Can Fin Homes Limited (511196) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Can Fin Homes Event Discussion Conference Call hosted by DAM Capital Advisors Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanket Chheda from DAM Capital Advisors. Thank you, and over to you, sir.

Thanks, Michelle. Very good morning to all of you. Today, we have with us the management of Can Fin, primarily led by Suresh Iyer, who is the MD and CEO. Without further ado, I will hand over the call to MD sir to enlighten us on the event that got announced yesterday, followed by which we'll take up Q&A. So over to you, sir.

Yes. Thank you, and good morning, everyone. This particular incident for which we have done a reporting is related to the stock exchanges, pertains to Ambala branch. It is a branch where the local -- all the branches, we have local check signing powers, and the branch staff has misused the check signing powers and has been issuing checks. This entire payment and everything is centralized through a [ sweeping, sweeper ] account, which we maintain with the bank, Canara Bank. And as a result, the entire pool accounts in terms of disbursements are also released from there as well as the collections, which are there at the branches, are also deposited here. So on a monthly basis, there are about INR 25 crores of disbursement which happened on a daily basis, plus about INR 250 crores approximate collections that come in a month. Because of this, there was a normal balance of about INR 50 crores, INR 60 crores, which is already always maintained in that account, which has been maintained. As a process improvement, we decided to move from a decentralized approach to a centralized disbursement, and a CMS approach for which we had already contacted Canara Bank. In the process, while arriving for the data, we further sliced and diced the data so that we can give the tentative numbers to the bank. In that process, it came out that there are some blips that came out in the branch in one particular branch. So we further investigated, and the branch came out with this thing that the fund transfer, which was there, was misrepresented in the reconciliation as a sweep-out or that is a fund which is [ destined ] from the head office. Whereas when we took the statement, it came out that there were individual names or account holder names, which were appearing in place of a transfer to head office. So that alerted us, and we further investigated. That is how this has come out. And we have carried out this exercise for all the branches for a period going back in time, and there are no other instances or no other branches where this has happened. Only in this one particular branch this has happened, wherein this staff has misrepresented and misused the check signing powers. So an FIR was filed based on the initial information that we had about 4 checks being drawn in individual names on Sunday at Ambala police station. Subsequently, while doing analysis further, yesterday, we arrived at a number after completing for all the branches, and it was found that in this one particular branch, the total amount of such transfers which had happened is to the tune of INR 38.53 crores. Therefore, immediately, we have reported to the Stock Exchange when the amount was crystallized yesterday around noon. So that is how this has happened. It has come out as part of a process of -- a process improvement exercise that we have been doing. We had actually CMS plus centralized disbursement is there, which was also intended basically to withdraw the check signing powers which are already decentralized and with the branches, and it was not giving us comfort. So it was a process improvement, which has resulted in this being detected. Plus, there is no further impact because all other branches have been verified on the same front. And this also does not affect the assets because there are no underlying assets. So in terms of the asset portfolio, what was done last year was when one fraud was detected at one of the branches in Rajasthan, the entire asset portfolio was sanitized and branch and auditors carried out by Canara Banks, the parent. At that time, on the asset side, this exercise was carried out, whereas this doesn't pertain to assets and is more of a procedural back-office issue, which was a lot part of the scope last time and which has now come out. So over to you. If there are any clarifications or queries, we can take that.

[Operator Instructions] We have the first question from the line of Jinesh Gopani from Axis Mutual Fund.

This is [ Abhijit ] from Axis Mutual Fund. Sir, my first question is I just wanted to check the total amount which you have founded. This is over what period of time that you have found out? And is this an audited number or just the initial estimate?

Well, this is the final number. We have carried out the exercise going back from April 2021 onwards. We have taken out the data. And we have gone for all the branches by doing this exercise. So this should be a final number because this has not been found in any other branch. And this is the total amount. All other disbursements, fund transfers and all are accounted for because they are tallying. It is only this one branch that this particular amount is there. Of course, the auditors would want to audit it and verify it, but we are fairly confident this is the final amount because we have done the exercise going back in time from April 2021 onwards.

Sir, where did the risk mitigating measures fail, if you can please elaborate? And how can we curtail it in future? I just wanted to verify if this is a one-off.

Yes. So basically, this risk mitigation measure was that we had a pool or where -- what went wrong or what method was there. There is a pooled account, as I mentioned earlier, where all the disbursements are going out from that central sweeping, sweep-out account as well as all the collections, which are collected at the branches other than the NACH and ECS. It is all pooling into that same account. So there is the regular in-and-out from that account across all the 193 branches. So there was a total pool, and on a daily basis, there is a -- looking to the INR 25 crores of disbursement, [indiscernible] plus collections, there is normally a balance of about INR 50 crores to INR 60 crores, which is normally maintained. So since that was regularly being maintained, it didn't kind of address on a single -- because it is not a single transaction and a single point in time. Otherwise, it will immediately [ bid ]. But a normal balance was being maintained, and this was, therefore, not too much, everything was given. When we've decided to do the slice and dice, that is when we actually found out that for the size of the branch, the amount of transactions are slightly not tallying or not in line. Then the branch reconciliation immediately threw up and was triggered for that, and we got this particular -- in a particular branch. As for the risk mitigation measure, as I mentioned earlier, we had already initiated this centralized disbursement, which we wanted to do because this was one of the process improvements, which we had -- we wanted to initiate. That is [ withdrawals ] check signing powers, which was already decentralized. So keeping that in mind, this CMS and centralized disbursement process discussion had already been initiated with Canara Bank. And so going forward, once this is implemented, which probably will take about a month's time because we are -- the changes are [ disbursements ], then in that case, the check signing powers will be withdrawn because already certain other activities like DSA payments and all, was already -- has been decentralized in the last couple of months only. So one by one, all the [ said rent ] payments and all are also -- is also centralized. DSA payments have now been centralized. This disbursement will also be centralized, so practically, branches will not have any other payments, barring maybe electricity bills and stuff like that. So there can always be a limit foot on our 25,000, not exceeding 25,000 at the branches for petty cash expenses. So that is the whole process, which is underway and will stop this local check signing powers.

