DHFL crisis: Why depositors may still get part of their money back

As per NHB guidelines, DHFL has invested close to Rs 700 crore in SLR securities, which are mainly bonds of state electricity distribution companies

Dewan Housing Finance Company Ltd (DHFL), which is now under the charge of Reserve Bank of India's administrator, has created a 1,500 crore  'floating charge' against the outstanding Rs 6,000 crore fixed deposits for protecting the interest of depositors.

Unlike banks where small depositors up to Rs 1 lakh are protected under the Deposit Insurance and Credit Guarantee Corporation (DICGC), no such insurance facility exists for depositors of the housing finance companies (HFCs) or non-banking finance companies (NBFCs).  

However, as per the National Housing Bank (NHB), the public deposits of HFCs are secured by a 'floating charge' on the statutory liquid assets created by way of a trust deed.

It is mandatory for housing finance companies to maintain a statutory liquidity ratio (SLR) against public deposits. Currently, the SLR requirement is at 12.50 per cent, which comprises 6 per cent of government bonds and 6.5 per cent of fixed deposits in commercial banks.  

As per NHB guidelines, DHFL has invested close to Rs 700 crore in SLR securities, which are mainly bonds of state electricity distribution companies. In addition, the company had put around Rs 800 crore in fixed deposits of close to a dozen banks. The trusteeship for creating a floating charge  for DHFL's  fixed deposits  is Catalyst Trusteeship. A mail sent to Catalyst remained unanswered at the time of filing the story.

A week ago, the DHFL became the first financial services company to be taken to Insolvency & Bankruptcy Code (IBC). As per the bankruptcy code , the secured creditors , employees and dues of employees have the first charge on assets in case of  liquidation, while fixed deposits  are unsecured  and come last. But, if there is a resolution or restructuring, fixed deposit holders do have some hopes to get their money back.

It is still unclear as to how a floating charge against deposits will be treated in case of a restructuring, resolution or liquidation. According to experts, there is every possibility of DHFL using the floating charge assets in the normal course of business.

As the name suggests, a floating charge can be lifted by the company anytime during the course of the normal operation. The fixed charge, however, is permanent in nature where company has no right to lift it without the consent of the borrower.

In fact, there are trigger points under the NHB guidelines where the trusteeship has power to act on behalf of the depositors to protect their interest.

Has Catalyst Trusteeship used any of the NHB's trigger points to protect the interest of depositors?

Under NHB guidelines, the amount due to depositors becomes payable in the event of a default by a company or if it ceases to carry business or in case it winds up operations.

Currently, outstanding public deposits of DHFL are close to Rs 6,000 crore . In May, the mortgage lender stopped premature withdrawals of existing deposits to avoid further deterioration of its liquidity position. Last month, the High Court put a stay on any payments to any creditor secured or unsecured.

Under the bankruptcy code waterfall mechanism, secured creditors come first. The banks dues are over 30,000 crore, while they owe 40, 000 crore to debenture holders.

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