DHFL Crisis

Why in news?

The shares of Dewan Housing Finance Corporation Ltd (DHFL) plunged 29.15% to Rs 48.50 on the BSE recently.

How did the crisis evolve?

DHFL is a non-banking finance company with a focus on housing finance.
Mutual funds had lent to DHFL in the form of debt securities.
The company (DHFL) delayed interest rate payments in June, 2019.
It has reportedly missed interest payments of Rs 960 crore.
Valuation norms require a write-down in the value of assets in case of such payment delays.
The default in payments by DHFL has hit the net asset values (NAVs) of debt funds.
Consequently, the NAVs of several debt schemes fell by 6-53%, reflecting the marked-down value of their holdings in DHFL paper.
DHFL has faced a series of downgrades by rating agencies on its debt in the following 2 months.
ICRA, CRISIL, CARE and Brickwork Ratings (Brickwork) have downgraded credit ratings on commercial papers of DHFL to 'D' (Default) owing to liquidity concerns.

What is the recent happening?

With the recent fall, the DHFL stock had plummeted around 96% from the 52-week level of Rs 690, leading to significant losses for the investors.
DHFL owes close to Rs 1 lakh crore to banks and investors.
It recently said the company’s ability to raise funds had been substantially impaired and the business had been brought to a standstill.
It also raised significant doubt on the ability of the company to continue as a growing firm.

What do the statements reveal?

The company has reported a loss of Rs. 2,223 crore for the January-March 2019 quarter.
With this, DHFL has highlighted three critical financial issues flagged by the independent auditor engaged to verify its accounts.
One, it says that there have been deficiencies in loan documentation with respect to Rs. 20,750 crore of loans.
The company’s management is now working to remedy this.
It is unclear if these documentation issues will affect the saleability of its residual mortgage loan portfolio.
Two, due to the liquidity stress faced by developers, DHFL claims it has been unable to realise cheques relating to around Rs. 16,000 crore worth of wholesale loans.
Three, the results mention an NHB (National Housing Bank) inspection finding its capital adequacy ratio to be at 10.24% in end-FY18.
This is well below the statutory minimum of 12%.
Clarity on these issues will be available only after DHFL’s statutory auditors assess the conditions.
Meanwhile, these issues do raise doubts about the true value of DHFL’s loan book, the monetisation of which its lenders are banking on, etc.

What does this call for?

The statements by the company raise doubts about the sustainability of its operations and the quality of the residual assets it hopes to monetise.
If the liquidity crisis at DHFL evolves into a solvency issue, the ramifications for financial markets and investor confidence may be far more widespread than due to the IL&FS case.
[Unlike IL&FS, DHFL is a listed company that has directly raised retail funds through public deposits and NCDs (Non-Convertible Debentures)]
Shareholders and lenders to DHFL now need to take note of the developments.
It is also time for regulators such as the RBI and the NHB, who have so far taken no public stance on the firm.
All these highlight the urgent need for a detailed resolution framework for distressed financial firms, which are excluded from the IBC route.
Such a framework was proposed in the FRDI Bill, but it was shelved along with the controversial bail-in clause.
There is a need for financial regulators for housing finance companies to take their supervisory roles more seriously.
It is also essential to build in-house capacity to subject the filings of their constituents to more stringent scrutiny.

Source: Money Control, Business Line