THE GREAT BANK ROBBERY
The mega loan fraud by DHFL has highlighted the urgency of transparency in sanctions and loan disbursements by private and public sector lenders, writer Rakesh Kumar Singh
The Rs 34,615 crore DHLF scam, arguably the biggest bank robbery in the banking industry, has signaled a serious need to rethink the regulatory mechanism governing banking in the country.
Absent a foolproof mechanism, the Mumbai-based private lender allegedly cheated a public sector-led consortium of 17 banks, Union Bank of India.
A time-limited investigation into the mega fraud that resulted in a huge loss of over Rs 34,600 crore to the Treasury is a sine qua non to inspire a sense of confidence in the public at large and market investors in particular. .
The mega loan fraud by DHL has underscored the urgency of transparency in sanctions and loan disbursements by private and public sector lenders.
The DHFL used Rs 42,871.42 crore in 2010, but the fraud could not be detected until 2019. This says a lot about the absence of a regulatory checks and balances mechanism.
Then-DHFL promoter and CMD Kapil Wadhawan and then-manager Sudhakar Shetty along with other defendants concluded a criminal conspiracy to deceive the 17-bank consortium led by Union Bank of India. The Wadhawan gang convinced the consortium of banks to sanction huge loans totaling 42,871.42 crores and embezzled a significant portion of said funds by falsifying the books of DHFL and dishonestly defaulted on the repayment of legitimate dues of said banks from the consortium, thereby causing an unwarranted loss of Rs 34,615 crore to the consortium’s lenders, the CBI alleged in its FIR filed on June 20, 2022.
Besides DHFL and its former CMD Kapil Wadhawan, the CBI named 11 other individuals and entities, including DHFL Director Dheeraj Wadhawan and Sudhakar Shetty, as well as 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 to embezzle loan funds and then misappropriated by the accused promoters of DHFL.
The fraud by DHLL was committed despite the formation of a consortium of DHLLenders under the leadership of Union Bank of India on July 24, 2010 with 29 member banks. Member banks have agreed to joint facility documentation, collateral pooling for global facilities sanctioned by the DHFL Consortium lenders to the corporate borrower.
If that were not enough, it is common knowledge that DHFL was availing of the credit facilities of the complainant bank Union Bank of India since 1984. The loan facilities used by DHFL were renewed/revised/improved from time to time by the bank. complainant as well as by e-Corporation Bank and e-Andhra Bank, which have since merged with Union Bank of India.
The borrowers defaulted on the loans sanctioned by the DHFL consortium lenders and their accounts with the consortium lenders were classified as non-performing assets. The accounts were also declared fraudulent by each of the consortium’s lenders.
The consortium banks’ loans were sanctioned by the management committees of the DHFL consortium banks based across the country including New Delhi, Mumbai, Ahmedabad, Kolkata, Kochi, Pune, Chennai, Hyderabad, Mangalore and Bengaluru without lifting any red flag at any level. This is only an indication of the failure of the governance of some of the banks.
The full amount of the loan was sanctioned on the basis of distorted documents and falsified accounts by the DHFL promoters.
DHFL defaulted on its debt repayment obligations to consortium lenders from May 2019, followed by a sharp correction in DHFL’s share price after concerns surfaced over the financial health of the private lender.
On issues raised by the consortium lenders, the directors and officers of DHFL claimed that the decline in share price was due to the sale of commercial paper by one of its investors,
As early as January 2019, there were media reports of serious allegations of embezzlement, round trip and embezzlement fraud against DHFL and the promoters/directors. Following this, a meeting of consortium lenders was held on February 1, 2019, during which a central 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 claimant bank) was incorporated. Consulting firm KPMG was then appointed auditor to carry out a special examination audit of DHFL from 1 April 2015 to 31 March 2019.
In the meantime, DHFL and its directors have continued to say that they plan to put the company in difficulty through various means such as the securitization of a pool of real estate loans, project loans, the disposal of the developers’ stake in the company and other group companies and the contribution of a strategic investor. DHFL CMD Kapil Wadhawan continued to assert that DHFL held strong liquidity equivalent to six months of cash and would remain in excess cash even after taking into account all repayment obligations for the 2018-19 financial year. However, after falsely assuring lenders that adequate steps were being taken to de-stress the business and maintain the business had adequate liquidity, DHFL delayed its interest payment obligations to term loans in May 2019, which continued thereafter, resulting in the reversal of the account. in the NPA.
Based on early warning signals such as delays and defaults on payments to banks/market borrowings, invocation of bank guarantees, resignation of key personnel, adverse market reports, rating downgrade external to the category of default, the notification of RFA (Red Flagged Account) by other banks, the complaining bank classified the account of DHFL as RFA on October 18, 2019, and a supervisory circular was issued against Kapil and Dheeraj Wadhawan.
Subsequently, in view of cash constraints resulting in interest and zero-service installments, the account of DHFL was categorized as below standard (NPA) by Union Bank on October 31, 2019, in accordance with the RBI guidelines of the bank.
Following a notification dated November 18, 2019 from 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 2016 Code on insolvency and bankruptcy.
The Reserve Bank of India (RBI) then issued a press release on November 20, 2019, replacing the board of directors of DHFL and appointed R Subramaniakumar as a director of DHFL under the RBI Act to take control of the society.
The NCLT, by an order dated June 7, 2021, approved a resolution plan whereby the consortium banks recovered a measly Rs 5,977.93 crore and NCD 7,186.74 crore.
During the special review/forensic audit, KPMG observed that significant amounts had been disbursed in the form of loans and advances by the borrowing company to several interconnected entities and individuals having commonalities with the entities DHFL promoters, which were used to purchase shares/debentures.
According to the KPMG study, most of the transactions of these entities/individuals were similar to investments in land/property.
The forensic audit also revealed significant financial irregularities, embezzlement of funds by related parties, fabrication of books to show fraudulent non-existent retail loans, round tripping of funds and use of embezzled funds for asset creation 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 has led to the creation of a bloated portfolio of home loans in which 1,81,664 fake and non-existent personal loans totaling Rs 14,095.08 crore (outstanding as of 31.03.2019) have been created. These loans, called “Bandra Books”, were kept in a separate database in Foxpro Software, against which the loans were marked as disbursed by DHFL and were later merged with the OLPL (Other Large Projects) loans.
Bandra’s books were primarily maintained by Jayesh Khona, then Senior Vice President of Special Projects, DHFL, assisted by Snageeta Amin and Priya Naik.
Details of these non-existent retail loans using fictitious names were kept in a separate accounting system (Foxpro Software) and were later transferred to DHFL’s main accounting software (Synergy) by Priya Naik and Sangeeta Amin.
(The writer is a special correspondent for The Pioneer)