Bankers worry DSP Mutual Funds' legal action will delay rescue of DHFL; other creditors may be pushed to take legal action

Mumbai: The resolution plan of one of India’s biggest shadow banking firms, Dewan Housing Finance Ltd (DHFL), may be delayed as its creditor DSP Mutual Fund has initiated legal proceedings against it, two banking sources told Reuters.

DHFL ran into trouble late last year as cracks in the shadow banking system in India began to emerge after the near collapse of another financial firm, IL&FS, stoking fears of a broader contagion.

In July, DHFL said it was “undergoing substantial financial stress” and may not survive as a going concern. Its auditors then raised several red flags around its financials, deepening worries that a crisis in the shadow banking sector was far from over.

DHFL owes nearly Rs 1 trillion ($14.35 billion) of debt to its creditors including banks, mutual funds and insurance companies. The firm has submitted a revival plan to the banks which is being evaluated.

DSP Mutual Fund said on Friday it had initiated legal action against DHFL after it failed to pay 50 percent of the Rs 1.5 billion it owed to the asset management firm.

Two banking sources with direct knowledge said they now feared that DSP’s action would push other creditors to take similar legal action against DHFL to recover their dues. “After one firm files a case, there are other parties as well that end up taking legal recourse, and we are worried about that now,” said one of the bankers, who is part of the restructuring process.

DSP in a statement on Friday said its legal action was aimed at recovering its remaining dues and it had not done anything to disturb DHFL’s rescue plans. DHFL did not immediately reply to an email seeking comment.

Banks have signed an inter-creditor agreement to come up with a solution to tackle DHFL’s debt. Mutual funds that are not part of that agreement can take legal action to recover their dues.

However, the central bank rules say that three-quarters of lenders by value of outstanding credit and 60 percent by number must agree on a restructuring plan so that it can be cleared, making it critical for mutual funds to be on-board with the plan.

“The focus should have been on resolving DHFL’s crisis urgently, but this legal action will only end up adding to the problem and stalling the process,” said the second source.