The Reserve Bank of India (RBI) has decided to supersede the board of troubled mortgage financier Dewan Housing Finance Corporation Ltd. (DHFL) and said bankruptcy proceedings would be initiated against the company.
R. Subramaniakumar, former MD and CEO of Indian Overseas Bank, has been appointed as the administrator of the mortgage lender. RBI said the action was taken due to governance concerns and default by the entity in meeting payment obligations.
This is the first instance of RBI superseding the board of a non-banking financial company. The government had changed the law earlier this year to give such powers to the RBI.
Also, DHFL could be the first financial services company to face insolvency proceedings at the National Company Law Tribunal (NCLT) after the government, on Monday, issued a notification specifying the categories of financial service providers that can be taken up for resolution under the generic framework of the Insolvency and Bankruptcy Code. Till now, financial services firms were kept out of bankruptcy proceedings.
In a statement, the RBI said it “also intends to shortly initiate the process of resolution of the company under the Insolvency and Bankruptcy... Rules, 2019 and would also apply to the NCLT for appointing the Administrator as the Insolvency Resolution Professional.”
The mortgage lender, facing a cash crunch since last year after banks choked lending, has overall debt of ₹80,000 crore. Banks have exposure of ₹40,000 crore to the company. While efforts were made by banks for resolution, the process hit a roadblock as markets regulator SEBI did not allow mutual funds having exposure to DHFL to be a part of the resolution plan. Banks wanted to execute a plan in which all lenders to DHFL were involved. Efforts to change promoters’ control by selling significant promoter stake was also not successful.
Banks had begun to classify loans extended to DHFL as ‘non-performing’ indicating bleak chances of a resolution. ICICI Bank, Union Bank of India, Central Bank of India and UCO Bank are some lenders that have classified the loans as NPAs. If DHFL is admitted for insolvency, banks will have to increase provisioning for the account to 50%, as in the case of other insolvency proceedings. This will hurt banks’ profitability to a large extent.
SBI has an exposure of ₹7,000 crore and has already provided for ₹1,400 crore till the end of September.
