Everyone knew Dewan Housing Finance (DHFL) was a ticking time bomb, with news of the company facing liquidity issues coming to light when infrastructure leasing company IL&FS defaulted on its loan. Yet banks and mutual funds did precious little with their holding of DHFL’s debt.
Rating agencies too sat on their recommendation till DHFL ‘delayed’ the payment of a Rs 1,000 crore obligation. DHFL on its part is saying that it has merely delayed the payment and not defaulted on it.
But it seems rating agencies do not want to take DHFL and its management at face value and have called the ‘delay’ for what it is – a default.
Credit rating agencies have downgraded commercial papers outstanding of Rs 8,500 crore to default. But this is just the start of a new set of problems for the NBFC sector which has been in a crisis state since IL&FS default.
DHFL has a loan outstanding of Rs 1 lakh crore with public sector banks funding nearly half of it. It’s not the default on a Rs 1,000 crore loan or a downgrade of Rs 8,500 crore that is the problem but worries about the entire Rs 1 lakh crore that is scaring the market.
Debt mutual funds NAV that generally move in a band of a few percentages during a year have seen a drop of over 30-50 percent in a day. Mutual funds have an exposure of Rs 5,400 crore and have to mark down the NAVs of their bonds by 75 percent.
While mutual funds have already taken a hit the problem has now shifted to banks who hold the biggest chunk of the loan. The risk is that banks would again go on a lending freeze citing the DHFL issue.
Furthermore, there is a risk of cross-defaults. Chances are lenders of DHFL may be sucked in causing a crisis to the entire sector.
Prima facie the crisis does look severe, but there is some relief from the fact that DHFL has a sizable and performing loan book. It collects Rs 2,200 crore as monthly instalment. Further, the company has assets which can be monetised.
The group has been working to bring in strategic investors and securitize its non-core housing exposure. Reports say that DHFL is in talks with Oaktree Capital for selling off developer loans of Rs17,000-18,000 crore. However, these developments have not yet borne fruit. The company may now have to press the panic button and may have to sell the assets at a lower valuation than what they would have accepted earlier.
Time is of the essence here. DHFL and government agencies will have to work at top speed to contain the crisis. As of December 2018, DHFL had assets under management of Rs 1.3 lakh crore and loans of Rs 1 lakh crore. The crisis can be contained but the action has to visible and not obfuscated by using words such as ‘delayed’ rather than ‘defaulted’.
The asset sale and money from the stake sale of its affordable housing finance company Aadhar should be used to pay back the money as soon as possible. Repayments over the next two months are Rs 6,000 crore and collections from monthly payments are Rs 4,400 crore. The numbers say the issue is manageable if all those working on it address it with a cool head.
For the longer-term there is no substitute to better and more stringent supervision of NBFCs. Steps need to be taken to ensure they are well-capitalised and risks are mitigated.
The Jet Airways issue was poorly handled by the management and banks and a repeat of the same will be catastrophic. The recent rate cut by RBI will have little meaning if confidence on the ground is not restored.