DHFL is no IL&FS yet, but it isn’t far from getting there unless a Santa shows up with bag full of good money

One of the largest non-banking finance companies (NBFCs) housing finance firm in India, Dewan Housing Finance Ltd (DHFL), has just announced that it will not accept any fresh deposits or renew the existing ones. Also, premature withdrawals have been put on hold except in cases where there is a proven medical or financial emergency. The statement has triggered panic with DHFL shares tumbling in early trade on the BSE touching an intra-day low of Rs 107.15 apiece. The shares are trading around 16 percent down at the time of writing this. “There is indeed a liquidity problem with DHFL. We have stopped looking at it a while ago and advised our clients to stay away,” said a Mumbai-based analyst on condition of anonymity. [caption id=“attachment_6023581” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] What has happened with DHFL? Everyone knows that the company has been facing a liquidity crunch for a while. At the time of the IL&FS crisis, the whole NBFC industry came under a shock. DHFL got attention when DSP Mutual Fund sold Rs 300 crore of DHFL papers at 11 percent in the secondary market, way higher than the traded rates raising fears that borrowing costs may be shooting through the roof. The stock markets panicked as large investors dumped these shares along with other NBFC stocks. With DHFL clarifying on its liquidity position, further damage was averted then. What is the immediate trigger now? To begin with, DHFL hasn’t so far defaulted on any payments. It has honored all repayments. But, the trouble happened when a spate of rating downgrades happened on its papers. Recently, rating agency CARE downgraded the fixed deposit programme of DHFL worth Rs 20,000 crore from CARE A to CARE BBB- (Credit Watch with negative implications). This, according to CARE Ratings, means ‘moderate’ credit risk. According to the existing regulations, an NBFC can’t accept public deposits with such low ratings. This is one reason why DHFL has now stopped taking deposits. Restriction of premature withdrawals may be due to the company’s tight liquidity situation. Not just CARE. Early this month, CRISIL downgraded DHFL commercial paper worth Rs 850 crore too on account of the weak liquidity condition of the company. DHFL’s commercial papers were downgraded to A4+ from A3+. Its rating also continues to be on ‘Rating Watch with Negative Implications’. DHFL’s liquidity dropped to Rs 2,775 crore as of end-April. CRISIL noted that the downgrade is driven by a more-than-expected reduction in the company’s liquidity because of further delays in fundraising from sell down of project finance loans and lower inflows from the securitisation of non-housing loans. DHFL’s scheduled aggregate cash outflows (including loan repayment and securitisation payouts) till July 2019 remain high, at around Rs 8,400 crore. Other raters like ICRA took a pessimistic outlook too on DHFL. ICRA has revised the rating on the commercial paper programme of DHFL from A3+ ‘Watch with Negative Implications’ to A4 ‘Watch with Negative Implications’. What are the implications of the DHFL crisis? If the DHFL cash situation worsens, it will have systemic implications. There are as many as 164 schemes across 23 asset management companies with total industry exposure to DHFL alone at around Rs 5,183 crore, as on 30 April 2019, according to data provided by Value Research, Livemint reported. In absolute terms, UTI Asset Management Co has the highest exposure to DHFL papers, followed by Reliance Nippon Asset Management Ltd, it said. The trust deficit that is being built on DHFL’s decision to stop accepting fresh deposits will have a cascading impact on other housing finance companies (HFCs) in general and NBFCs in particular. The Reserve Bank of India (RBI) will have to step in sooner than later to assure the depositors. But, DHFL isn’t an IL&FS yet. As mentioned earlier, DHFL hasn’t defaulted on any payments yet. The current action is due to the rating downgrades. For a while now, DHFL has been trying to get institutional investments. There have also been allegations of fund diversions against DHFL following which the government initiated a probe . The company has denied all charges. At this stage, it will be too difficult for DHFL to get people to put money on the table unless it gets ready for a majority stake sale that too even from large private equities focusing on distressed funds. “That seems to be the only way out,” said the analyst quoted above.

Clearly, concerns about the rising costs of borrowings are clearly dominating the investors’ psyche. There is a range of reasons at play. These include global markets turning volatile, crude staying high, US economy picking up and pushing the interest rates higher and, certain weak domestic economic fundamentals such as a nose-diving currency, widening current account deficits (CAD) and a big mess in the banking sector.

That apart, a senior trader told this writer that markets may be on a tipping point and after a big rally, large investors may be finally looking at high valuations with caution. Although the sentiments are battered primarily by the IL&FS-triggered liquidity shocks, there is a bigger concern that is emerging on the currency front. Despite the government’s bail-out package and government bureaucrats ‘talking up’ Rupee, the currency has not recovered from the 70 levels against the US dollar. At a larger level, the DHFL episode is a warning to the investors that the NBFC space is not out of the woods yet. The dream run that India’s shadow banks enjoyed for a long period may be finally over. (Data support by Kishor Kadam)