From the day Dewan Housing Finance Ltd exposed its ugly side to lenders in late 2018, banks have been living a nightmare. Roughly, around Rs 90,000 crore of the bank money is at stake. Almost all big lenders have exposure to the housing lender.
State Bank of India has the biggest share—around Rs 10,000 crore. Bank of India has around Rs 4,125 crore exposure to DHFL, Canara Bank Rs 2,681 crore, NHB Rs 2,434 crore, Union Bank of India Rs 2,378 crore, Syndicate Bank Rs 2,229 crore and Bank of Baroda Rs 2,075 crore. Indian Bank has an exposure of Rs 1,552 crore, Central Bank Rs 1,389 crore, IDBI Bank Rs 999 crore, and HDFC Bank Rs 361 crore. These figures may have changed by now to account for accrued interest.
How did banks end up in the DHFL mess? At one point, DHFL was a big name in pure play mortgage business. The story is, in some way, similar to the Kingfisher-Vijay Mallya case. Banks lent to Mallya just on the basis of his name, not the airline’s cash flows. Similarly, DHFL’s promoter Kapil Wadhawan was a name banks wouldn’t dare to ignore in a tight competitive loan market. Bank officers used to queue up at Wadhawan’s office.
DHFL’s business was booming and some analysts even secretly called it the next HDFC. The glory was short-lived. Towards late 2018, DHFL began showing signs of liquidity crunch. Post the IL&FS mayhem, rumours of defaults by the mortgage lender began to float around. In July-August, 2019, DHFL defaulted on a series of payments. And all hell broke loose.
The crisis, a result of years of mismanagement and dangerous over-leveraging by Wadhawans, weighed DHFL down. Liquidity became scarce. When the mess deepened, the RBI superseded the board on November 20, 2019 and later pushed the firm to the NCLT for insolvency resolution 10 days later. The company was admitted for IBC proceeding on December 3, 2019. The writing on the wall was clear.
Where does the NCLT process stand now?
Even after a year in NCLT, there is no big progress on the DHFL resolution yet. A few bidders have put their hats in the ring. These include Adani Group, Oaktree Capital, Piramal Group and SC Lowy but lenders aren’t keen on low bids and wants fresh bidders to get maximum value to recover their dues. The process is underway.
But even the highest bid that is on the table, around Rs 33,000 crore by Adani, lenders are set to take a huge haircut (loss on the original exposure). Most banks have taken sizeable provisions on their exposure and hence whatever recovery comes will be a bonus. Provisions refer to the amount banks need to set aside against potential loan losses.
“Even if the highest bid is accepted, the loss to creditors will be huge. But earlier no one was expecting such high price. So that’s coming as a positive surprise,” said Siddharth Purohit, senior analyst at SMC Global Securities.
Kapil Wadhawan has moved NCLT, requesting to join the meeting of committee of creditors and access to DHFLs documents.
DHFL’s collapse has important lessons for the financial world. The case isn’t limited to the financial mess alone. The Wadhawans were allegedly engaged in a web of unlawful transactions involving the underworld.
According to the Enforcement Directorate, Wadhawans had real-estate dealings with gangster Dawood Ibrahim’s aide and drug trafficker Iqbal Mirchi.
Kapil Wadhawan allegedly created a string of shell companies to facilitate illicit financial transactions and purchased prime properties belonging to Mirchi’s family in Mumbai’s Worli area. Wadhawans also routed money from DHFL to the shell companies in which Kapil had a share. DHFL, at one stage, was used like a piggy bank by Wadhawans who had unquestionable control over it.
Banks will be lucky if they recover a part of their exposure to DHFL. They can’t expect much and don’t have a choice but to accept what they get at the end of the auction.
DHFL offers a more valuable lesson to the banks—be extra cautious on lending to NBFCs driven by an individual promoter and those which choose to grow too big, too fast. Quality of the book is more important than volume game.
(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)