Nomura analysts said the Reserve Bank of India and the government would need to segregate the potential solvency issue at DHFL from liquidity issues at other larger wholesale NBFCs and HFCs.
The latest default on interest payments by Dewan Housing Finance Corporation (DHFL) can accentuate contagion risk in the Indian financial sector as banks, pension and mutual funds, and insurance companies have an exposure of around Rs 1 trillion to the company, warn analysts.
It is crucial, they say, the company sell its assets in time and the government steps in to prevent the DHFL contagion spreading to other financial firms.
“This default could also accentuate contagion risk in the financial sector (in the backdrop of IL&FS’ default last year), leading to higher costs and polarisation of funds to better-rated NBFCs - those with liquid balance sheets will also be better off,” global financial firm CLSA said in a note on Thursday.
Nomura analysts said the Reserve Bank of India and the government would need to segregate the potential solvency issue at DHFL from liquidity issues at other larger wholesale non-banking financial companies (NBFCs) and housing finance companies (HFCs).
“A possible solution could be to provide a liquidity line to solvent NBFCs/HFCs so that the DHFL issue does not lead to a contagion,” they said in a statement.
The fear of a contagion was highlighted by CARE Ratings on Wednesday when it said there had been a deterioration in the liquidity profile of DHFL, with cash and liquid investments decreasing within a month from Rs 4,668 crore (including reserve requirement) as on March this year to Rs 2,775 crore on April 30.
DHFL is expecting a negative cumulative mismatch of around Rs 4,180 crore between June and August in its cash inflows and outflows, CARE said.
Indian banks will have to take a significant haircut and make provisions as they gave loans worth Rs 50,000 crore by way of loans and bonds to DHFL.
Besides, life insurers, including Life Insurance Corporation (LIC), and pension funds have an exposure of another Rs 30,000 crore to the company.
Dewan Housing also raised deposits of Rs 10,000 crore, or 10 per cent of its total liability, from retail investors. It raised another Rs 10,000 crore from mutual funds and via external commercial borrowings.
“Mutual funds, with an exposure of Rs 5,000 crore, or 0.4 per cent of debt AUM, will be the first to take mark-to-market (MTM) hits of as much as 75 per cent.
"Banks will also face similar MTM risks on bond books, but for loans they will follow 90 days past overdue for NPLs (non-performing loan) and time-based provisioning that starts from 15 per cent,” CLSA said.
Analysts said timely sale of DHFL assets would be the key to its survival.
The group has already sold its stake in affordable housing finance company Aadhar, which would bring in Rs 2,700 crore, and plans a three-way split of the company into retail book, corporate book & SRA-financing (slum redevelopment) book and then sell portfolios.
On June 4, DHFL missed interest payments on its NCDs amounting to Rs 960 crore raised in June last year.
According to the trust deed, the company has seven working days to make the payment before it is termed as default.
The company has said it would start repayment from next week.
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Photograph: Rupak De Chowdhuri/Reuters
