Money & Banking

DHFL crisis: The ‘hidden’ issues no one is talking about

Radhika Merwin | BL Research Bureau | Updated on August 14, 2019

Possible hiccups in collection of loans sold under securitization and borrowers impacted by the lending freeze, are less talked about issues

Dewan Housing Finance (DHFL) has been back in the news over the past week due to several reasons. Resignation of one of the statutory auditors-- Deloitte Haskins & Sells LLP, ongoing discussions with lenders on the proposed resolution plan, and the company’s communique to the exchanges that it may not be able to meet its financial obligations in the immediate future, has brought the focus back on the persisting challenges in the company.

But there are other less-talked about issues that are brewing out of the DHFL mess, which need immediate attention.

According to the company, it has sold over ₹30,000 crore of retail loans so far to meet its debt obligations, by way of securitization. Most of the sale has been done through the direct assignment route--- transfer of a single asset or a portfolio of assets to financial entities through an assignment deed (essentially bilateral agreement). Normally, the responsibility of the collection of loans still lies with the seller (also called the servicing agent)—DHFL in this case, unless otherwise specified by the buyer (banks) in the agreement. Also, the buyer at any point in time has the right to change the service agent if he so wishes. But given the high servicing cost and complexities, the buyer usually lets the seller take care of the collections.

The big worry in DHFL is: given the persisting issues and uncertainty over resolution plan, who will take care of the collections of these loans sold? Will the ongoing turmoil, impact the credit behaviour of DHFL borrowers, taking a toll on collections. Importantly, how will this impact the future sale of the residual assets of the company?

Also, for borrowers of DHFL (particularly those with loans for under-constructed houses) who have submitted their documents, the company’s freeze on disbursements can be a huge cause for concern. If they are unable to raise funds from any other lender to complete the construction of their property, they would be left in the lurch with little recourse. In any case, longevity of the lender and safe retrieval of the title deed and other documents deposited as a security for the housing loan on closure of the loan, are critical.

All eyes now, are on the outcome of the resolution with lenders. Immediate fund infusion and kick-starting of the business of DHFL is imperative, to avoid a crisis at banks (that have bought the retail loans) and to protect borrowers’ interest.

Issues at hand

DHFL has been facing a liquidity crisis since September 2018. According to the company’s filing in the exchanges, it has paid over Rs 41,000 crores to meet its financial obligations during this period---mainly through a combination of securitisation of assets and repayment collections.

Technically under securitization, assets are pooled and a special purpose vehicle (SPV) is created which issues the tradable securities such as pass through certificates (PTCs) or bonds to buy assets. But under direct assignment, no SPV is created and the company transfers a single asset or a portfolio of assets to financial entities through an assignment deed.

In case of DHFL, how well the company is able to monetise its residual assets going ahead (particularly wholesale assets) needs to be seen. LAP, project loans and SME loans constitute about 43 per cent of DHFL’s portfolio (as of Dec 2018). Of the Rs 89,387 crore loan book, about Rs 34,800 crore pertains to project loans, SRA loans (Slum Rehabilitation Authority) and wholesale mortgage loan portfolio.

Kick-starting business

The company’s fortunes now ride on its ability to secure funding from bankers and restructure its borrowings/liabilities. The resolution plan that has been submitted by DHFL to lenders seeks moratorium on repayments but no principal haircut to lenders, according to DHFL’s August 6 communication to the exchanges.

Access to additional credit line to restart operations will be very imperative. While deciding on the resolution plan, lenders will have to do proper due diligence and audit to ascertain the quality of the assets. If significant mark-downs or write-offs in the value of loans (in particular wholesale loans) need to be done, then lenders should do so and then decide on the resolution plan.

The joint auditors--- Chaturvedi & Shah LLP and Deloitte Haskins & Sells LLP-- had put out several disclaimers and qualifications that could have a material impact on the financial statements of the company for the year ended March 2019.

DHFL in its notes to March quarter results had stated that in respect of loans of about a) Rs 16,487 crore, cheques received from borrowers were initially recorded as receipts, despite the cheques not been deposited in the banks, but were later reversed. b) It had also flagged some lacunae in the documentation of project/mortgage loans amounting to ₹20,750 crore. C) It had also marked down value of loans (wholesale) aggregating Rs 34,818 crore. In respect of all these, the auditors stated that they were unable to obtain sufficient evidence to support the values of the loans.

Deloitte Haskins & Sells had recently resigned as DHFL’s auditor citing reasons relating to the disclaimers laid down by them in the financial statements for the year ended March 2019, which did not allow them to continue as statutory auditors of the company.

Hence before arriving at any resolution plan, the lenders will have to undertake an audit to put these concerns to rest. Also various lenders---bankers, mutual funds, provident fund, retail investors---reaching a consensus will be critical.

Published on August 14, 2019

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