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India shadow bank fears linger as Dewan seeks strategic partner

Nonbank lender faces liquidity concerns but denies fraud allegations

A worker cleans the windows of an office building in Mumbai's central financial district.    © Reuters

MUMBAI -- Concerns are rising over another debt crisis in India as Dewan Housing Finance admitted it was seeking a strategic partner to help overcome financial troubles. The company denied fraud allegations on Monday but admitted it needed to raise funds to stem a crisis of confidence.

Dewan, one of India's largest private housing finance companies, is facing allegations that it siphoned off around 310 billion rupees ($4.3 billion). The company has been in trouble since a liquidity crisis broke out at IL&FS, short for Infrastructure Leasing & Financial Services, in September, raising fears of sector-wide collapse. IL&FS has since been taken over by the government.

In a conference call with analysts and journalists on Monday, Dewan management denied allegations of fraud that was reported last week by local investigative newspaper, Cobrapost. The newspaper alleged Dewan diverted loans to shell companies, including some with links to its owners, the Wadhawan family.

"The allegations are extremely unfounded," said Dewan Chairman and Managing Director Kapil Wadhawan. He also denied that the companies named by Cobrapost were shell companies and said that the board had appointed an external auditor to look into the allegations.

"We want a strong strategic partner who cannot only add value but also alleviate any concerns the market might have on the business and also bring in fresh equity and capital," said Dewan Chairman and Managing Director Kapil Wadhawan. He added that the process would be completed in three months.

Following the Cobrapost report, investment bank Credit Suisse warned that debt mutual funds could see another wave of risk aversion due to their high exposure to Dewan. Local rating agency CARE Ratings cut Dewan's crediting rating by a notch for several debt instruments.

Dewan announced over the weekend the sale of its affordable housing arm Aadhar Housing to U.S. private equity company Blackstone for a reported 27 billion rupees and said it was considering selling its insurance subsidiary. Wadhawan said Monday that the company was in a position to meet all its debt obligations for the next six months.

BrickWork Ratings, another local agency, said in a note published on Sunday that Dewan is facing a slowdown because it curtailed loan disbursements and it is likely to shift from on-balance sheet lending model to an asset-light co-lending model which would also release capital and bring down leverage. BrickWork placed Dewan on "Credit watch with developing implications."

BrickWork said in the note that recent events "have resulted in impacting the company's financial flexibility and could have further impact on the profitability of the company if not addressed in a reasonable time period."

Dewan shares jumped 5% soon after the conference call and ended up 4.17% at 116.10 rupees. The stock had been lingering at five-year lows before Monday.

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