This pooled account is maintained with Canara Bank, is it? Just a clarification.

Yes.

Okay. Okay. Just can you also please comment on the underwriting which happened through the Ambala branch? There is no fraud on underwriting, right?

No, there is no fraud on underwriting. In fact, we have also visited all the -- the branches have been visiting the SMA accounts and all. There is no issue on this thing. Disbursements have regularly happened. There is -- we have also subsequently -- at the local branch, we have senior people have been sent on [ Saturday night ], Sunday and all after the -- and they have verified all the loan buckets. They have verified the loan files. They are all intact. Everything is in place. So that is not an issue. So on the asset side, there is no issue because this was purely a check issued with misusing the check signing powers and has got nothing to do with the asset.

We have the next question from the line of Saumil from Kotak Life Insurance.

I just want to understand, given we had a cost which was detected last year, and I believe there was a comprehensive audit [Technical Difficulties]

We have the next question from the line of Dhaval from DSP.

I just had 2 questions. One is relating to recovery process. Any thoughts of how much we can recover immediately and, overall, your estimates of final loss? Any broad thought process around that? So that's the first question. And second, relating to the operating risk, I mean, so basically, overall, any other big areas of sort of where the process needs to be improved and we are investigating or any such process deviation which are there versus industry standard, which needs attention and you're right now on it. So just trying to see if there is anything more that can come in any of the other functions, yes.

Yes, the first point about recovery. So just an update, yesterday, late night, we have come to know that the staff has been actually arrested at Ambala. So right now, since we have also filed, we first had an indication of only 1.45, which we had initially signed the police complaint form. Yesterday, once the amount got finalized, we have also updated the police. So now I believe that police is taking forward that investigation, and since the personnel staff has been arrested also, they will be in there doing this. So any collection or any recovery that is done will now come through the court process. That is what we believe. So if that being the case, at least in this quarter, we don't expect any money coming even if it does come. So at least from our side, we will be making a 100% provision for this amount in this quarter. Quarterly profit last -- in the first quarter was around INR 183 crores. So worst-case scenario, we will -- if nothing comes through, we will have -- probably have to take that INR 38.53 crores hit this quarter. So the profits will be down to probably INR 145 crores, INR 150 crores in this quarter. That's the first point. The second point of your question is regarding the process improvement, whether anything else is happening. So we -- in the last few months, post the joining and all, we have already reviewed the processes. We have been doing a lot of process and think the improvement as a strengthening activity. Last time when this Canara audit was carried out, it has to do on the asset side. And thereafter, we had a staff -- [ DPM-level ] staff recruited from Canara, wherein we had -- who was deputed to oversee risk. So on the risk side in terms of the LCR, the ALM process, the risk policy, risk appetite framework, the stock ratio, all those things have already been implemented. And we have done that and strengthened that process. We have also, as part of the audit last year, the entire asset side and the lending side was already reviewed. We had already -- based on that, the company had taken steps to strengthen the lending process. Some of the policies and processes are also reviewed, and things like [indiscernible] implemented things like certain map-related or certain lending areas were stopped. So all those activities on the asset side was already taken based on the audit that was done last year. During -- in the last couple of months post my joining and post [indiscernible], we have done a few activities like we have centralized at DSA payout. The next in line is -- was the -- scheduled the payout for the advocates and this thing. So that is one process improvement we have introduced. Other process improvement is that we have restarted implemented training -- entire training cells. We have for the staff or for -- to improve the training processes and all those things. Second, we have also introduced the fraud control team, which is the extra [indiscernible], which will now be viewing the -- to -- as a step to not see that all documents like it happened in the last year does not happen. We have introduced our -- started a new fraud control cell also. We're also doing the CMS and this centralized disbursement process, which has been initiated, which has resulted in this thing coming out. Now based on this yesterday, we also had a discussion with Canara, and we are also looking for implementing a module which is successfully working at Canara Bank, which is an online digital reconciliation process. Okay. Other than that, we have also -- on the litigation side, we are almost finalized the litigation module. We are also finalizing another module, as I said, small software changes, which are there. So these processes are already happening, and other process improvements, nothing has actually come. It is just strengthening the processes. But in this one particular process, it has come out. So this is the ongoing activity, which we will be doing. And hopefully, nothing should come out. In this particular instance, also, it has come out in one particular branch and mainly because of the check singing which has been misused, which automatically will stop the moment we go in for a centralized disbursement.

Got it. Just one final thing. In terms of business impact for second quarter, due to centralization disbursement, do you see any -- for the full quarter, do you see any impact around that more than normal or it should be part of your business as usual?

There could be a small blip, one, because we will be moving -- definitely, within a month, we'll be moving to centralized disbursement. So this small process change could be a little disruption for a few days or a week also. And maybe a little bit of sentiment, at least particularly in the North branches. So that might be a small change. That's about it, not more than that. At least business -- on the business side, everything should continue. There is nothing to stop the business because those processes have already been reviewed and in place.

