Public Sector Banks Yet To Classify DHFL As A Bad Loan Despite Being Red Flagged By Reserve Bank Of India Norms

Despite DHFL being ‘red-flagged’ under the Reserve Bank of India’s (RBI) framework for dealing with fraudulent disbursements, most public sector banks have held back from making bad loan provisions.

SBI and Union Bank of India are the largest lenders to the DHFL group. A host of public and private sector banks are part of the consortium which sanctioned the loans. DHFL has a total outstanding debt of nearly Rs 84,000 crore, of which Rs 26,324 crore is in the form of bank loans and Rs 41,431 crore in the form of non-convertible debentures (NCDs).

DHFL has successively defaulted in debt and has cited a court-ordered freeze on repayments after it missed its recent dues.

However, most public sector banks, which came out with their results for the quarter ended September 2019, chose to go by the textbook definition of an NPA, where repayment is overdue by 90 days.

In May 2015, the RBI, had introduced a framework for dealing with fraudulent loans. These guidelines also came up with the concept of early warning signals (EWS) and ‘red-flagged accounts (RFA)’.

“An RFA is where a suspicion of fraudulent activity is thrown by the presence of one or more EWS. These signals in a loan account should immediately put the bank on alert regarding a weakness or wrongdoing, which may ultimately turn out to be fraudulent. A bank cannot afford to ignore such EWS but must instead use them as a trigger to launch a detailed investigation into an RFA,” the RBI said.

The threshold for early warning signals and red-flagged accounts have been kept at Rs 50 crore per bank.