Bank Of Baroda Initiates Forensic Audit Of DHFL Loans

Public sector lender Bank of Baroda has initiated a forensic audit of loans to Dewan Housing Finance Corporation Ltd., after news website Cobrapost alleged that the company has re-routed loan funds back to promoter group entities.

According to three people in the know, Bank of Baroda initiated the forensic audit after it received a letter from the Ministry of Finance directing it to do so. A similar letter was sent to State Bank of India as well. Consultancy firm KPMG has been appointed by Bank of Baroda for this audit.

According to DHFL’s latest investor presentation, the firm had about Rs 38,000 crore in outstanding bank loans at the end of December, 2018.

A spokesperson for DHFL said that the company is yet to receive any confirmation regarding a forensic audit in writing. A spokesperson for KPMG said the firm does not comment on company specific matters.

A forensic audit into the end use of funds by DHFL would disclose whether bank loans were used to fund legitimate business or if they funneled into related parties. As per RBI rules, banks are required to monitor end use of funds to prevent misuse of public deposits which are loaned out by banks.

Last month, investigative news organisation Cobrapost had alleged that DHFL had siphoned off funds by extending loans to shell companies owned by its promoters. Wadhawan Global Capital is the promoter firm of DHFL.

The loans were extended after receiving financing from domestic and international banks for onlending purposes. In its investigation, Cobrapost claimed that SBI had given loans worth Rs 11,650 crore to DHFL, while Bank of Baroda had given around Rs 4,400 crore. They are the two largest lenders to the company. Both banks have confirmed in the past that their actual exposure is close to the number mentioned by Cobrapost.

Union Bank of India, which is the consortium leader to DHFL, has also approached consultancy firms this week, to seek bids for conducting an audit of the housing financier’s transactions with the bank, the third person quoted above said. It is not clear if Union Bank of India will continue to pursue a forensic audit of its own or whether lenders would do a joint audit.

Spokespersons at Bank of Baroda and Union Bank of India did not respond to queries sent to them.

The government has also initiated an investigation into DHFL’s books, Bloomberg News reported this month. On Monday, the company said that it had received a notice from the income tax department seeking clarifications on certain aspects of the books of accounts of DHFL. The housing financier said this notice was not linked to any allegedly suspicious transactions.

Mounting Troubles

DHFL was among the worst hit by the risk-aversion that took hold following the collapse of Infrastructure Leasing and Financial Services (IL&FS) in September 2018. A sale of DHFL bonds at a deep discount by a mutual fund raised concerns over the firm and led to a sharp drop in its stock price.

Tight liquidity conditions forced DHFL to use all available funds for debt repayment and pull back on growth. As such, DHFL’s loan disbursements plummeted 95 percent in the third quarter of the current financial year. It disbursed Rs 510 crore in loans during the October-December period compared to Rs 13,870 crore in the preceding quarter.

DHFL also began unlocking capital by initiating talks to sell non-core units like its affordable housing finance business.

Earlier this month, rating agency CARE Ratings downgraded DHFL’s bonds, loans and deposits worth Rs 1.2 lakh crore, after the housing finance company’s share price tumbled to all time lows and yields on their outstanding bonds rose. The firm’s ratings were placed on watch, with the agency saying that it will continue to monitor developments going ahead.

In an interview with BloombergQuint, last week, Kapil Wadhawan, chairman and managing director, DHFL said that the downgrades came as a “big surprise” for the company. Wadhawan claimed DHFL has strong fundamentals, adequate liquidity and asset liability management. “How can the rating agencies, purely on the basis of yield spreads and market volatility, take actions that are detrimental to the company going forward?”

Wadhawan claimed that the allegations by Cobrapost were unfounded and that the company’s audit committee would respond to these allegations within three weeks. He also urged bond holders and lenders to focus on facts laid out by the company.