Cash crunch fears, risky exposures to debt market hurt financial stocks

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26 Aug, 2025 12:21

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Cash crunch fears in the bond market triggered a sharp selloff in the equity market for the first time in over four years. A sharp fall in the stock prices of Dewan Housing Financial Ltd (DHFL) and Yes Bank led benchmark indices to crack before recovering in late trade on September 21.

Investors panicked after old bonds of DHFL were sold at a discount (higher yield than market levels) by DSP Mutual Fund. Market participants suggested the lack of a buyer for the DHFL bonds coming shortly after Infrastructure Leasing & Financial Services (IL&FS) defaults on its interest payments to bondholders magnified liquidity crunch in the debt market and led to the panic.

The market recovered once DSP MF clarified it sold DHFL papers worth Rs 200-300 crore to improve liquidity and reduce its overall maturity profile.

According to sources, DHFL could be one of DSP's relatively high exposures in which they would be wanting to trim exposure after the recent events.

In an investor call, Chairman Kapil Wadhawan assured that Dewan Housing has a strong liquidity position and sufficient funds available to service any repayment obligations.

“We wish to categorically state that DHFL has not defaulted on any bonds or repayment nor has there been any single instance of delay on any of its repayment of any liability. We do not have any exposure with IL&FS,” he said.

Infrastructure financier IL&FS and debt holdings of some of its subsidiaries were downgraded to ‘junk’ and lost its investment rating after failure to repay debt on time over the past few months.

Wadhawan added that DHFL shall remain "cash surplus even after considering repayment till March 2019 of all our liabilities on account of CP, NCD, interest payment, bank dues etc."

Also Read: Debt and defaults: What happened to IL&FS?

Housing finance companies

Ripple effects of the DHFL-panic were also felt on other companies including non-banking financial company (NBFC) and mortgage lender Indiabulls Housing Finance.

Indiabulls Housing Finance stock plunged 35 percent to a 19-month low only to recover from the lows and end 8.2 percent weaker.

Both DHFL and Indiabulls housing finance blamed rumours for the sudden fall of the stock market.

Ashwini Hooda, Deputy Managing Director of Indiabulls Housing Finance told Moneycontrol, “It was a volatile day and there was some contagion effect playing its part. The large default (by IL&FS) grew concerns on the liquidity front and so there is redemption pressure from mutual funds, which led to the selling (of DHFL bonds).”

According to him, Indiabulls Housing Finance has the most liquid, most under-leveraged and risk management-driven balance sheet with 20 percent of it in cash, while most companies have just about five percent or less.

Hooda added, "Even if we don’t borrow a single rupee for next six months, we should be able to pay back all our liabilities, disburse all our home loans, and still be left with 25 percent margin cushion, he said adding the company has Rs 23,000 crore of liquid cash on its balance sheet."

Later in the evening, ICRA ratings agency affirmed credit rating for Indiabulls Housing Finance across various financial instruments and papers.

Sources suggest the panic intensified after it was known that in an internal meeting with banks, RBI assessed the health of top 20 HFCs, of which nearly six of them (HFCs constituting less than 15 percent of loans) had a relatively high-risk profile and hence the exposure needed to be reduced.

This further added to the pressure on the two mortgage lenders and bank stocks including Central Bank of India, Punjab National Bank, Bank of Baroda and Vijaya Bank among others.

Yes Bank

On the other hand, Yes Bank’s Chief Executive Officer and Managing Director Rana Kapoor’s term was cut short by the Reserve Bank of India (RBI) from three years to four months up to January next year.

This resulted in multiple brokerage firms, both global and domestic, downgrading the stock and reduced their target prices reflecting the near-term pain.

Yes Bank lost 28.7 percent by the end of the day while DHFL ended at a massive 42.4 percent fall, recording its steepest loss.