The next question is from the line of [ Harshwashan Agrawal ] from [ Bandan AMC ].

Wanted to understand 2 things. One is this fraud which has happened, it has happened during what period in the -- say, what was the number of transactions which happened? The reason I ask is because you mentioned the sweeping, sweep-out account average balance is from around 50 cr, 60 cr and the fraud is of 38 cr. So it seems like a large amount depending on the daily average balances. So it should have been caught earlier also, right?

You're right. So this transaction, as I said, we have done the audit from the period from April 2021 onwards for all the branches. And this pertains to something a little less than 200 number of instruments, which are there. This entire thing at one particular branch is ranging in a little less than 200 number of instruments.

Okay. And this has probably happened in over a period of last 2 years.

Kind of a little more than a year.

So sir, any plan to go back further into the just say, maybe, say, evaluate 5 years and something like that, just to see if there is something more to it?

As I said, we have gone back in time, and we have run for a little more than 6 to 8 months beyond the last transaction which has been deducted. So I think the first such difference would have been somewhere in November 2021, once the first single check. So we have gone back in April 2021. So for another 6 to 8 months beyond that, also, we have gone, and nothing since has been -- is there. Plus, as I said, this when we sliced and diced the whole thing, again, the quantum doesn't come to be beyond this. So this is the final thing. We have 1 beyond 6 to 8 months also from the last -- or the earliest transaction also that was detected.

Fair point. And sir, just another question that I wanted to understand was something related to what the previous person also asked was on the impact on disbursements. Now you did allude that there could be some impact, but is it possible to quantify that?

See, last -- the first quarter, we have had a growth of about 15%, 14% in disbursement compared to Q1 of last year, okay? So I guess this quarter, you can say it could be compared to Q2 versus Q2, quarter to -- quarter-on-quarter, it might probably be either flat or maybe 5% growth. You can probably reduce that. That's what I would say.

The next question is from the line of [ Dhavei ] from Dymon Asia.

Sir, just wanted some clarity in terms of the measures that are being taken to ensure that what has happened in the current branch does not or has not occurred in the other branches. And what are the checks and balances that incrementally you're likely to put into avoid such recurrences because this is the second such instance in the past 1 year, 1, 1.5 years wherein cases of fraud had emerged.

Just as I just explained, what we have done is this exercise has been carried out for the period from April 2021, 6 to 8 months prior to the first ever such incident that had -- we could detect. And this has been done for all branches, okay? And across all these 193 branch data, we have not come across this in other branches. It is only limited to this one branch. And on the entire period, there is only -- this is the amount. So we can fairly say, and we are with full -- almost full confidence, I think I can say that this should not exceed INR 38.53 crores.

Okay. And sir, what is the [ take-up validation ] that you're planning and the internal audit guidelines that you would put in place to ensure that such occurrences don't happen?

See, we have audit policy where the audit frequency is there. So for the top 20 branches, they are audited every month. Then we have branches which are in the range of we call the large -- very large and extra large branches, which we classify that is about 200 and odd, INR 200 crores in the portfolio, that is audited every quarter. And the other branches are audited every 6 months and 6 months, okay? So every branch has to undergo an audit at least 2 times during the year. That is the -- even in the -- even a very small branch. Plus, any branch, which is -- where there is a fraud detected or any other thing, there also, we have a monthly audit carried out for this. So this is the audit policy, according to which we are going. So every branch, even a small branch has to be audited twice. So the second -- this particular branch, incidentally, the audit also reached on Friday morning when the -- as per the date, it was to be due, and this branch was to be audited, and the quarter also reached on Friday morning for this particular branch with Ambala that we are talking about.

The next question is from the line of Sandeep Jain from Baroda BNP Paribas Mutual Fund.

See, what I want to understand is about the pool account that is what you are mentioning. So the current practice is to have a pool account at every branch level for the disbursement and collection. That is true, right?

No. So there is a pool account, central pool account, and there is a -- every branch draws from the pool account and deposits every day at the end of the thing, leaving a small INR 5,000 balance. There is a sweeping. So there is an excess balance at the end of the day at the branch that is pooled into the central account head office. And as and when the disbursements are required, all the branches, the sweep-out will also be -- I mean the sweeping from -- to the respective branches from here will be or to the extent from this centralized account, which is maintained in the head office.

Got it. And the transaction which you are referring, that is fraud transaction, which you are referring, that is going towards some of the individual names that may be DSAs or some other guys, right?

No, this is not to DSA. To be exact, this has been drawn in the name of the particular staff himself and the name of his wife. So whereas in the system, it has been shown as a transfer out. So the funds which have been pooled in from the central office, they have been drawn from the central office. That is how they have been shown. But actually, the [indiscernible] would transfer this thing to this branch has gone to the individual account. So incidentally, both these people also have an account with Canara, so it got marked as a transfer out -- transfer entry, whereas it was a transfer to an individual savings bank account rather than a current account of the company.

Got it. And what is the kind of authority?

Account maintained with Canara Bank only of the individuals.

Okay. And what is the kind of authority currently having with the kind of branch managers and people to pay from that pool account in terms of limit and all?

