India’s biggest banking fraud – DHFL

The Indian banking system is one of the leading banking systems in the world and among the largest in developing economies. However, time and again we have heard of the banking system taking hits on accounts of frauds. These frauds range to the tune of thousands of crores and drain the wealth of the country damaging its progress. India was still reeling from the financial fraud of Vijay Mallya and Nirav Modi and Mehul Choksi when the banking system received another big blow which is possibly the biggest financial fraud in the history of the country’s banking system.  

What is the value of India’s biggest bank fraud?

While fraud of Vijay Mallya and Nirav Modi rocked the Indian banking system with their whopping amount of Rs. 9,000 crores and Rs. 14,000 crores respectively, The latest addition to the banking frauds is quite higher than the combined total of the two. 

The latest Indian banking fraud is by DHFL and is touted to be approximately Rs. 34,000 crores, an amount that is quite beyond the imagination of an average Indian. The promoters of the NBFC DHFL (Dewan Housing Finance Limited ) are now booked by CBI for defrauding a consortium of 17 banks led by UBI (Union Bank of India). 

Following the complaint filed by UBI, CBI has now booked the former promoters of DHFL Mr. Kapil Wadhawan and Mr. Dheeraj Wadhawan along with 13 others for the offense. According to the complaint filed by UBI, the consortium in total had provided a credit facility to the tune of Rs. 42,000 crores. However, of this credit, an amount to the tune of Rs. 34,615 crores remain unpaid. The loan was initially declared NPA by the banks in the year 2019 and was officially designated as a fraud in 2020. 

When was the DHFL scam discovered and how?

The fraud was first uncovered in the year 2019 when it was alleged that the company systematically defrauded the banks by siphoning off the funds. The credit issued by the banks was systematically giving out funds as secured and unsecured loans to sham entities or pass-through entities which were allegedly related to DHFL’s primary stakeholders either through their associates or their proxies. 

These funds were later rerouted to the promoters of DHFL through entities controlled by them. The initial accusation was made by Cobrapost in February 2019 and later based on this accusation, the lender banks appointed KPMG for a ‘Special Audit Review’. The findings of KPMG indicated that large sums of money were diverted to multiple companies (in the form of loans and advances) that had ‘interconnected entities and commonalities’ with the DHFL promoters. These funds were later used to buy shares and debentures. 

How were the funds disbursed?

The special audit review of KMPG further revealed that the company books showed 66 entities having commonalities with DHFL promoters were disbursed Rs 29,100 crore, against which Rs 29,849 crore remained outstanding. 

The majority of transactions of these entities and individuals were in form of investments in land and properties. Furthermore, a major outstanding of DHFL was to the extent of Rs 11,909 crore which was on account of loans and advances worth Rs 24,595 crore that were given to 65 entities between April 1, 2015, and December 31, 2018. 

The promoters of DHFL also disbursed Rs 14,000 crore in the form of project finance but the same was shown as retail loans in the company books. The company also showed an inflated retail loan portfolio of about 1,81,664 retail loan accounts that were false and non-existent and showed an aggregate of Rs 14,095 crore outstanding. The records of these loans were maintained in separate ‘Bandra Books’ in a separate database and were later merged with OLPL (Other Large Project Loan) accounts. 

Further investigation showed that the OLPL category was largely formed out of the non-existing retail loans amounting to Rs 14,000 crore. An amount of Rs 11,000 crore from these accounts was transferred to OLPL loans and approximately Rs 3,018 crore was retained under the retail portfolio under the guise of unsecured retail loans.

Conclusion

The news of this fraud rocked the financial world and the repercussions were also felt in the stock markets. After months of false assurances by the company, the case was finally lodged against the Wadhawan brothers by the UBI led consortium of banks. They are currently in jail in connection with cases registered by CBI and ED.

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