New framework to bail out stressed financial companies likely today

Amid the crisis at Dewan Housing Finance (DHFL), financial sector regulators are planning a framework for resolving stressed financial conglomerates.  The new framework, which will be discussed by the regulators at a meeting in Mumbai on Friday, will help adopt a uniform approach on bailing out such companies. The process is hampered now because of a lack of coordination and inter-regulatory issues.
 
Sources in the know of the developments said an inter-regulatory panel of the Financial Stability and Development Council (FSDC), which includes chiefs and senior officials of the Reserve Bank of India, the Securities and Exchange Board of India and the Insurance Regulatory and Development Authority of India, will meet at the RBI headquarters.
 
Sources said the regulators would identify the companies that would come under the new mechanism and require a lifeline. “It will be on a case to case basis; not every finance company would come under this. The regulator will decide certain parameters based on which financial conglomerates would be shortlisted,” said a regulatory official privy to
the development.
 
This mechanism will not cover companies who are already under insolvency or had initiated a resolution process under the Insolvency and Bankruptcy Code (IBC), sources said, adding that DHFL and other systematically important non-banking finance firms may not come under this new framework.
 
Explaining the new mechanism, another source said that if an arm of a conglomerate defaults, then not only regulator concerned but all the regulators should step in and proceed the with resolution. At present, each regulator is bound by its laws and they act as per their sectoral regulations.   Sources say regulators may advise the parent firm of the particular subsidiary to come forward and bail out the stressed arm. Regulators may give certain exemptions if such a scenario arises. For instance, when LIC became majority stakeholder in the cash-strapped IDBI Bank, the latter faced Sebi’s takeover code hurdle. At present, legal complications may arise if the parent tries to bail out its group company since balance sheet of each company is different.
 
“When a company is in stress and looking for resolution plan, all regulators should make a joint effort if there is a scope of revival,” said Ashwin Parekh, an independent
banking expert.
 
Currently, there is a lack of coordination which is critical. Each case cannot go to IBC especially the finance firms. There has to be different approach for each companies which is facing liquidity crunch," said Ashwin Parekh, an independent banking expert
According to him, the central bank is losing grip over many decisions leading to shrinkage of the whole banking space. This is the need of the hour where the regulator should follow holistic approach.
 
Whatever the haircut a lender decides, it should be acceptable to all the regulators, said another expert. Currently, all regulators are not on the same page as there are both secured and non-secured creditors are involved, where in majority of cases, the mutual funds exposures are substantially high.
 
Major NBFCs are facing an acute liquidity crunch after the IL&FS group defaulted last year. They are selling their non-core assets, and securitising retail assets to banks in order to raise funds as markets are not giving them money anymore and loans from banks are becoming sparse.
 
Meanwhile, DHFL, India’s third-largest housing finance company, has been downgraded to default category, alongside Reliance Capital and the IL&FS group. All three were considered AAA once.