India needs a separate framework for resolving financial intermediaries, and not use IBC meant for resolving the bad loans of non-financial debtors for that purpose.
The RBI has done the right thing by superseding the boards of two Srei non-banking financial companies (NBFCs) and putting them under an administrator. However, it should not rush to the companies’ resolution under the Insolvency and Bankruptcy Code (IBC). After the IL&FS default created a major systemic problem, it makes sense to proactively pre-empt any such blow-up. The integrity of the financial system is paramount. If protecting that integrity entails truncating some deemed rights of the promoters of financial firms, that is part of the game. It will not do to let large financial firms with major exposure to banks and retail investors to be seen to be at risk.
India needs a separate framework for resolving financial intermediaries, and not use IBC meant for resolving the bad loans of non-financial debtors for that purpose. The resolution of Dewan Housing Finance Ltd (DHFL) is being touted by many as a success. It is hardly that. Assets worth ₹61,000 crore were handed over to the new promoter, the Piramal group, for upfront payment of ₹14,700 crore and non-convertible debentures offering a coupon of 6.75% and a tenor of 10 years, issued by DHFL under Piramal control. In which world would a company like DHFL be able to raise ₹19,500 crore at a premium of mere 50 basis points over the yield on 10-year government bonds? And, retail investors who had invested more than ₹2 lakh were left feeling betrayed. If and when the NBFC receives interest and repayment on its outstanding loans, why should the retail investors and lenders be content with steep haircuts and not receive a share of those proceeds?
The government has not mustered the will to come up with a replacement for the Financial Resolution and Deposit Insurance Bill that was introduced in the last Lok Sabha, only to stumble in the face of public apprehensions. So, the RBI could give Srei promoters a finite window of time to find the capital to repay loans and allay creditor concerns, or, failing that, hand over the NBFCs to the newly minted National Asset Reconstruction Co Ltd.