India's bankruptcy-resolution process has just begun to find its feet with recent precedent-setting court rulings, but bankers, lawyers and insolvency experts say the system is about to face a huge test.

The non-bank financing giant Dewan Housing Finance Corp Ltd (DHFL) will go into insolvency proceedings, the central bank said on Wednesday, making it the first financial institution to test the new laws.

So-called shadow banks such as DHFL have been key drivers of lending growth in India, with their consolidated balance sheet worth a whopping 28.8 trillion rupees ($400 billion) in 2018-19, based on central bank data.

"No one knows how it will work out," said Manish Lalwani, an independent insolvency professional. "It is not clear if the existing law is equipped to deal with such cases."

With nearly 1 trillion rupees ($14 billion) owed to its staggering 85,000-plus list of financial creditors, DHFL's insolvency will be by far the largest process handled by tribunals in the three years since the bankruptcy code was enacted.

Its financial creditors range from banks to mutual funds and pension funds to deposit holders, which bankers and lawyers say could lead to conflicts over how any recoveries from the process are apportioned. That leaves little hope for vendors or other operational creditors who may also be owed money.

"In the case of Essar Steel we saw there was a precedent set when Standard Chartered Bank was not treated at par with other lenders because of the type of collateral security held. We may see that happening in DHFL's case too," said independent consultant Ashvin Parekh, referring to a recent court ruling that paved the way for ArcelorMittal to buy Essar Steel.

The government just days ago tweaked its insolvency regulations to allow for financial firms including non-banking finance companies to be forced into insolvency.

The new rules allow administrators to split the entity into good and bad assets and to divide up its retail and non-retail lending books.

But the range of stakeholders has many lawyers doubting whether the DHFL case can be resolved within the 330-day time limit for the process now set down in law.

"With the timeline and with all the investors...I think it's going to be a circus," said Vivek Daswaney, founding partner of V Law Partners.

($1 = 71.7380 Indian rupees)

(Reporting by Nupur Anand and Swati Bhat; Additional reporting by Promit Mukherjee; Editing by Euan Rocha and Hugh Lawson)


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