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DHFL Crisis:
Back in September 2018, DSP, a mutual fund
house had loaned out considerable amount
of money to DHFL. And then one day they no
longer wanted to wait for DHFL to pay them
back. So, they asked someone else to take
the burden off of them by offering a huge
discount.

When news of the sale spread, DHFL stock

price has crashed by 60%. Everybody was
now wondering “Why did DSP do it? What’s wrong with DHFL? Is everything alright
at DHFL?”

And then all the banks and the fund houses that ever-loaned capital to DHFL took a
back seat and said “Yeah. This is bad. We probably might take a hit as well”

At the same time, there were also allegations that the owners of the company were
siphoning funds to enrich themselves. Eventually, though the allegations fizzled out
and the company went back to assuring
stakeholders that they would never default
on their payments, until they finally
defaulted in June 2019. It was at this point
that DHFL has finally stated that it was
going through substantial financial stress.
It even confessed that its ability to raise
more capital was considerably impaired
and its future existence, now doubtful.
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An in-depth analysis will reveal that DHFL,
much like other NBFCs was running what
bankers call an “asset-liability mismatch”.

A housing finance company like DHFL

disburses loans that have repayment periods
of about 20 years. The company generates
reasonable interest income and if the
consumer were to default on his payments, DHFL will still have a house they could
liquidate to help recover a part of their investment. So, there is little concern on the
lending side. It’s the borrowing bit that’s slightly more complicated.

Now DHFL would want to make an extra penny by trying to borrow at cheap rates.
But borrowing at low interest rates comes at a cost — You can’t take 20 years to pay
back the loans. DHFL’s lenders will gladly offer loans at cheaper rates if they promise
to repay the loan sooner. How soon? 4–6 months would be optimal. But DHFL is
expected to receive its funds over the period of 20 years. How then could you expect
it to pay back its dues within 4–6 months. This is a problem referred to as the Asset
Liability Mismatch. Long story short, DHFL was running out of time. And since they
couldn’t reach a resolution plan with their lenders any more, Reserve Bank decided
to intervene. The plan now is to take the company to bankruptcy court and see if
DHFL's lenders can reach an amicable resolution. If they don't, the company will be
liquidated, and the assets will be sold to the highest bidder. And until the lenders
get paid completely, there's little hope for the stock price to recover.