DHFL at Stake

DHFL has defaulted on Rs 850 crore of commercial paper and Non-Convertible Debentures
when they missed the interest payment deadlines on them. Being the liquidity jammed home
financier, the credit rating agencies like CARE, CRISIL and ICRA downgraded their short term
debt instruments/ bonds to default or D from A4 or A4+.
However, DHFL has paid Rs 40,000 crore of its financial obligations since September and is
committed to meeting all debt obligations in time. As a mode of recovery, since December,
DHFL has sold several of its strategic retail assets, including its housing arm Aadhar Housing
finance Ltd, educational loan business Avanse and DHFL Pramerica Asset Managers. In
January, DHFL sold Rs 1375 crore of wholesale loans to foreign alternative investment
management fund Oaktree Capital that purchases the loan portfolios of stressed companies.
The loan portfolio has been sold at a value lower than its book value. Also, DHFL has sold Rs
2000 crore worth of its loan portfolio to offshore investors led by SC Lowy, a Hong Kong
Headquartered privately held Bank group in order to meet the immediate debt obligations.
DHFL was started in 1984 by Rajesh Wadhawan and is now led by Kapil Wadhawan. It provides
housing loans to people in Tier 2 and 3 cities. DHFL buys the corporate bonds, commercial
paper from Mutual Funds at cheaper rate and finances to retail investors at higher rate. The
difference is their profit. DHFL gets money from Mutual funds which they have to pay back
within 1 year and it finances money to retail investors/ home buyers for 10-15 years’ time
period.
The downfall of DHFL has primarily been due to major reasons. First, since IL&FS being a
biggest NBFC, defaulted and triggered the liquidity crunch for other lenders and the banks
declined to lend further and the opportunities to raise money came to a halt. The investors
lost their confidence in other NBFC’s as well. The Mutual funds that funded NBFC companies
became wary of lending to them. 165 mutual funds who had exposure as on April, to DHFL
got affected. Mutual funds collectively had an exposure Rs. 5,236.53 crore to DHFL debt. As a
result, Mutual Funds dramatically reduced giving loans to DHFL or charged loans at higher
interest rates to them. Hence, DHFL developed an Asset Liability Mismatch (ALM). This way
DHFL had stopped making margins and they were caught into liquidity jam although the
quality of assets have been prestigious. The assets are claimed to be valuable with low non-
performing assets but are worth about Rs 1 lakh crore.
Second, the management of DHFL was not honest enough with investors when DHFL was
observed to have been diverting the investors’ money into their shell companies that doesn’t
exist. These reasons led the DHFL share price to surge steep compared to other NBFC’s. This
shattered the investors’ confidence and the share price of DHFL fell from Rs 700 per share to
Rs 100 per share.
In December, DHFL had Assets under Management of Rs.1.26 trillion, lending to low and
middle formal income home loan borrowers. In May, DHFL had announced that it had stopped
taking fresh deposits and renewals of existing deposits with immediate effect since there
were delay in interest payments by them. Government also has put a lookout option that
does not allow the promoters to go out of India.
The Wadhawan Global capital, the holding group of DHFL now needs to take a tough stance
to come out of the ongoing crisis. DHFL must get a new strategic partner and must bring a
new management to drive this company ahead. This shall revive the Mutual funds confidence.
The Indian economy seems to be in panic as the markets have dried up with no more
opportunities to raise money. Such important companies facing acute troubles is only putting
Indian economy in a perilous state.