DHFL Banking Scam

Case Study by: G. Krishna Swathi Sri

2203029 (BFS-A)
 Introduction to DHFL
 In the recent past, the economy of India has been hit by one corporate marauder
after another. Billionaire entrepreneurs like Nirav Modi, Mehul Choksi, Vijay
Mallya and Lalit Modi have all defrauded the people of India. There are many
promoters of small and mid-cap companies that are known to be involved in
scams.
 Dewan Housing Finance Ltd (DHFL) is the renowned Non-Banking Financial
Corporation (NBFCs) in the country.
 This means that all banks are supposed to lend a certain portion of their funds to
companies like DHFL.
 This is the reason that money deposited by small depositors in bank accounts of
State Bank of India, Bank of Baroda, etc. ends up in the hands of NBFC’s like
DHFL.
 Allegations against DHFL:
 Let’s have a look at the alleged way in which DHFL was able to siphon off money which was provided
to it by public sector banks for the purpose of lending to others.
Loans to Shell Companies
 Cobrapost has alleged that DHFL has made dubious loans to shell companies. Shell
companies are pass-through entities. This means that they are not the final destination of
the money.
 It is created to confuse tax and other regulatory authorities. Cobrapost claims to have
identified 34 such corporations.
 These corporations have indirect links to the promoters of the DHFL group, and reports
indicate that DHFL has lent out close to $1.5 billion in unsecured loans to these
companies.
 The problem is that DHFL has lent money to these companies without taking inadequate
security. DHFL has not followed these processes. As a result, public money has been lent
out to people without collateral
 Round Tripping: 
  The money which was loaned out has later flown back into entities which were
owned by the DHFL group. This is known as round-tripping.
 Hence, in effect, DHFL gave an unsecured loan to its promoters.
 The shell companies and other transactions were just paraphernalia which was
used to cover up these blatantly illegal transactions.
 Purchasing Assets:
 Lastly, the money acquired by round tripping was used by DHFL in order to
purchase assets in other countries.
 It is a known fact that DHFL has invested money in startup companies in the United
Kingdom. It is also known that DHFL has purchased a cricket team in the Sri Lankan
Premier League.
  It is alleged that the proceeds of these loans were used to make these
transactions.
 Cobrapost also alleges that other personal assets have also been created in
countries like Mauritius and Dubai by the owners of DHFL.
 The Reveal of the DHFL Scam

 All the tension started to begin for DHFL when the Central Bureau of Investigation (CBI)
charged them and others for duping a sum of Rs 34,615 crores.
 There are about 17 banks that have been tricked by home loan provider DHFL.
 Former CMD Kapil Wadhawan and director Dheeraj Wadhawan are among 13 others who
have been booked in connection with the case.
 DHFL has borrowed a total of Rs 42,000 crore loans from banks like State Bank of India,
and Bank of Baroda and the highest being borrowed from Union Bank of India (UBI), out
of which DHFL has not paid a sum of Rs 36,000 crore.
 The UBI (Union Bank of India) has asked one of the leading providers of risk, financial,
and corporate governance, KPMG to look into this matter.
 They have been accused of syphoning off the money to their other companies or Shell
companies to buy assets at a cost of public sector lenders.
 The rating agencies downgraded the rating score on commercial paper after the company
defaulted on debt payments.
 The Resolution Plan
 DHFL tried to make an impression in front of the investors that they would be repaying
them the full amount.
 They devised a resolution plan that transformed its debt into equity and moved to the court
in the hopes that it would influence their plan.
 Raid by ED
 The ED made claims that they found several linkages to money laundering.
 This money has been used for their advantage, which was intimately associated with the
company's promoters, especially Dheeraj Wadhawan.
 They also found that this loan money was also linked to the criminal organisation, Dawood
Ibrahim.
 Removal of Board of Directors
 DHFL had no longer had power and control and was bankrupted due to which the Central
Bank of India decided to remove its board of supervisors and managers. The decision took
place under Section 45-IE (I) of the Reserve Bank of India Act, 1934.
 First Arrest of Kapil Wadhawan
 This created sensational news when the promoter of the DHFL, Kapil Wadhawan was
arrested under the Prevention of Money Laundering Act (PMLA).
 The ED had found out that his firm was allegedly involved in providing loans to the
criminal association of Dawood Ibrahim.

 Charge Against DHFL

 The CBI finally booked DHFL and 13 others related to this case for swindling 17 banks of
Rs 34,615 crore. They are undergoing investigation by both the CBI and the ED.
 The ED has stated that Yes Bank is also involved in this scam.
 Significance of the scam:
 The banking system of any country is the backbone of its economy. Excessive losses to banks
affect every person in the country because the amounts deposited in banks belong to the
citizens of the country.

 Reasons of the scam:

 RBI data show that around 34% of scams in the banking industry are on account of inside
work and due to poor lending practices by and the involvement of the junior and mid-level
management.
 The data also show that one of the fundamental problems in the way of the development of
banking in India is on account of rising bank scams and the costs consequently forced on the
framework.
 Frauds in the banking industry can be grouped under four classifications: ‘Management’,
‘Outsider’, ‘Insider’ and ‘Insider and Outsider’ (jointly).
 All scams, whether interior or outside, are results of operational failures.
 Scams in India: Steps needed
 Banks have to exercise due diligence and caution while offering funds as bad loans lead to
high NPAs.
 The regulation and the control of chartered accountants is a very important step to reduce
non-performing assets of banks.
 Banks should be cautious while lending to Indian companies that have taken huge loans
abroad.
 There is also an urgent need to tighten the internal and external audit systems of banks.
 The fast rotation of employees of a bank’s loan department also needs to be considered.
 Public sector banks should set up an internal rating agency for rigorous evaluation of large
projects before sanctioning loans.
 Further, there is a need to implement an effective Management Information System (MIS) to
monitor early warning signals about business projects.
 The CIBIL score of the borrower should be evaluated by the bank concerned and RBI officials.
This must also include the classification and responsibilities of the lending and recovery
departments.
 Financial fraud can be reduced to a great extent by the use of artificial intelligence (AI) to
monitor financial transactions.
 Rather than having to continuously write off the bad loans of large corporates, India has to
improve its loan recovery processes and establish an early warning system in the post-
disbursement phase.
 Banks need to carry out fraud risk assessments every quarter.
 Conclusion
 The DHFL financial scam is termed one of the biggest scams in the banking industry.
 Scams like this can prove to cause huge damage to Indian investors.
 What can we learn from this is just that we need to have strong and stringent banking
laws and policies.
 The country can only hope to see strict business and financial advisory groups without
corrupted intentions.
 It is quite evident from the above-mentioned facts the DHFL scam remains the biggest
scam to date.