INTRODUCTION  

The Indian Economy has been experiencing a decline in consumption which has ultimately
led to a decline in the GDP growth. For an economy to be declared as one which is under
recession, there has to be a negative growth for two quarters. Hence, as until recently, the
Indian economy can be said to have just been thriving on the brink of recession with a 5%
growth rate. Many factors are responsible for this considerably low growth rate. One of the
many factors that can be considered dates back to the September of 2018 when the IL&FS
scandal happened. 

ABOUT DHFL 

Dewan Housing Finance Corporation or DHFL is one of the leading housing finance
companies of India with a prime focus on affordable housing finance to middle and lower-
income groups. It was founded in 1984 and is headquartered in Mumbai.
Large companies accomplish their financing with funds from financial institutions and the
public. After collection of the funds, these funds are invested in other properties with an
intent to make money in the future.
The NBFCs prefer to raise money from short term sources like- Commercial paper,
debentures, bonds, etc. as a loan from banks generally bear a higher rate of interest but the
lending is for a longer duration.

THE BUSINESS MODEL - DHFL

DHFL’s Business Model is unique in nature as the company followed a policy of borrowing
money at a cheaper rate of interest and then re-distributing it back to retailers, individual
citizens for housing finance at a higher rate on interest. The difference in interest is what the
company used to earn. Thus, the organisation did not require extensive capital investment
to run the business.

The difference
Borrow at Loan them out in interest
lower/cheaper again at
rates is the
rates of higher rates of
profit for the
interest interest
company

DHFL used to borrow funds primary from deposits from individual people and from mutual
fund companies at a cheaper rate of interest and then use this
 

DHFL also targeted only the tier-2 and tier 3 cities because of the following reasons:

 Availability: There was not much availability of housing loans in the tier 2 and tier 3
cities
 Higher Interest Charges: Due to non-availability of easy housing loans, DHFL could
charge a higher rate of interest to the people in tier 2 and tier 3 cities and earn
higher profits.

As a result, the loan book of DHFL was around 30,000Cr, which increased to 90,000Cr by
2018.

THE CRISIS - When it all started ?

The DHFL share traded at just ₹10 at the start of the year 2004, the same share traded at
₹690 in the year 2018, but the again the price went down to ₹40- ₹50 by the end of year
2019. So, what really happened and when did it all start that lead to such rise and fall of
DHFL share price.

DHFL primarily got money from individual investors opening up accounts for fixed deposits
or by mutual companies. Around 150 mutual companies provided loan amounts to DHFL
against payment of fixed interest charges.

It all started in the month of September 2018 when DSP an Asset Management Company (a
company that invest in mutual funds) sold off DHFL shares/Bond Papers at a very steep
discount rate. With the outbreak of this news, the price of the share fell by more than 50%
from ₹690 to the range of ₹200. As a result the promoters had to call a press conference to
clear the doubts of the general public and declare that there was nothing wrong with the
company.

The second outbreak of news came in January 2019, when Cobrpost (a non-profit Indian
news website) accused DHFL for Siphoning of funds. According to Cobrapost, DHFL
transferred Rs 31,000 crore of loans to 'dubious' entities linked to the promoters. They also
accused that DHFL promoted i.e. the Wadhawans, used the proceeds from the loans taken
from the listed company by a network of ‘pass-through’ entities/shell companies to create
offshore assets worth approximately Rs 4,000 crore and to buy a cricket team in Sri Lanka.
As a result, the share price went down from the range of ₹200 to ₹100/share.
The cumulative effect of these, resulted in lesser confidence of investors, mutual fund
organisations in investing more capital in DHFL. The amount being invested in DHFL was for
a shorter duration, whereas DHFL was giving out long term loans. This created an asset-
liability mismatch and as a result the bubble bursted in the month of June 2019 when DHFL
missed an interest payment deadline.

WHAT HAPPENED IN DHFL?

In September 2019, when IL & FS which is giant NBFC defaulted in payment and was on
verge of bankruptcy, the credit rating agencies were severely criticized for not downgrading
the company earlier. After this incident, the banks, mutual funds, and other finance
companies took a cautious stand on giving money to NBFC's to avoid repeating the IL & FS
case. This meant more difficulty for NBFC's to raise money and since DHFL was lending
money for the long term, a liquidity crisis arose. This left DHFL with an option to raise money
from long term sources which meant the higher cost of raising funds and low net interest
margins. Now it became difficult for it to pay interests and meet other obligations.

