Union Bank Says Lenders May Be Forced To Convert Half Of DHFL Debt Into Equity

Resolving Dewan Housing Finance Corporation Ltd.’s over Rs 90,000 crore debt is “not so easy” and banks are considering converting their outstanding into equity, Union Bank of India said.

Rajkiran Rai, the managing director and chief executive for the state-run bank, which is the lead-lender to the crippled housing financier, clarified that if the banks take equity stake in the company, it will be for a short -term, which is till they get a suitor.

DHFL owes over Rs 45,000 crore to banks, and the rest to other financiers including mutual funds, pension funds and insurers, which are not regulated by the Reserve Bank of India.

“It’s not a normal resolution process. It's a financial company. Here the creditors are banks, insurance companies, pension funds and mutual funds. It is not so easy. In normal resolution, its banks and NBFCs, so this is new to us also,” Rai told reporters on the sidelines of the annual banking industry event Fibac.

DHFL has become the poster-boy of the NBFC crisis that afflicted the financial sector after the infra-lender IL&FS went belly up last September.

Rai said converting debt into equity is “one of the ideas” on the table as lenders seek to wriggle out a solution.

“Even if banks acquire equity, it will be for a very short-term. But it will become a long-term pain if banks fail to get a good investor and we are not ruling that eventuality as well,” Rai said.

However, he did not offer specific comments on questions surrounding how other lenders to DHFL like the debenture trustees and pension funds will be a part of the inter-creditor agreement, which is essential before any resolution begins under the new RBI norms.

“So many regulators are involved in this. There is RBI, then there is Irdai and alsoSEBI It is not so easy. But for us banks, thankfully it's easy as our regulator allows it,” Rai said.

It can be noted that earlier this month, governor Shaktikanta Das had said that the RBI was in touch with the Securities and Exchange Board of India and insurance watchdog Insurance Regulatory and Development Authority to allow mutual funds and insurers to become a part of the inter-creditor agreements.

Meanwhile, Arijit Basu, a managing director at State Bank of India, which also has exposure to DHFL, said lenders are “evaluating” resolution plan.

“We are bankers who have lent, there are others who have also lent like MF, insurers, pension funds. All have to be brought on the same page if we have to have a resolution. Both the banks and the regulators are looking at this issue very closely,” Basu said.

When asked specifically if everybody is on board with the plan being discussed, Basu initially said everyone is working “jointly to find a solution.”

“...all the regulators have to come on board and give their approval. That is moving forward in a very coordinated and systematic manner,” Basu said.