The Bombay high court on Wednesday modified its earlier order to allow Dewan Housing Finance Corp. Ltd (DHFL) to pay banks and other financial institutions that bought out the mortgage lender’s loans under securitization agreements.
Lenders have bought securitized portfolios worth ₹37,633 crore from the stressed mortgage lender, but were unable to get their repayments owing to a court order of 10 October. Had this not been overturned, lenders would have been staring at a huge set of bad loans accumulating on top of their existing pool of non-performing assets (NPAs).
To be sure, DHFL was collecting payments from borrowers, but was unable to pay lenders. Once a loan is securitized, the originator (DHFL in this case) only acts as a collection agent for the buyer of the loan pool.
Justice A.K. Menon, who heard the case in two sittings on Wednesday, said this also applies to payments DHFL had collected since 10 October, but was unable to pass on to the lenders to comply with the court order.
Acting on a motion filed by Reliance Nippon Life Asset Management Co., or RNAM, the high court, on 10 October, extended its previous stay on the payments by DHFL to its creditors, barring payments made pari passu (in equal proportion) to all secured creditors. The order was also used as the basis of similar orders passed in Axis Asset Management Co. Ltd, Kotak Mahindra Asset Management Co. and Edelweiss Asset Management Ltd cases against DHFL.
In the earlier order, the court had said that it seemed that the same securities, which were used as cover for non-convertible debentures (NCDs), were being utilized for securitization. However, the lenders’ counsel assured the court on Wednesday that the assets hypothecated under the debenture trustee agreement were separate from those securitized to lenders.
DHFL’s counsel told the court that it will ensure that a security cover of at least 1.1 times of its outstanding dues towards the NCDs is maintained, in accordance to the trustee agreements. The cover was 1.2 times as on 30 June 2019 and, according to information available with DHFL’s counsel, it was 1-1.11 times as on 30 September.
“In view of this, the order is modified to the extent that the first defendant (DHFL) shall make payments under the securitisation agreement and to other assignees of receivables," said Justice Menon.
At least eight banks had appealed against the blanket ban on payments by DHFL to unsecured creditors. These include State Bank of India, Bank of Baroda, Union Bank of India, Canara Bank, Bank of India, IDFC First Bank, Standard Chartered Bank and HDFC Bank, among others. Besides, Aditya Birla Finance Ltd and Aditya Birla Housing Finance Ltd had also filed intervention applications seeking a change in the earlier order.
Purchases of loan pools by banks help inject liquidity into non-bank lenders. Banks often buy loans from shadow lenders comprising securitised retail loans to meet the shortfall in priority sector lending.