So that is very depending on the grade, kind of a structure. And this particular branch had a senior manager-level person heading it. And therefore, the power to the branch were there, and the transfer of individual transactions averaging it out -- averaging out is around INR 20 lakhs. So it is within the power because a normal branch of a senior manager level has a loan sanctioning power of up to INR 45 lakhs.

Got it, got it. So it was necessarily doing as a petty expenses kind of thing, and there were some expenses kind of being transferred out. Because what I'm trying to say is when they put a request to transfer out from the pool account, they need to do certain kind of reasoning that why you are taking that fund apart from the disbursement, right? So where the thing has lapsed in terms of getting transferred out as the various entries are there kind of.

No, no, this is not expense or a pool amount which has been drawn from head office for the purpose of expenses. This was pooled in and as well as the transfer. So it was expected for disbursement because otherwise, there are -- there is a separate [ servicing ] for expenses, which are -- they are there, they are being monitored separately. This was only for the full disbursement amount and for the collections which are there. So this accounted for the disbursement and collections which are coming into the branches and the disbursement which is going on from the branches. So this should have been transfer normally for us. Normally, this account is used for the purpose of disbursement, which are -- we think the customers are on at that time. This money is drawn from the central account, and whenever money is pooled, deposited over there from collection. At the end of the day, there's a surplus, it is pooled into the central account at head office.

Certainly. So that gives me another question that if this pool account is for the disbursement and mark my -- if I'm not able to ask a proper question, but -- so I suppose if the disbursement happening for any housing loan, right, all the necessary checks and balances in terms of property mortgage, in terms of document, in terms of kind of valuation and all those things are there, and then the disbursement happened. So the point which I'm trying to understand is there is so much kind of [ the entire ] disbursement [indiscernible], right? Because this pool account is only for the disbursement.

Precisely. The impact here, the staff has drawn an individual check which is not backed by an asset, which is not backed by a disbursement and has misrepresented it as showing it as a pool from this -- for this. Since on a central level, the INR 60 crores, INR 50 crores, INR 60 crores balance was on the regular course maintained, the slicing, dicing was not done, it was continually -- continuously being maintained on a regular basis. In line -- which was in line of the normal disbursement. It is only when we defer to slice and dice and take out the data for the purpose of the CMS and centralized disbursement activity which we are going to implement. This figure of pool to the branch exceeded the amount of the portfolio of the branch and the disbursements which have actually happened. That's why what we did was we verified each branch disbursements, individual disbursement data with the amount which has been pooled and a tally to tally, so that is where we have realized that only in this one particular branch, there is an excess pool, which has -- or draw, which has happened by the branch, and that has gone to fund the individual savings bank account, going to the savings bank account of the staff and the wife.

We have the next question from the line of Mahrukh Adajania from Nuvama.

Sir, so does Canara Bank have any view on this? Have they given any feedback on what happened?

So we had a meeting with Canara. And as I said earlier, they have also suggested to take this online digital reconciliation module, which is very successfully operating over there. That is one thing. And of course, we also believe that these all activities have come up or this particular incident has come up because we initiated this activity. So obviously, they also have prodded us to actually hasten these steps that we have already taken. And since we were anyway talking to Canara only for the CMS and centralized disbursement, in fact, that activity will now immediately get implemented. I mean that is what is the immediate thing. So the full support in that -- on all those fronts is coming from Canara Bank. The entire team, we have appraised in terms of the chief risk -- or the group risk officer, group compliance officer, all the MDs all the executive directors also. So the entire support in terms of this thing, reconciliation, everything is also coming from Canara side. And in fact, they have asked us to hasten this entire activity of review of processes.

Got it, sir. Sir, my next question is on basically what will be the size of total disbursals of the Ambala branch, the size of the branch?

The branch is a small branch. It has less than INR 100 crores. It is around INR 85 crores is the portfolio of the branch. That's why this was absolutely a high number and the quoted pullout to the brand in terms of disbursement was much higher and immediately caught the attention the moment we did the slice and dice. That is how the cause trigger came when we decided to do this breakup.

Got it, sir. Sir, sorry if I'm -- sorry to run over this again. But so basically, in a normal course, the amount would have been disbursed to the savings account of the borrowers. But instead, here, you found that it was transferred to the savings account of the employee and why. That's the correct understanding, right?

Absolutely correct. So this is not backed by any asset. It is a simple transfer from one account of the -- pulling from the central pool account of head office and going into the savings bank account of the staff, which was masked showing as a transfer out, pure transfer out. And incidentally, since that account was also with Canara Bank, that [indiscernible] was also a transfer out only because it was an Internet transfer from Canara to Canara. [indiscernible] or it could not -- was just got missed out.

Got it. Got it. But otherwise, the transfer out happens to savings bank, which could be with any bank, right?

No, no, no. The -- yes, so what happens is the -- when the disbursement check hits, so if the branches issued a disbursement check in favor of a customer, the customer will present it to any bank that will come for clearing to Canara. At that time, Canara will take the pull from this account, and it will go to the individual customer's accounts. So that is the reconciliation we did when we looked at the clearings in which accounts the appearing has happened, and we compared it with actual disbursements, loan control accounts, loan accounts that we are having and in whose favor the checks have been drawn based on the authority letter given. When we compare that to in all of the branches, these numbers, these names, these accounts, these amounts and dates are matching, except for this one branch where, obviously, these are not reflecting in the customer account because there are no underlying customer accounts, but these are simple transfers going to an individual account of the staff and his wife.

Got it. And sir, my last question is why do you -- why would it impact the P&L?

