DHFL’s debt resolution plan hits a roadblock as collections drop

Lenders have followed the Reserve Bank of India’s guidelines of reporting suspicious transactions and tagged DHFL as a red-flagged account. (Aniruddha Chowdhury/Mint)

Dewan Housing Finance Corp. Ltd’s (DHFL’s) debt recovery process has hit an unexpected hurdle with scores of collection agents quitting in the wake of the crisis at the mortgage lender, the latest in a string of setbacks that is likely to jeopardize a speedy debt resolution, according to two people aware of the development.

Banks are hoping to recover loans worth 38,342 crore by implementing a debt resolution plan for the home financier and contain the risk of contagion in the Indian financial sector. Lenders have followed Reserve Bank of India’s guidelines of reporting suspicious transactions and tagged DHFL as a red-flagged account, one of the two people cited above said on condition of anonymity.

This classification, the person said, has been uploaded on the Central Repository of Information on Large Credits (CRILC) database of the central bank, and lenders will now meet to discuss the next steps.

“Red-flagging is a step towards fraud reporting and although the final report of the KPMG forensic audit has not yet come, we have reported based on the draft report,” the first person said, adding that several banks, including consortium leader Union Bank of India and Central Bank of India have classified the account as non-performing (NPA) as the last repayment was in July.

Rajkiran Rai G., chief executive of Union Bank of India, said last week that the bank has already provided for 15% of its loans to DHFL. “We have an exposure of about 2,000 crore to DHFL and have made adequate provisions for it,” said Rai.

If the DHFL account is declared as fraud-hit, banks will have to set aside 100% of outstanding loans as provisions either in one go or over four quarters.

The crisis has now hit DHFL’s recoveries from borrowers as collection agents have started quitting, the second person said, requesting anonymity. According to this person, the number of agents has fallen from about 11,000 last September.

“The problem is that it has started impacting collections. Their primary clientele is in tier II and III cities and in these places, you need to have people go door-to-door for collections,” said the second person. This person added that as a result of this, DHFL’s collections, which was around 93-94% (of the repayment due on that date) till recently, is now down to almost 80%.

“They are making efforts to follow up with these borrowers with the staff they have, but if they keep losing people, then this could be a big risk,” he added.

The fall in collections does not affect DHFL alone as the mortgage lender, which has sold over 37,000 crore worth of securitized loans to a clutch of lenders, acts as a collection agent for these pooled loans.

These banks, and some non-banking financial companies (NBFCs), were in a soup last month when a Bombay high court order barred DHFL from paying any unsecured creditor, including buyers of pooled loans.

DHFL did not respond to an email seeking comments till the time of going to press.

Purchases of loan pools by banks help inject liquidity into non-bank lenders. Banks often buy loans from shadow lenders comprising securitized retail loans to meet the shortfall in priority sector lending.

“The government has just issued rules for resolution of stress in financial services providers under the Insolvency and Bankruptcy Code. I believe this fits well into the needs of DHFL’s lenders who are likely to use it as the current plan under the inter-creditor agreement (ICA) is yet to take off. Moreover, since forensic audit report reflects certain related party transactions which may hinder resolution under ICA proposed by existing management, lenders may have to bring in a new promoter group, which may prefer a court-driven process through NCLT,” said Anil Gupta, sector head- financial sector ratings, Icra.

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