While Dewan Housing Finance Corporation (DHFL) has defaulted on dues amounting to Rs 1,000 crore, a report by CLSA pointed that it can expose borrowings worth Rs 1 lakh crore to default risk. Pointing that this default, as well as that of IL&FS, could accentuate contagion risk in the financial sector leading to higher costs and the polarisation of funds to better-rated NBFCs, the report said that the Reserve Bank of India may have to consider liquidity lines.
DHFL, which defaulted on repayment of bonds of Rs 1,000 crore, has AUM of Rs 1.3 lakh crore and borrowings of Rs 1 lakh crore as of December 2018, said the CLSA report prepared by Aashish Agarwal and Prakhar Sharma.
Stating that banks have funded almost half (Rs 50,000 crore or 0.5 per cent of the sector loans), it said that insurance companies and mutual funds come next. Further, almost 10 per cent or Rs 10,000 crore worth of such borrowing has been done in form of deposits. While public sector banks have been the key lenders, among the private banks Yes Bank and IndusInd Bank have relatively higher exposure, said the CLSA report. It said that if mutual funds with exposure of around Rs 5,000 crore will have to take a 75 per cent haircut immediately, banks may also see MTM losses on bond exposure, however, loan provisioning will be more gradual.
The report pointed that while this default along with the recent default by IL&FS and the downgrade of credit ratings of NBFCs, could accentuate contagion risk in financial markets. “This will lead to tightness in bond-markets and lower inflows into mutual funds, eventually resulting in higher costs and polarised allocation to high quality borrowers,” said the report.
Pointing that it can also have a knock-on impact on sectors like real estate, housing, auto and SMEs, it said that, “the RBI may need to consider direct or indirect lines of liquidity to ease concern.”