Because we'll have to provide for it. We'll have to make 100% provision for it because it is not supported by underlying assets. And in the event of the money coming back or the police recovering it and handing it over to back to the core process, only at that time, we will recover it. In that time, it is a money which has gone out without an underlying asset. So we will have to make 100% provision for it.

The next question is from the line of [ Ashwani Kumar Agarwalla ] from Edelweiss Mutual Fund.

Sir, I just wanted to know that how do you [indiscernible] the auditors? Because in the last 2 years, despite at least 2 audit per year, this was unchecked. This was unnoted. So it is unlikely that [indiscernible] would not be [indiscernible] of the person who did this. And how was the auditors appointed? What is the process? And how do we overcome this going forward?

So yesterday, post this event, we also had a call. We also called the auditors because as you rightly said, yes, there are 2 audits which have also happened during this process, March '22 and March '23. So we have updated them on the events and have also asked them to review the processes because yes, it should have been caught both internally as well as during the audit process by the auditors. So I mean they are going to come back on this. And the central auditors are basically doing the physical audit in terms of the top 20 or the top 20 branches each, so roughly about 40 branches are physically verified. Other than that, we have local firms, audit firms, which are doing the audit at their respective branches for the remaining branches. So this particular branch, the local audit was done by a firm, [ CFM ], for both these years. Two different firms we were involved at the local level in Ambala. It's [ not based ] audit firm, which has done locally for these 2 chances. And the central auditors here have taken the audit reports from these appointed auditors who are there.

And sir, do we have an auditor rotation policy that if someone is auditing this year and next year, he will not be auditing this branch?

No. So the auditors are appointed for 3 years. But within that, also, the signing partner is changing every year. And the branches say, for example, there are 2 auditors. So one -- the first one has done it for 20 branches. The next year, they will do it for another 20 branches. The same 20 branches will not be given to them. So that's internally checked. So here in these 2 years, both the central auditors have overseen this [indiscernible]. They have done locally, but as I said, the firm which is based in the north, but they have been overseen by these auditors.

We have been -- there are other HFCs, which are backed by PSU, something like an [ LNG ] housing finance and PNB Housing Finance. But -- and are there other housing finance companies in the private sector? But we haven't seen any kind of such frauds happening in those places. So this has been [indiscernible] for the last 2 years, 1.5 years, especially last year, we had a INR 5 crores. This year, we had INR 38 crores. So you had a very long and illustrious career with [ LUH Limited ]. So do you think that the processes in [indiscernible] are much more lax with any of the housing finance?

See, the overall processes have already -- are obviously there, can -- there is always scope for improvement. And that is, as I said, is what we are reviewing and looking into some of the things are already in process. And yes, there will be some more processes, which will get reviewed. So I won't say there are the processes in terms of the regulatory. All those things are already there. And since last year, the -- on the asset side, Canara had got involved, and they also implemented a lot of things. Now on the rest of the activities also including a lot of particularly IT-related and digitization and all those activities also are now being taken up. So processes are in the -- I mean we are in the process of improving our systems a little more. And there is scope for improvement. I won't deny that.

The next question is from the line of Umang Shah from Kotak Mutual Fund.

Just wanted to understand one thing. If you could please explain so there was a change in the Chief Compliance Officer, which happened a couple of days back. What exactly was the reason for his resignation?

No. So it is not actually a change. It's basically because internally, the policy we have -- the bank has taken is that as a large HFC, we have to have 3 levels below the CEO. That is what is the regulatory policy. And since now the third level below -- and that comes into [ fruition ] from 1st of October. Our present Chief Compliance Officer is the level of a AGM, whereas at 3 levels below the level of CEO would come to a DGM level. So this year, since that -- the new policy that it has 3 levels below the CEO comes into effect, we cannot continue with the present CCO who is at the level of an AGM. That is the only reason that is -- why it has happened. But the existing CCO continues in the organization as a head of -- [ we have modernized ] Head of Credit, and our new gentleman has been brought in as a Chief Compliance Officer. So it's basically because of this new requirement that it has to be 3 levels below, so it cannot be below the level of a DGM.

Understood. The other question is that is the management and the Board kind of looking at this whole issue from a more larger perspective that whether there was any sort of a convolution of these officers at the branch level and some of the offices above them, given the fact that, as you already mentioned that there were almost 200-odd instruments, which were issued and it kind of remained undetected for a fairly long period of time. Is there going to be a further due diligence or inquiry to the matter from a more wider lens or scope of investigation?

Obviously, yes, we will do a lot of things. But the first thing that was there -- that we have first and we've done is, we have reported for the Audit Committee, and the Board is obviously going to review it. And we will look at a wider [ listing ] as well and which are the processes can be further strengthened. That definitely is going to -- Board will look into it. And action also has already been initiated, and we will also [indiscernible] whether a further action is required in this particular case also in terms of staff action or whatever point will be taken.

The next question is from the line of Abhinav Anchal from SBI Life.

Sir, I have 2 questions. One, obviously, it appears that there is no reconciliation between the disbursement and the instrument. So in that light, I have like a couple of observations, one, whether our assets are also inflated by the same amount. And the second, what gives you confidence that there won't be any other incidents prior to April 2021, where these things will not be happening?

