Dewan Housing Finance Corporation Ltd. (DHFL) is a deposit-taking housing finance company, headquartered in Mumbai with branches in major cities across India. DHFL was established to enable access to economical housing finance to the lower and middle-income groups in semi-urban and rural parts of India. DHFL is the second housing finance company to be established in the country. The company also leases commercial and residential premises. DHFL is among the 50 biggest financial companies in India. It is a non-banking financial company, also known as a shadow bank. This means it doesn’t have a banking licence or access to central bank liquidity, but is nevertheless involved in financial services – in this case, primarily giving loans to home buyers in India’s tier 2 and tier 3 cities.
Now its stock price has fallen by around 90 per cent over the past year and there are apprehensions about the viability of the company even as it is in the process of figuring out how to come out of its financial troubles. On July 14, Dewan Housing Finance Corporation (DHFL), reported a net loss of Rs 2,223 crore for the fourth quarter (Q4) of 2018-19. The result was in contrast to Rs 134 crore of net profit that DHFL reported in the same quarter of the previous fiscal year (2017-18). Not surprisingly, the full-year results also showed a massive decline. The company posted a net loss of Rs 1,036 crore in FY 19 when it in FY 18, it had announced a net profit of Rs 1,240 crore. If we listen to the latest news about companies we saw:
— Sep 21: DHFL got attention when DSP Mutual Fund sold Rs 300 crore of DHFL papers at 11 per cent in the secondary market, way higher than the traded rates sparking speculation that DHFL could be facing liquidity issues, which has been strongly denied by the company.
—Jan 29: An online investigative portal alleged that DHFL promoters had lent money to ‘shell companies’ allegedly linked to the promoters who have used this money to buy assets abroad.
—March 7: Its share price post the accusation fell further, prompting Care to downgrade the ratings of various debt instruments of DHFL by a notch.
—May 19: CARE Ratings downgraded DHFL’s FD programme worth Rs 20,000 crore from ‘A’ to ‘BBB-‘. CARE A signifies “low” credit risk, while CARE BBB- signifies “moderate” credit risk.
— May 21: DHFL stopped acceptance and renewal of fixed deposits. Also stopped renewals and premature withdrawals from existing fixed deposits on hold.
—May 30: Informed the stock exchanges that it will not be able to furnish the audited standalone and consolidated financial statements for FY19 within the time stipulated by SEBI norms.
—June 4: Delayed interest payment on its bonds and bond repayments worth Rs 960 crore due on June 4.
—June 5: ICRA, CRISIL, CARE and Brickwork Ratings (Brickwork) have downgraded credit ratings on commercial papers of DHFL to ‘D’ (Default) owing to liquidity
But how this started? DHFL’s troubles started when a big non-bank financial company — Infrastructure Leasing & Financial Services (IL&FS) — defaulted on its debt obligations in September 2018. IL&FS was found to be afflicted with a serious asset-liability mismatch, and its performance resulted in many investors in the NBFC sector to hit the pause button for fresh investment. DHFL’s finances, too, suffered as a result of declining investments and rising demands for meeting its obligations. Essentially, since September last year, DHFL has been playing catch up on its financial obligations. That too without fresh money to count on and worsening loans portfolio. Many NBFCs rely on short-term borrowing to finance long-term lending, which puts them in a difficult spot when there is a liquidity crunch. In September 2018, after the IL&FS crisis emerged, DHFL’s stock also took a hammering, by as much as 60%. Then, in January, Cobrapost claimed that the company’s promoters were involved in Rs 31,000 crore scam to siphon off money. The company denied these claims and later said that an independent chartered accountant’s inquiry found them to be untrue. Nevertheless, the combination of factors put DHFL in a difficult place, forcing the company to sell a number of its businesses to ensure it could pay back on debt. Regardless, on June 4, the company failed to pay about Rs 900 crore worth of interest, prompting rating agencies to downgrade all of its commercial paper
The company insists that this is only a temporary problem and has said that it will pay back the amount within the seven-day grace period. If it can do so, this will allay some fears about this being an “insolvency issue” – whether the company itself can survive. Instead, it will become just a “liquidity issue”, suggesting the company just needs more time to mobilise money. DHFL has insisted that the underlying assets that it holds, a big chunk of which are house loans, are valuable and have a very low non-performing asset percentage. But those underlying assets are worth about Rs 1 lakh crore. As a consequence, if this is indeed a solvency issue, if the company’s survival itself is uncertain, it could be a huge blow to India’s financial markets. This will lead to further panic – and tighter liquidity – across the system. If the company fails, that will affect all of those that have extended credit to the company. That includes about Rs 50,000 crore from banks, another Rs 30,000 crore from the Life Insurance Corporation, pension funds and more. In other words, this isn’t about just one company failing: it is a danger to the already-beleaguered banking system. As of Q4 FY 19, DHFL had almost Rs 1.2 lakh crore of assets under management. DHFL’s financial health is a matter of concern for even the common man because some of the biggest investors in DHFL are public sector banks and mutual funds. If DHFL was to struggle in paying back, the loss would be spread across the financial world. Wadhawan says DHFL in the process of submitting its resolution process under the inter-creditor agreement as entered into by banks. The terms of a resolution will be final by July 25. DHFL is also trying to identify a strategic investor to bring in fresh equity
One sector has already been affected: mutual funds, which allow investors to put their money into a selection of stocks as picked by a fund manager. Indian regulations mean that once payments have missed their due date, rating agencies have to move immediately to change the rating of the company, in this case, move DHFL down to “D”. Subsequently, mutual fund companies have to immediately follow suit and markdown all DHFL debt 75%. That means that, if a mutual fund owns DHFL debt – even if it is not the bonds that the company was unable to pay in time – it has to be marked down 75%. UTI Mutual Fund, for example, which owns a large amount of DHFL paper has written down all of that debt completely, meaning it doesn’t expect to get anything back. This may change if DHFL does indeed manage to pay the money back as promised. But regulations mean rating agencies cannot immediately change the company’s grade. As a result, mutual funds and their clients will have to be prepared to not earn that money back and also to guard against speculative investors hoping to make a quick buck.