The Asset- liability Mismatch

A housing finance company like DHFL

disburses loans that have repayment
periods of about 20 years. Despite the
unusually long repayments periods, the
loan is a rather safe bet. 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 recoup a part
of their investment. So, there is little
concern on the lending side. It's the borrowing bit that's slightly more complicated.

DHFL borrows funds with short repayment periods by issuing a contract note. In banking
parlance, they call this a Commercial Paper (CP). Once the repayment period is complete
and the CP is due to mature i.e. expire. the company simply issues a new set of commercial
papers and borrows once again. This way the company can "roll over" funds to meet their
short-term obligations. Some naysayers have equated such manipulation to Ponzi Schemes,
a fraudulent investment operation that offers returns using money paid by subsequent
investors, rather than from any actual profit earned. While there are similarities, in that
both schemes require new investment from other sources to keep working, NBFCs, unlike
Ponzi schemers, have the capacity to earn income from their usual lending operations. And
so NBFC's get around this little inconvenience rather easily until that is they can "roll over"
the funds no more i.e. the lenders refuse to invest in Commercial Papers.

There is an inherent problem in the way these shadow banks function.

They raise short-term loans of between three- and six-months duration, using CPs. On the
other hand, the businesses they lend to (home loans, commercial purpose loans, vehicle
loans etc.) are long-term ones. This is referred to as asset-liability mismatch.
However, following the IL&FS crisis, neither banks nor mutual fund companies or other
investors have been keen on betting their money on these NBFCs. In the meantime, the cost
of funds has also increased.
On the other hand, inflows into the mutual fund industry have slowed down, which has a
bearing on NBFC funding. “They (mutual fund managers) had a risk aversion towards the
(NBFC) sector and there is a slow down in debt funds as well. As a result, they are even more
cagey about investing in these businesses. As a result, NBFCs face an acute liquidity squeeze,
hitting the overall financials of the company.

The Stock Slump

On September 21st, a full 16 days after the first IL&FS default, DSP sold 300 Cr. worth of
commercial paper. The deal in itself wouldn't have raised eyebrows if it hadn't been for 2
important details. The commercial papers belonged to DHFL, a solid growth prospect in the
housing finance space and the papers were sold at a discount. The discount in itself wasn't
steep and considering the large volume (300 Cr.), one could argue that the discount was
indeed warranted. But in times of fear, rationality takes a back seat. Over the course of 5
trading days, DHFL's stock price tumbled from Rs. 613 to Rs. 273, a precipitous fall of 55%.
The investor community had taken the signal - DHFL was going the route of IL&FS or was it

The capitulation was complete but it wasn't very apparent to the general public as to why
the stock took a beating. On the face of it, it seemed like all of this was a massive
misunderstanding. The management team at DSP stated that the sale was a purely routine
exercise to raise some extra cash and that DSP still held DHFL papers in bulk. This, by all
accounts, was a statement of intent - it trusted DHFL to pay back its debts. The credit rating
agencies had reaffirmed the AAA rating on the commercial papers and the DHFL
management had made no qualms about their ability to repay all their obligations and still
be left with more cash.

The Final Stage

DHFL has insisted that the underlying assets that it holds, a big chunk of which are house
loans, are valuable and have a very low non-performing asset percentage. But those
underlying assets are worth about Rs 1 lakh crore. As a consequence, if this is indeed a
solvency issue, if the company’s survival itself is uncertain, it could be a huge blow to India’s
financial markets. This will lead to further panic – and tighter liquidity – across the system.

If the company fails, that will affect all of those that have extended credit to the company.
That includes about Rs 50,000 crore from banks, another Rs 30,000 crore from the Life
Insurance Corporation, pension funds and more. In other words, this isn’t about just one
company failing: it is a danger to the already-beleaguered banking system.

The company sold its several businesses to ensure it could back the debt. Regardless, in June
2019, the company failed to pay about Rs 900 crore worth of interest and then credit rating
agencies CRISIL and ICRA downgraded the rating of DHFL's commercial paper from A4+ to D.
Its share price has fallen by 91% in last one year.