So first point regarding the assets. As I said earlier, these are not backed by assets. So the assets are not [ inflated ] to that extent. These are purely steps which have gone towards the savings bank account, okay, by misusing the check signing powers. So these are not reflected as assets. Assets all, entire portfolio of that particular brand is backed by the proper assets. There are loan files, dockets. Everything are available. Customers are there. Payment is coming, and that has been verified and customers. So that is not the issue. These were -- something like an overdrawn amount from the things and transferred to the savings bank account of the thing. So that is not to do with the assets. That is the first one. And what -- sorry, can you repeat the second part of the question? I...

Sir, the second part on that, what gives you the confidence that there wouldn't be any such incidents prior to April 2021?

Yes. So as I said, we have already gone to about 6 months prior to this. And across all of the branches, not a single incident has been found. So there is no point to start with because it is not -- there is no incident, no event in any other branch of this kind. In this particular branch, we have gone 6 months beyond the first such incident, which has also happened. So we went back. We first did to 2023, then went to '22 then '21. And then I think that is almost 6, 8 months and nothing [indiscernible]. So we stopped at that. Of course, we have -- the entire exercise has happened for all this period. And the staff also has been there during this period. So prior to this since it was somebody else, obviously, there is no scope of this particular thing happening in that sense, the branch manager.

The next question is from the line of [ Tedros ] from Tata AMC.

I just wanted to understand that since there is a centralized pool account that transfers the money to branches, is there no process of reconciliation that happens? Because over 1.5 years, there's an excess draw of about INR 38.5 crores by a branch where the book size is INR 85 crores. So nearly 40% of the book size of the branch has been drawn in excess without any assets or any documents to back this. So was there no reconciliation process between the 2 accounts?

So that has a reconciliation, but this was misrepresented, as I mentioned earlier, that it is a fund transfer. And since it's a big pool and the balance of INR 50 crores to INR 60 crores was there on a pool basis, there was no discrepancy. So it was not gone too much in detail, which is the mistake which obviously is glaringly evident. Now in this particular -- when the slicing dicing happened, and that is when this has come out, and obviously, that is something which will end the moment we go for a centralized disbursement and [ determining ] withdrawal check signing powers. So that is there. Incidentally, there is an audit also as was earlier also pointed come. There are 2 audits also which have happened. Somehow, that also got missed in the audits also by the [ CFMs ]. So somehow it is just -- I mean, obviously, there's no excuse for it, and there is no justification trying to go into any justification for it.

Is there a thought process to, for once, get an external third-party auditor and just audit all the processes of the firm and do a very, very manual review of your operations?

We will be discussing it in Audit Committee. As I said, since this came up on Monday, that is late evening, and we crystallized it by Tuesday, we immediately reported it yesterday. We will be having an Audit Committee, and I'm sure the Audit Committee will suggest and will want to look into it, and we will do it accordingly. The first thing was the reporting. So we have gone and reported. And now we will obviously look into all these things. And definitely, there could be such cases it is possible, very much possible.

The next question is from the line of Ankush Agrawal from Surge Capital.

Most of the questions have been answered. I just wanted to point out this whole issue of insider trading in a company. I mean last year when the [ fraud ] came out even and when the management resigned, that time also even before the news was announced by the company, the stock has already taken a big hit. Yesterday as well. I mean even before you announced, prices have already taken a hit, and there were already rumors. So I mean this is another area where the company should look into because it's a clear evidence that inside information is getting lead somehow.

Various points, we'll definitely look into it. But actually, as I mentioned earlier, we had filed a police complain, and it did appear in the local Ambala newspaper on Monday morning. So the first instance, when we give out [ the news ] on Friday, it was about 2 or 3 [indiscernible], which were released like this. We accordingly took the data of enter July, which was immediately available with us. And that was coming to 4 instruments of 1.45 cr. So we reported that, and immediately on Sunday, the FIR was filed in the local Ambala police station. And that appeared on the Monday news morning newspaper also. In the local news, not in the national news, but in the local newspaper, it has come. So that was probably a precursor to this whole thing, I would say. The final figure actually we arrived at only yesterday and immediately reported within 24 hours is the requirement. So first, we reported to the stock exchanges and we did so. But what you're saying is yes, true, that is true. I mean we'll have to.

The next question is from the line of Vivek Ramakrishnan from DSP Mutual fund.

Sorry, I missed a certain part of the call because of transitioning to the lift. Sir, in terms of the check, when you say funds transfer, was it assumed that it was transferred to an account within the same Can Fin housing pool because there must be some process in terms of checks and balances? Or was the whole bank staff colluding with this person to enable transfers to his wife's account.

See, the local check signing powers are available in the branch. It's a 4 men branch, 3 of the regular staff and 1 on contract. So the check was signed by the people who had the authority to sign. Normally, what happens is if I issue a check to X and Mr X will deposit it in the bank and the account will get -- will be pooled from the central this thing and will be credited to the account of Mr X. Here, the same thing was done in the name of the staff and the name of the wife, but there was no asset back to it. But the same way it was pooled. Normally, if in account to account, this -- the moment we did the entire pooling of the -- all the disbursements of the branch and the account names in which it was actually cleared this immediately discrepancy or this difference came out. This is not backed by any individual account. Otherwise, all the other instruments and all the other branches and including the INR 84-odd crore that are whatever has been disbursed from 21 April onwards in this particular branch also. All the other instruments which are coming in our this thing are backed by the individual loan account wherein for which it has been drawn. So if on the bank statement of our branch did show that it has been cleared in the name of Mr. X, there is a known account in the name of Mr. X or account of somebody who were in that builder or a vendor is Mr X and therefore, that check has been drawn is the name of the vendor or the builder. So that is also coming and matching with our disbursement memo where this is being captured. So all other cases, the account has actually been -- credit has gone to the respective account in which it should have gone as per the loan assets. The discrepancies in this is the INR 38.53 crores, wherein it has gone to an individual account of the staff and his wife. And there is no disbursement memo to back it up.

