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The National Housing Bank (NHB) has classified the refinance account of Star Housing Finance Ltd as “fraud” following audits that flagged alleged phantom loan accounts, fund diversion and other irregularities at the affordable housing lender. A forensic audit reportedly identified loan accounts that did not correspond to genuine borrowers, along with concerns over fund utilisation, revenue recognition, employee loans and the pledging of the same loan pool to multiple lenders. The development comes as the company faces financial stress and explores a proposed change in ownership and fresh capital infusion.
The NHB action follows a series of audits into the company's lending and financial records. A snap audit conducted earlier this year had raised concerns over the creation of phantom loan accounts and other transactions, following which the company submitted a fraud monitoring report to the housing finance regulator.
A subsequent forensic audit commissioned by NHB examined the company's loan records and operations in greater detail. The investigation flagged alleged ghost or phantom loan accounts, including cases where funds were reportedly disbursed without corresponding genuine borrowers. The audit also raised concerns over the use of loan proceeds for activities unrelated to normal housing finance operations.
The findings extended beyond the loan accounts themselves. Auditors reportedly identified concerns around the treatment of EMI receipts, management of non-performing assets and the recognition of income from accounts that were allegedly not genuine. Suspected irregular expense vouchers and the creation of questionable fixed assets were also highlighted during the examination.
Another significant concern involved the security backing the lender's borrowings. The audit reportedly found instances where the same underlying loan pool had allegedly been pledged to more than one lender, raising questions over the adequacy of controls surrounding the company's lending portfolio and collateral management.
NHB had issued a show-cause notice to Star Housing Finance in May, seeking an explanation over why its account should not be classified as fraud. After examining the company's response and the findings of the forensic audit, the regulator concluded that elements of fraudulent conduct were present in the company's activities and operations.
Star Housing Finance has acknowledged receipt of the NHB order and said it is working towards taking corrective measures in response to the findings. The company is also pursuing a proposed change in ownership under which a new investor could acquire a majority stake and provide fresh capital, subject to regulatory approvals.
The proposed ownership transition comes at a difficult time for the company, which has also experienced senior management changes. Its chief executive stepped down recently, following the earlier departure of its chief financial officer. The company has appointed two independent directors as part of efforts to strengthen its board and is expected to undertake further changes subject to approvals.
The regulatory action has also affected investor sentiment. Star Housing Finance's shares closed at INR 4.99 on August 27, down 1.96% on the day, while the stock had declined substantially over the preceding year.
The classification as fraud is a serious regulatory development, but it does not by itself amount to a final determination of civil or criminal liability. Further regulatory, investigative and enforcement processes will determine the consequences arising from the findings and establish responsibility for any wrongdoing that is ultimately proved.
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