DHFL owes nearly 1,00,000 crore of debt to its creditors. The company is taking active steps
to monetize its assets and is in discussions with multiple Indian banks and international
financial institutions to sell off its retail as well as wholesale portfolio. Now, it is in the
process of restructuring its debts with lenders and an inter-creditor agreement (ICA) is being
drafted to set new terms for the loans.

IMPACT ON THE FINANCIAL SECTOR

If the company fails, that will affect all of those that have extended credit to the company
which includes about Rs 50,000 crore from banks, another Rs 30,000 crore from the Life
Insurance Corporation, pension funds and more.  This isn't about just one company failing: it
is a danger to the already beleaguered financial sector and could be a huge blow to the
financial markets. A proper default would lead to an even tighter liquidity crunch, further
concerns about the viability of NBFCs, and a knock-on effect on numerous other industries.

When it happened those who got caught were debenture holders of the company-- pension
fund, mutual fund and the lenders from the NBFCs who had lent to IL&FS. 40% of the
incremental consumer financing last year was done by the NBFCS, not banks. 25 - 30% of
the NBFC money was coming through funding or Mutual Funds spots.
Mutual Funds used to buy their (NBFCs) papers for 90-120 days and give them money and
they used to roll over. Second, they used to place bonds or mutual fund spots in the market.
45-50% of the NBFC financing was coming from Mutual funds at that time. But, because
mutual funds like DSP, HDFC and others were hit by the IL&FS scam, they stopped their
funding to the NBFC. When they stopped funding, the NBFCs had to release the money to
pay back whatever is maturing.

Real Estate Sector

the real estate companies were getting money largely from the NBFCs because they were
not getting any lending from the banks. The NBFCs were giving these companies funds to
start new projects, construction and financing etc. However, after RERA, they could not
divert the money given by house owners hence, they depended on NBFCs even for their
working capital requirements.
The real estate companies are now stuck because the projects are not going ahead and
subsequently shutting down due to the NBFC crisis. The realtors are not able to complete
the projects

What has been the impact on auto sector?

According to a Kotak Mahindra report, the total auto and car sales figure in the country is
about Rs 5 lakh crores. The monthly sales may be around Rs 40,000 crore. Now a 20%
decline in the Rs 5 lakh crore sales figure would sum up to about Rs 1 lakh crore which is
financing.
Hence, there is negative growth. Although, around Rs 60,000 crore financing has come back,
out of which dealership may be around Rs 10,000 to Rs 15,000 crore and the NBFC sector
has built a Rs 1 lakh crore liquidity in its balance sheet. Liquidity in the balance sheet means
the NBFCs keep the money to pay back their liabilities.
They are not lending but they are paying back their liabilities. And since they are paying back
their liabilities, there is a problem. Since the NBFCs are building the liquidity to pay back
their liabilities so that they do not default, the money is not going to the market.

Conclusion

India’s economy currently faces severe challenges, both domestic and international. In

better times, with more money generally in the market, a number of these companies like
Jet and DHFL may have found it easier to dig their way out of hole.But with India’s growth
story in danger and a steep drop in consumption, the failure of DHFL could have major
repercussions across the economy, which is already struggling to deal with the twin-balance
sheet crisis – a high number of non-performing assets and heavily indebted corporates.A
proper default would lead to an even tighter liquidity crunch, further fears about the
viability of NBFCs, and a knock-on effect on numerous other industries. It will also command
greater regulatory attention, at a time when India’s policy makers and regulators need to be
thinking about steadying the ship.

https://www.businesstoday.in/opinion/columns/nbfc-crisis-domino-effect-on-indian-
economy-ilfs-scam-gdp-growth/story/378109.html

https://qz.com/india/1620385/ilfs-crisis-spreads-to-indias-nbfcs-like-reliance-cap-dhfl/

https://www.moneycontrol.com/news/business/companies/dhfl-crisis-a-look-at-the-story-
so-far-4067751.html
https://economictimes.indiatimes.com/blogs/et-editorials/dhfl-crisis-for-a-law-to-resolve-
financial-firms/

https://scroll.in/article/926444/scroll-explainer-what-happened-to-finance-firm-dhfl-and-
what-that-means-for-the-indian-economy