Sure, sir. And you get -- you had mentioned that it is a Canara Bank account. So would it have been caught earlier if it was another bank account? Is it just because it's a Canara Bank account that it slipped the loop?

Since it was Canara, it also came as a transfer. Otherwise, if it could have been a check gone for clearing or something, maybe it could have come, we don't know. I mean I don't think it is because it was Canara Bank it got missed out. I wouldn't say that. But yes, it was a transfer. So by oversight, I mean, so if it had been -- our pool account had been in HDFC and it had been say the account had gone into HDFC account, then also it would have shown as a transfer. So it is not that it is Canara to Canara or because Canara is a parent. It is -- the staff was smart enough to open it in the same account in which the pool account was there.

The next question is from the line of Sonal from Prescient Capital.

This is Sonal Minhas. Am I audible?

Yes, yes, you're audible. Please go ahead.

Sir, I have 2 questions. First one, since this was disclosed as a loan house property. Why are we only talking about because new memo backing it up. What were the collections against this account? And were there any -- was this disclosed as standard account? Was this disclosed as an NPA in the books? Could you just elaborate that? I have a follow-on, but I wanted to just understand this first.

No, this is not pertaining to any loan account. As I said, there is a drawal there, for example, the branch is INR 84 crore branch. There is in this 2, 3 years, 2.5, 3 years. The total disbursement say is about INR 40 crores. So against INR 40 crores, the drawal has been to the extent of INR 78.53 crores. So the assets are only INR 40 crores, only INR 40 crores would have been drawn, but INR 78.53 crores has been drawn or pooled from the central account against the disbursement of only INR 40 crores. So that is how the INR 38.53 is excess. So it's something like there are no assets -- it's not a loan account for which it was drawn.

Okay. And who was monitoring the collection again. So for example, if I understand this correctly, the assets were inflated by INR 38 crores, INR 39 crores. Is that -- is that correct? Or in your books, the assets were shown as INR 40 crores?

No, no, the loan is only...

In your books, was the asset shown as INR 40 crores or there was shown as INR 40 crores plus INR 39 crores.

No, it is shown as INR 40 crores only. So there were only INR 40 crores of loans. I mean, just a number, not exact there, INR 40 crores on the loans, but so only INR 40 crores would have been drawn to fund the disbursement, but INR 78.53 crores was drawn.

Okay. But this is a fairly simple excel analytical exercise that anybody can do. You don't even need a strong internal auditor for getting this done. This is a 5-minute exercise, which somebody can do maybe at an entry level, maybe at whatever the right level. What is it that basically the system was doing to see or oversee all this? That's the first one. And secondly, sir, whatever limited understanding we have of the banking system, such people or let's say the staff that you're basically talking about, this is kind of a creeping confidence that people get once there's an oversight into smaller things. So just a small suggestion from our side, being in the investing community by and large, is that if you can look at the entire books from the tenure of this staff or even longer, that will be great to give us confidence that this is not something which is a one-off incident between the last 2 years you're talking about, it is longer than that, maybe...

Absolutely correctly pointed out, it is a simple exercise, which should have been done. But because it was a pool account and the average balance was maintained, it was missed out. So there is a definite lapse and action will be taken. And we will also carry out -- we have right now carried out across the branches to see if it was a broader this thing. Now we will go for this particular branch. We will go deeper and also come back and we will give you the numbers. That's definitely we will do that.

And I think the minimum is for the tenure of the staff who was there. That is the minimum thing to be done.

Absolutely, we will come back on that. We will come back. As of now, our first objective was to look at it and throw the net wider and see if there is other branches there something like this is happening and up to what period. So we have done that up to 2021 April onwards for all the branches. Now for the specific branch and for the specific staff will go back in time and get it done specifically for this. We'll do that.

Sir, the second question, you always back your assets by the quality of the diligence that you do on the folios. And there are folios, which basically say there is an asset paper, there's ownership trail, whatever it is there. What is the quality of the diligence done on those papers to see that if, let's say, one paper is not -- I'm just throwing let's an example, a little bit maybe other kind of thoughts which are there, that, let's say, one property is not given loan to twice or let's say the paper is fake or there is some other kind of discrepancy in the paper because like you talked about the thoughts in the beginning of the call, that should be like a standard practice, right, that such things are not overlooked over time. So I just want to understand by the second question. What is your confidence on the quality of diligence of the papers that you received or the ownership trail that you receive based on whatever you've seen in the system over the course of last few months, if we...

