15 July 2019: Troubled housing finance provider DHFL has admitted to irregularities in recognising some income and in failure to monitor end use of some other loans. In the filing for its Q4FY19 results, the company has warned that it may not be able to continue as a going concern with funding drying up after a downgrade to ‘default’ category.
The company released its already-delayed results for the quarter ended March 2019 on Saturday, wherein it reported a loss of Rs 2,223 crore following provisions of Rs 3,190 crore toward fair value loss. The provisions were needed to reflect the fair value of loans worth nearly Rs 35,000 crore, which have been placed on the block by the company. These loans are nearly a third of its total financial assets of Rs 1.04 lakh crore.
The company said that it had been informed by the housing finance regulator that its capital adequacy should be 10.24% (and not 15% as computed by the company). This is below the statutory requirement of 12%.
These disclosures come after a series of bad news from the company, which began with an unexplained flash crash in its share price. This was followed by drying up of liquidity for finance companies in the wake of the IL&FS collapse. In January this year, the company faced allegations of irregularities in lending by a news portal.
Independent chartered accountants appointed by the audit committee to review these allegations highlighted procedural lapses and documentation deficiencies. These showed that end-use monitoring of the funds loaned had not been performed despite a specific mandate by the finance committee as part of loan sanction conditions. The company said that it will seek an explanation from the borrowers and might even recall the loans and is doing a fresh valuation of them.
DHFL has admitted that there are documentary deficiencies with respect to grant/rollover of inter-corporate deposits of Rs 4,018 crore, which are to be repaid, and Rs 1,307 crore that are being converted into secured term loan.
Lenders to DHFL, led by Union Bank and State Bank of India, in a meeting on July 1, 2019 said that they would enter into an inter-creditor agreement (ICA) among themselves. This is a pre-requisite for them to implement a restructuring plan. Unlike manufacturing companies, there is no scope for lenders to initiate bankruptcy proceedings against a financial services firm.
DHFL on July 1, 2019 had a meeting with the consortium of bankers, wherein the latter agreed to enter into an ICA for a potential restructuring of the company’s liabilities. DHFL’s debt liabilities include Rs 45,379 crore of bonds that it has issued and Rs 39,551 crore of borrowings. Besides this, it has Rs 1,135 crore of deposits. A bulk of the liabilities are with institutional lenders, largely banks.
According to lenders, DHFL has indicated that retail investors might get repaid first since these represent a larger number of creditors and a smaller amount of the total loan. “The company is in the process of submitting a resolution plan to the lenders and the lenders are expected to give an in-principle approval to the plan by end of July 2019,” DHFL said in its disclosure.