DHFL mess deepens: Has India’s banking regulator learnt its lessons from shadow banking episodes yet?

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26 Aug, 2025 12:21

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Dewan Housing Finance, DHFL, saddled with close to Rs 85,000 crore debt and the first such case of bankruptcy that entered India’s NCLT court, is proving to be a tough case to crack for everyone who is trying to fix the mess--from courts to the regulators.

The case was referred by the RBI in November last year to the NCLT court. Two months later, there isn’t any notable progress yet. Banks, who have reportedly agreed to dilute bidding terms to get a buyer, are not lucky yet. Creditors also agreed to let the NBFC resume lending operations but since depositors have moved the Supreme Court against this decision, this plan too has hit a roadblock.

Adding to the woes, some of the large lenders including State Bank of India has tagged the DHFL account as fraud after a forensic report found that DHFL probably engaged in lending to entities linked to promoters or in violation of prudential norms. All these make an early resolution highly difficult for DHFL’s lenders. This, unfortunately, also means more sleepless nights to DHFL’s retail depositors who have already submitted Rs 4,800 crore worth claims to an RBI-appointed administrator.

Industry in a mess

India’s problematic shadow banks, which exposed their riskier side to the financial system with episodes like Dewan Housing Finance (DHFL) and Infrastructure Leasing and financial services (IL&FS), are in need of an urgent asset quality review.

The Reserve Bank of India (RBI) undertook a major exercise in 2015 under former RBI governor Raghuram Rajan to get the dirt hidden under the balance sheets of state-run banks out. It is now the turn of shadow banks, which have high inter-linkages with the broader banking system. Banks have over Rs 7 lakh crore loan exposure to these companies at end November.

IL&FS group resolution

IL&FS collapsed around August 2018 when it started defaulting on bonds that came due to investors. The company, which started as a road construction financing company had quietly grown to around 348 subsidiaries and amassed a debt pile of about Rs 91,000 crore by the time the crisis broke out in the group. The NBFC merrily rolled over securities until things came to a grinding halt. Rating agencies, analysts and regulators waited till the last moment to act.

When IL&FS finally started to default on its payments to institutions, it triggered panic in financial markets. In October 2018, government set up a panel under veteran banker Uday Kotak to set the resolution process rolling in IL&FS empire. Late last year, at the new board’s first AGM, Kotak said through resolution the new board expects to recover at least half of Rs 90,000 crore debt on IL&FS books. That work is still in progress.

An NBFC AQR?

The logical outcome of the NBFC crisis was that investors developed a trust deficit on shadow banks and banks gradually turned wary on lending to these institutions, pushing up their credit costs. There is no clear estimate on the extent of problems in the NBFC sector even now. NBFCs rely on borrowing from banks and market, unlike banks which can raise money from deposits.

Till November, the banking sector has lent Rs 7.3 lakh crore loan outstanding to NBFCs. The exposure has grown by 29 percent over the 12 months till November 2018. If the banking regulator has learned its lessons from the DHFL, IL&FS episodes, it should put the shadow banks though a comprehensive asset quality review to separate the bad apples from the good ones. The process shouldn’t delay now.