DHFL ‘Demise’ Highlights Larger Problem Of Funding Crunch At NBFCs

Rating agency Fitch has said the liquidity crisis at Dewan Housing Finance Corporation (DHFL) highlights the bigger problem of funding crunch at India’s non-banking finance companies (NBFCs) sector. The rating agency also said in contrast, India’s banking sector has not faced any such liquidity issue or withdrawal of deposits. “The liquidity pressures are in stark contrast to the banking sector, which has not faced significant liquidity pressure or deposit withdrawals, despite asset-quality and capital weaknesses,” Fitch said in its report.

In the first week of June, the housing finance company was to release interest payments against the debt of non-convertible debentures (NCDs). This led to ratings downgrades to default category. As of June 4, the company had Rs 960 crore of interest payment dues. Rating agency CRISIL downgraded DHFL’s papers from A4+ to D. While, ICRA slashed its rating of DHFL bonds to D from A4. CRISIL downgraded Rs 850 crore worth of commercial papers of the company. It also said the rating has been removed from 'Rating Watch with Negative Implications'.

“DHFL has delayed debt servicing on some of its non-convertible debentures (NCDs), not rated by CRISIL, because of inadequate liquidity. The payments were due on June 4, 2019. DHFL has Rs 850 crore of outstanding CPs of which, Rs 750 crore is due in June 2019. The first CP matures on June 7, 2019. With liquidity inadequate as on date to service debt and visibility very low on timely fund raising, CRISIL expects the CP to be in default on maturity,” CRISIL stated in its report.

It is estimated that as many as 165 mutual funds have exposure in embattled housing finance company, with a cumulative exposure of Rs 5,336 crore across 24 fund managers. The ongoing crisis in the NBFCs sector has been triggered after the Infrastructure Leasing and Financial Services (IL&FS) defaulted on bond payments last year.

“Non-bank financial institutions' (NBFI) issues were already known to the market but Dewan became a focus point after the failure of Infrastructure Leasing & Financial Services Limited in September 2018 contributed to a sector-wide liquidity squeeze as investors become more risk averse,” Fitch said in its report. IL&FS has piled up Rs 91,000 crore in dues to asset management companies and other financial institutions.

On Thursday, DHFL shares saw a single day 16% fall in their prices to Rs 91.50 per share in intra-day trade. Experts say the DHFL issue is more of a payment delayed in nature rather than a default one. Also, the net asset values (NAVs) of a lot many debt schemes fell by up to 53%, which shows a marked-down in the value of their holdings in DHFL commercial papers. The fall in NAV means investor will have to bear losses. The company is now eying deals to sell some of its key assets to collect funds and channel the same for interest payments. For instance, DHFL is selling Avanse Finance to Warburg and Pincus, global private equity firm, in a deal valued at Rs 800 crore. The deal has got the approval from the RBI.

“The funding squeeze has contributed to higher funding costs and a slowdown in loan growth for India's NBFI sector. NBFIs are an important channel for extending credit to the wider economy, given their wide distribution networks, which are often more extensive across rural India than those of banks,” Fitch further said.

The sector's role as a credit provider became outsized as the Indian banking system was forced to deal with its weak asset quality. Banks, particularly public-sector banks, were under capitalised and had limited capacity to lend more. NBFIs now account for nearly 20% of credit to the economy in comparison to about 15% , 5 years ago, it added.