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Red flags in the DHFL case

It is not just shareholders and lenders to Dewan Housing Finance (DHFL) who need to sit up and take notice of the startling revelations in its delayed results filings for the quarter ended March 31 2019. It is also time for regulators such as the RBI and NHB, who have so far taken no public stance on the firm, to shake off their ambivalence. Ever since Cobrapost made a string of allegations against the DHFL group in January, its liquidity problems have been well-known to the markets with its promoters engaged in frantic efforts to monetise assets to repay loans. But statements by the company in its latest ‘unaudited and unreviewed’ results now raise doubts, both about the sustainability of its operations and the quality of the residual assets it hopes to monetise.

Reporting a loss of ₹2,223 crore for the January-March 2019 quarter, DHFL has highlighted three critical financial issues flagged by the independent auditor engaged to verify its accounts. One, it says that there have been deficiencies in loan documentation with respect to ₹20,750 crore of loans which its management is now working to remedy. It is unclear if these documentation issues will affect the saleability of its residual mortgage loan portfolio. Two, due to the liquidity stress faced by developers, the company claims it has been unable to realise cheques relating to ₹16,487 crore worth of wholesale loans. This raises questions about whether the write-off of ₹3,190 crore taken by the company this quarter covers its entire stock of doubtful loans. Three, the results cryptically mention an NHB inspection finding its capital adequacy ratio to be at 10.24 per cent in end-FY18, well below the statutory minimum of 12 per cent. Clarity on these issues will be available only after DHFL’s statutory auditors weigh in on them. Meanwhile though, these issues do raise serious doubts about the true value of DHFL’s loan book, the monetisation of which its lenders are banking on, for a quick resolution.

Should the liquidity crisis at DHFL snowball into a solvency issue, the ramifications for financial markets and investor confidence may be far more widespread than was the case with IL&FS. Unlike IL&FS, DHFL is a listed company that has directly raised retail funds through public deposits and NCDs. This case underlines the urgent need for a detailed resolution framework for distressed financial firms, which are precluded from the IBC route. Such a framework was proposed in the FRDI Bill, only to be shelved along with the controversial bail-in clause. The episode also goes to show that simply transferring the regulatory responsibility for housing finance companies from the National Housing Bank to the RBI is unlikely to pre-empt a repeat of such episodes in future. What is really needed is for financial regulators to take their supervisory roles more seriously, and to build in-house capacity to subject the filings of their constituents to more stringent scrutiny.

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