Sure. See, in terms of the local documentation, we have LSR, which is given by a local advocate, that is they carry out a search. Encumbrance is verified and then that search is done. Original property documents are there, pre-sanctioned SARFAESI check that is checking with the central registry for securitization is also carried out to see if there is any preexisting charge on the property. This is over and above the chart which can come in the encumbrance certificate if -- because the SARFAESI only deals with the mortgages, whereas loans or transactions, which are not having a mortgage will not get reflected in SARFAESI for which it will come or get caught in the encumbrance certificate. So the encumbrance certificate is verified by the advocate and LSR or this thing is given. The SARFAESI check -- pre-sanctioned SARFAESI check is there. Presently, it is not that the[ FTU ] is not happening. We have implemented PerFios for the bank statement verification and the things analysis. And we -- the local branches have the right to log on to the IT website to see whether the PAN is matching or not, okay? We also have a this CKYC module wherein CKYC is also updated. So that is also verified with Aadhaar,and that has also been implemented in the last some time. In fact, for the prior period, that is the legacy data from 2017 onwards also, the CKYC has been completed. So that activity has also been done wherein the Aadhaar verification with the UIDAI database is also checked. So these things, plus there is also a PSV there is a pre-sanctioned verification report wherein the staff verifies the physical property and the stage of construction before it is there. And the valuation report is also there for all cases. So there is an external valuation. There is an external advocate giving LSR. We have this thing. And then we also do a CIBIL check before this. So those standard practices are already there. The additional fraud control unit we are doing is for again, a verification from the central team also overseeing the activities, which are done by the branches. So that is what we are also additionally implementing over and above these steps which are already there. Plus post-sanction, the disbursement documents are also verified. That process is there to complete it, and we have a central depository where all the dockets -- we have at 3 locations across the country where all the dockets are moved once the audit is completed. So that is also there and they are not available at the local branches.

Sir, I have a third question, which is more a suggestion. I have been tracking your company for the last 3, 4 years, sir. The quality of disclosures in your investor presentation have come down largely after the last MD basically came in, and I'm very direct about this. Earlier disclosures about SMAs, your quality of NPAs, even the opening, closing balance of NPA book, disbursement by locations was pretty much standard part of the debt. Given the background of these 2 events in the last 1 year, 1.5 years, it will be great if you can up the quality of your disclosures, by and large, to what they were earlier or a notch higher than what they were to disclose your SMA buckets, your disbursements. Thirdly, also benchmark given the light of this kind of a stupid fraud which has happened, basically also up and compare your processes, maybe in a 2x2 chart with industry practices and say this is what we are doing right now. This is work in progress. This is the timeline basis, which is a fairly professional practice across any larger banks who come from -- who you come from other large organizations. To give the investor community a confidence on the time line of implementation of your processes in the disclosures that you are making, hence forth for the subsequent quarters. The earlier disclosures were really good, but now the disclosures are , I would say, it is -- it is based on the [ leap ] of pay that our NPAs are in the range of 0.4% to 0.7% and trusts for that. It's pretty much that.

No, no. We -- point very well taken. We will definitely improve, and we will add definitely more data onto our presentations. So give us a quarter, we'll start doing that.

And the processes as well.

Sure, sure.

The next question is from the line of Manan from ICICI Prudential AMC.

Sir, just breaking the issue down into slightly simpler terms for me to understand. I understand there is a debit entry and a credit entry. Now the cash has gone out of the system. So there was a credit to the cash bank account, right? Where was the debit sitting? Because is the debt sitting in some P&L expense item? Or is it sitting somewhere in the asset side? -- for this INR 39 crores.

This is basically overdrawn over and above the disbursements which are there. So this is purely a liability, which should not have been on the debit side.

The cash went out, right?

That is what...

Expense got done or asset got created?

No, there was no assets. So basically, the liability, there was no advances to liability was not -- entry was not there at all. However, when the account was pooled, there was a debit to liability and credit to the head office. So there was a debit on the liability side, which should not have been there in the first place as simple as that. I mean, I think basic first year , I'm sorry, but that is -- and it's a group of absolute goof up.

Okay. Somewhere the numbers weren't adding up at all, right, or some liabilities have come down by doing this entry.

Correct.

Liabilities, how will get reinstated. So now the reversal entry will be the liabilities will get reinstated and the expense will be done.

Yes. Well, that is where we'll have to charge to the P&L, and we'll have to do it. Correct. Debit in P&L to do that. Absolutely. As the previous which got it should have been done.

Okay. So the -- so whatever liability was reduced was actually being projected as a disbursement is what you are saying from the math.

Sorry.

So the liability that was getting reduced by whatever accounting entry was getting passed, it was getting projected to the head office that this is a disbursement to a customer. Customer [indiscernible] inflated EMI payment?

There was -- it was just projected as a disbursement, but it was actually going into the savings bank account. And there was no asset to back it up. There was no disbursement actually.

Okay, okay. And which liability was getting reduced in this process because you're saying there's some liability that came down. So which liability was getting reduced?

No, no. There's an interbranch from HO the amount is pooled to do it -- so basically, it was pooled from the head office central account.

So then maybe I think there's like a INR 38 crores to 39 crores hole in the balance sheet.

Sorry?

So there is INR 38 crores to INR 39 crores hole in the balance sheet. It's not passed anywhere. Now you will pass it in the expense.

So it is in -- I mean, there is a liability which is not backed by an asset. So we'll have to debit the P&L and square up the liability.

Thank you. Ladies and gentlemen, we will take that as the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Thank you, everyone, for joining this. And we have taken your feedback, and we assure that this improvement in the disclosures and everything will happen. As I mentioned, basically, we had our first thing was to report, and we have done that, and we have carried out this exercise across all the branches. So in terms of the amount or the thing it should not exceed this figure that has been arrived at because this exercise has been carried out for the last 3 years across all branches. However, as suggested, we will carry this further for the specific staff and for the specific brands beyond this period. And -- but hopefully, nothing should come around, come about from this, that is about it. And we will take care in the presentation also, with that feedback also we have noted. Thank you very much.

Thank you. Thank you very much sir. On behalf of DAM Capital Advisors Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.