utilization of diverted funds for creation of assets by Kapil Wadhawan, Dheeraj Wadhawan, and their associates.
The DHFL and its promoters disbursed an amount of Rs 14,000 crore as Project Finance but reflected the same as retail loans in their books, according to the Forensic Audit. This led to the creation of an inflated retial loans portfolio whereby 1,81,664 false and Non Existent Retail Loans aggregating to Rs 14,095.08 crore (outstanding as on 31.03.2019) were created. These loans, referred to as “Bandra Books” were maintained in a separate database in Foxpro Software, against which loans were shown as disbursed by DHFL and were subsequently merged with OLPL (Other Large Projects) Loans.
The Bandra Books were primarily maintained by Jayesh Khona, the then Senior VP of Special Projects, DHFL who was assisted by Snageeta Amin and Priya Naik.
The details of such non-existent retail loans using dummy names were maintained in a separate accounting system (Foxpro Software) and were then transferred to the main accounting software of DHFL (Synergy) by Priya Naik and Sangeeta Amin.
(The writer is a special correspondent of The Pioneer)