Explained: Why you should care about DHFL crisishttps://indianexpress.com/article/explained/dhfl-crisis-explained-5841523/

Explained: Why you should care about DHFL crisis

DHFL crisis explained: On July 14, the housing finance company reported a net loss of Rs 2,223 crore for the fourth quarter (Q4) of 2018-19. The result was in stark contrast to Rs 134 crore of net profit that DHFL reported in the same quarter of the previous fiscal year (2017-18).

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A woman walks past a signboard of Dewan Housing Finance Corporation Ltd. (DHFL) outside its office on the outskirts of Mumbai, January 31, 2019. (Reuters Photo: Francis Mascarenhas)

Dewan Housing Finance Corporation (DHFL), a major housing finance company, has been in the news for all the wrong reasons. Its stock price has fallen by around 90 per cent over the past year and there are apprehensions about the viability of the company even as it is in the process of figuring out how to come out of its financial troubles. Here’s why you should care.

DHFL crisis explained: What is the latest trigger?

On July 14, Dewan Housing Finance Corporation (DHFL), a housing finance company, reported a net loss of Rs 2,223 crore for the fourth quarter (Q4) of 2018-19. The result was in stark contrast to Rs 134 crore of net profit that DHFL reported in the same quarter of the previous fiscal year (2017-18). Not surprisingly, the full-year results also showed a massive decline. The company posted a net loss of Rs 1,036 crore in FY 19 when it in FY 18, it had announced a net profit of Rs 1,240 crore.

What is the actual problem?

Alongside its latest results, Kapil Wadhawan, Chairman and Managing Director, DHFL, said: “In the backdrop of a significant slowdown in disbursement and loan growth post September 2018, the financials of the company have been quite strained for the quarter impacting the overall performance of the year”.

In other words, the company has struggled to forward any new loans even as their existing loans are turning into non-performing assets (NPAs). DHFL’s gross NPAs have risen to 2.74 per cent in the fourth quarter of the last financial year as against 0.96 per cent during Q4 of FY18.

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DHFL’s troubles started after another big non-bank financial company — Infrastructure Leasing & Financial Services (IL&FS) — defaulted on its debt obligations in September 2018. IL&FS was found to be afflicted with a serious asset-liability mismatch, and its performance resulted in many investors in the NBFC sector to hit the pause button for fresh investment. DHFL’s finances, too, suffered as a result of declining investments and rising demands for meeting its obligations. Essentially, since September last year, DHFL has been playing catch up on its financial obligations. That too without fresh money to count on and worsening loans portfolio.

What is at stake?

As of Q4 FY 19, DHFL had almost Rs 1.2 lakh crore of assets under management. DHFL’s financial health is a matter of concern for even the common man because some of the biggest investors in DHFL are public sector banks and mutual funds. If DHFL was to struggle in paying back, the loss would be spread across the financial world.

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What lies ahead for DHFL?

Wadhawan says DHFL in the process of submitting its resolution process under the inter-creditor agreement as entered into by banks. The terms of a resolution will be finalised by July 25. DHFL is also trying to identify a strategic investor to bring in fresh equity.