Mumbai: In the six decades since the liquidation of the Palai Central Bank, no scheduled commercial bank has been allowed to fail. And not a single depositor of commercial banks has lost money. But now, possibly for the first time, depositors of beleaguered non-banking financial company (NBFC) Dewan Housing Finance Corporation Ltd (DHFL) are set to lose money.
On 17 January, the DHFL’s committee of creditors (CoC) — which are bankers — approved Piramal Capital and Housing Finance Ltd’s offer of around Rs 37,000 crore for the company, which has a debt of around Rs 85,000 crore.
The move came after the Reserve Bank of India (RBI) superseded the board of the mortgage lender in 2019, following concerns over governance, and initiated resolution under the bankruptcy laws.
The CoC plan will mean all the creditors will have to take a haircut, since Piramal’s offer covers only a part of the debt. But, according to the approved plan, it is the depositors who will take the maximum haircut — they make up for admitted claim of Rs 5,375 crore, of which only Rs 1,243 crore will be paid (23.1 per cent).
This is because the fixed deposit holders or the investors of non-convertible debentures (NCDs) are not secured creditors. The commercial banks are.
When a bank extended a loan to DHFL, the latter’s assets, financial or physical, were kept as collateral with the banks. As a result, the bank loans to DHFL are secured. This is in contrast with public deposits as the public or any such institution gives the money to a bank or an NBFC without asking for collateral.
According to the Insolvency and Bankruptcy Code (IBC), secured creditors are the highest priority to recover their dues. In the liquidation hierarchy, depositors stand low since they are unsecured creditors. So proportionately, banks will recover more than any depositor.
FD holders reject plan
DHFL has about 77,000 retail fixed deposit holders, apart from 3,500 institutional fixed depositors. According to the resolution plan, FD holders of up to Rs 2 lakh will get their entire money back. However, above Rs 2 lakh, only 25 per cent of the money due will be paid.
“We are now 400 plus petitioners who are FD holders. FD holders have rejected the resolution plan. Because FD holders up to Rs 2 lakh was getting paid 100 per cent, beyond Rs 2 lakh they were only getting 25 per cent. So we rejected the resolution plan,” Vinay Kumar Mittal, who is a lead petitioner on behalf of the FD holders, told ThePrint.
Mittal says, there are about 50,000 FD holders whose deposits are up to Rs 2 lakh. The amount involved for the remaining 27,000 FD holders is around Rs 1,400 crore. “Our demand is very clear. You pay retail FD holders 100 per cent as per the law, including whatever interest is due,” Mittal said.
“We are going to file another petition to an appropriate authority seeking action against National Housing Bank, RBI and DHFL for closing their eyes willfully and deliberately when the scam was going on,” he said.
While the committee of creditors has approved the resolution plan, the case is far from over. According to analysts, there are legal risks still.
“The biggest risk, in our opinion, is legal risk. DHFL’s resolution process has been ongoing for over a year, and the bidders have faced many hurdles in the process. Legal action may be taken on the verdict of the Committee of Creditors against this decision,” broking firm Motilal Oswal said in a note to its clients.
Contrast with bank deposits
DHFL was accepting public deposits with permission from the central bank. Unlike banks, NBFCs like DHFL need RBI’s prior permission to accept public deposits. But NBFCs are only allowed to accept term deposits or fixed deposits, unlike banks, and not demand deposits like savings account deposits.
Deposits with banks are considered safer than with NBFCs as bank deposits up to Rs 5 lakh are insured. This means if a bank goes belly up, depositors will get back their money up to Rs 5 lakh. This insurance cover is not available to NBFC depositors.
Moreover, as noted earlier, commercial banks have been allowed to fail in nearly 60 years. Be it crisis-hit Global Trust Bank, Yes Bank or Lakshmi Vilas Bank, the government and the RBI have ensured that no depositors of commercial banks lose their savings.
The bankruptcy code is not applicable to commercial banks. When a bank is in trouble, the authorities swing into action to save it.
However, despite this safety in commercial banks, depositors put their savings in NBFCs as they offer higher interest rates as compared to bank deposits. The same holds true for NCD holders. NCDs offer much higher returns than bank deposits — but with the caveat of higher risks.