Can DHFL Survive?

Some of the most important companies in India are facing serious trouble and it just reflects the management issues and economic slowdown peering upon the big companies.

Last year, we saw a key non-banking financial company, Infrastructure Leasing & Financial Services (ILFS) crashing down. The earliest private airline company, Jet Airways closed its shutters down. Anil Ambani’s Reliance Communication filed for bankruptcy. Most recently, Dewan Housing Finance Corporation (DHFL) is facing survival blues.

A little about DHFL

DHFL is one of the biggest non-banking finance companies in the housing finance sector. It is also called a shadow bank because it is into giving loans to home buyers in the country’s Tier 2 & Tier 3 cities without having a banking license or a central bank liquidity access. The housing sector was booming in 2013 and so did DHFL. It continued to outperform most of the housing finance companies.
Dewan Housing Finance Corporation came into the limelight in 2015 with its unprecedented growth. The total assets of the company doubled over three years from Rs. 43,863 crores in 2014 to Rs 92,297 crores in 2017. A fresh growth capital from Wadhawan Global Capital in 2016 also boosted the capital structure and the debt to equity ratio of the company. 

Now, what could go wrong with a company having an annual growth of about 20 percent? This level of growth definitely came with a price. What really happened at DHFL?

DHFL’s gross non-performing assets (NPAs) have grown from 0.96% for the March Quarter 2018, to 2.74% for the March Quarter 2019. Not just that, in June 2019, the company was faced with credit rating agencies downgrading the company’s short-term debt instruments to “D” which essentially means that the credit rating agencies do not expect DHFL to repay the short term debts it owes.

What can be the reasons behind such a sudden downfall?

1. The business model was based on lending for the long term with the use of short term borrowings. This meant while home buyers or developers took a 20-year-loan, DHFL financed it by borrowing through commercial papers of much shorter maturity of six months and kept issuing new papers when old ones came up for maturity.

2. With 570 branches across India, the company was able to give loans to Tier 2 & Tier 3 cities when the economy had demand and liquidity. But, as soon as the borrowing costs increased along with a slowed economy, it became tough to get funding. On top of that, even one repayment failure made it difficult for the company to get a fresh capital infusion. When the Non-convertible debentures started defaulting, DHFL was downgraded from AAA to D.

What steps has DHFL taken so far?

• Selling the family silver. The company has been selling its assets to raise funds. The parent company, Wadhawan Global Capital (WGC) has a stake of 37.3% in the company and has been selling off its stake in other subsidiaries like AHFL (Aadhar Housing Finance Limited). In March 2019, DHFL and WGC sold their shareholding in Avanse Financial Services, an education-centered NBFC, to Olive Vine Investment for about Rs 1,100 crore. 

• Exiting the Mutual Fund segment. DHFL exited the mutual fund business with the approval from the Securities and Exchange Board of India (SEBI). DHFL Pramerica MF was sold to its joint-venture partner Prudential Financial wherein DHFL sold 50% of its stake. 

At present, DHFL has paid over Rs. 41,000 crores to meet the financial obligations through securitisation of assets and repayment collections.

What is the way forward?

DHFL’s future is based on its capability to get funding from bankers and a resolution plan had been submitted for the same to help restructure the liabilities. The lenders need to do proper audit and due diligence to assess the quality of the assets before deciding on the resolution plan.

Chaturvedi & Shah LLP, Deloitte Haskins & Sells LLP- the auditors of DHFL had put out several disclaimers that had a significant impact on the financial statements of the company for the year ended March 2019. Deloitte Haskins & Sells resigned as the auditor of DHFL citing the reason as a continued failure on the part of the company in providing a justified explanation or details about certain unsecured borrowings to them.

With a loss of Rs. 2,224 crores in the last quarter of FY 2018-19, it became imperative for DHFL to get fresh equity investments between Rs. 2500 crores to Rs. 3000 crores to sustain lending operations. Once, the company gets this fresh funding, there is hope for it to bounce back in the market. 
One can only hope for a turnaround in this situation of turmoil in the company and the economy as a whole.