MUMBAI/NEW DELHI (Reuters) – India’s government has no plans to participate in the rescue of Dewan Housing Finance Corporation Ltd (DHFL), according to two sources involved in talks on how to restructure the shadow bank’s near 1-trillion-rupee ($14 billion) debt.

A consortium – led by Union Bank (UNBK.NS) and State Bank of India (SBI.NS) – was set up to restructure DHFL’s (DWNH.NS) debt a month after it first defaulted in June.

But having struggled to come up with a rescue plan, the banks last week turned to the government for help, the two sources directly involved in the talks told Reuters. But as DHFL is a private company with limited links to government, New Delhi is likely to stay clear, said the sources, who requested anonymity as the discussions were private.

“There is no question of the government issuing directions to the banks (to support DHFL),” one senior government official with direct knowledge of the issue told Reuters.

DHFL is currently classified as a “stressed account” on creditors’ books but will slip to a Non-Performing Asset (NPA) by Dec. 31 unless a resolution is found.

That means banks will have to set aside a higher provisioning amount and it will also impact the overall financial health of the lenders.

“If the government of India steps in, it will be a welcome step but our talks suggest that it is unlikely to happen,” said the second source, from one of the lead banks in the consortium.

DHFL’s creditors include mutual funds, pension funds, insurance firms and a wide array of retail investors, and its potential collapse could impact India’s already ailing banking sector and further weaken economic growth.

“Risk aversion in the system has increased in the past few quarters… The situation could worsen if DHFL’s debt can’t be restructured,” said Mona Khetan, banking analyst at Reliance Securities.

A government spokesman declined to comment. DHFL did not respond to a request for comment. Neither Union Bank nor SBI were immediately available for a comment.

“UTTER CONFUSION”

Banks, that have lent nearly 400 billion rupees to DHFL, are looking to convert their debt into DHFL equity and receive a 51% stake in the shadow bank.

But mutual funds and a majority of DHFL’s over 85,000 bondholders have rejected the banks’ plans.

The Serious Fraud Investigation Office (SFIO) is also investigating DHFL after a forensic audit by accounting firm KPMG suggested that money was siphoned off from DHFL to other entities.

A government source said on Thursday that an initial probe into the case concluded there had been “diversion of funds” but stressed that banks were free to proceed with their resolution plans despite the ongoing SFIO probe, which could last up to six months.

Banks are preparing to ask authorities if they can only set aside the amount under investigation and restructure remaining loans, three sources briefed on the plan said.

Typically, a fraud investigation requires that lenders set aside the entire questioned loan amount for four quarters.

“We are still continuing with the plan but no one knows anything about what may happen,” said one of the bankers. “There is utter confusion.”

Source: Read Full Article