(Bloomberg) -- India seized control of a second non-bank lender, stepping up efforts to contain the economic fallout from the nation’s shadow banking crisis.
The Reserve Bank of India removed the management of troubled home-loan provider Dewan Housing Finance Corp. and will initiate bankruptcy proceedings, it said late Wednesday.
The surprise move reflects efforts by Prime Minister Narendra Modi’s government to limit contagion from Dewan’s debt problems into the rest of the banking system, at a time when the economy is slowing. Since a series of defaults at a large infrastructure firm thrust shadow lenders into the spotlight last year, Dewan and others have struggled as banks and bond investors choked off access to new funding.
“The intention and the message is very clear from the regulator and the government to all corporates that any defaulter will be dealt with very strictly,” said Siddharth Purohit, banking analyst at SMC Global Securities Ltd.
Read a QuickTake on India’s shadow banking crisis
A big player in mortgage lending, Mumbai-based Dewan has total debt of about $12.5 billion. Other shadow lenders include Altico Capital India Ltd. and Anil Ambani’s Reliance Home Finance Ltd.
Dewan’s share price has plummeted more than 90% so far this year.
The shadow lender had been in talks with banks to restructure its debt, and had been seeking a strategic partner to help fund an infusion of new equity. But governance concerns had hindered progress.
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The removal of Dewan’s management and the initiation of bankruptcy proceedings offer a way forward in resolving the lender’s debt problems. It follows soon after the government’s move last week to allow financial firms to be placed into the nation’s bankruptcy court, which previously only heard cases involving non-financial companies.
India’s insolvency regime was also bolstered last week by a Supreme Court ruling that paved the way for ArcelorMittal’s $5.9 billion takeover of Essar Steel India Ltd. and empowered banks to set the terms of the distribution of sale proceeds among Essar’s creditors.
Still, the slow pace of bankruptcy procedures in India may suggest there’s a long road ahead for Dewan’s creditors. Arcelor battled for more than a year to take over Essar. While its offer was approved by a bankruptcy tribunal in March under the insolvency process, the payment had been kept on hold prior to last week’s Supreme Court ruling due to a dispute among lenders on the distribution of funds.
--With assistance from Swansy Afonso and Debjit Chakraborty.
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