Shadow banking crisis: Government to start DHFL's bankruptcy proceedings

Mumbai: India's central bank on Wednesday said it will begin bankruptcy proceedings against Dewan Housing Finance Coporation Ltd (DHFL), a move that puts the country's ailing shadow banking sector back in the spotlight.

DHFL's owes its lenders nearly 1 trillion rupees (USD 14 billion), including several mutual funds, banks, pension funds, insurance firms and retail investors.

The central bank's move on DHFL comes after a string of defaults by rival IL&FS last year, which triggered fears about contagion in the financial sector and forced the government to take over the lender.

"We are staring at a further liquidity crunch," said the head of an Indian housing finance company, who declined to be identified.

"Banks will now become even more cautious about non-banking financial companies as going to bankruptcy court destroys values because the realisation may not be much."

On Wednesday, the Reserve Bank of India said here it had superseded the board of DHFL and appointed R. Subramaniakumar, the former chief executive of state-run Indian Overseas Bank as the administrator.

In a media release, the RBI said it was taking the decision "owing to governance concerns and defaults by DHFL in meeting various payment obligations".

DHFL did not respond to a request for a comment.

The RBI's decision on DHFL, the first of its kind, comes after the federal government this month empowered the central bank to refer cases of stressed banking finance firms with assets of at least 5 billion rupees to the insolvency court.

DHFL submitted in September a draft resolution plan to banks proposing to convert debt to equity, while seeking to sell assets and raise more capital.

Given the slow progress, banks instead earlier this month turned to the government for help, but sources told Reuters New Delhi was not inclined to help as DHFL is a private company with limited links to the government.

"Now all creditors will be under one umbrella which helps," said an Indian banker who is a lender to DHFL and supportive of the RBI's approach.

Shadow banks play a critical role in India's economy. The consolidated balance sheet size of shadow banks in India was 28.8 trillion rupees during 2018-19, according to RBI data.