Successful resolution of Dewan Housing Finance Corp critical for banking

Reports suggest a minimum upside of 35 per cent from the bid process of the lender

In just about a week or so we will get to know who emerges successful in the bid for beleaguered housing financier – Dewan Housing Finance Corporation Limited’s (DHFL) business. For banks leading the negotiations with DHFL’s administrator and interested investors, the outcome of the bid will be critical to reassure that systemic risks like the one that the industry went through since September 2018 aren’t insurmountable.

DHFL was the first to be hit by the rising cost of funds which escalated post the IL&FS crisis and was not able to get back to its feet after that. Its also the only non-banking finance company (NBFC) the loan outstanding of which was referred for restructuring under the June 7, 2019 circular issued by the Reserve Bank of India (RBI) and with no consensus for recast, it was referred to insolvency proceeding by the central bank in November 2019. Abhinesh Vijayaraj of Spark Capital calls DHFL a test case in many ways.  

With the share of bank loans to NBFCs steadily on the rise, especially for those rated A or lower, putting in place an established resolution plan is important. Since the IL&FS fall out, the share of bank loans to NBFCs' liabilities rose to 31.2 per cent in September 2020 from around 25 per cent. On the other hand, NBFCs' dependence on market borrowings (bond market instruments) is also increasing and the number stood at 42.7 per cent in September 2020, up from 41.8 per cent in June, thanks to a slew of measures such as partial credit guarantee scheme (PCGS), targeted long-term repo operations (TLTRO) and special liquidity scheme.


 

Analysts say that with NBFCs continuing to replace short-term money with stable long-term funds, the dependence on bonds and bank facilities is set to increase. Banks are also an active player in the TLTRO segment and hence, it’s in their best interest that the NBFCs evolve a resolution mechanism for themselves, to shield them from further contingencies.

Another important aspect is that of the quantum of recoveries. Data indicates that Insolvency and Bankruptcy Code-evoked recovery has been twice as more effective compared to the normal recovery processes in terms of quantum recovered. In DHFL’s case, while most banks have written off their exposure, the upside upon a successful bid could be a minimum of 35 per cent going by reports, which may also be the highest recovery so far. Vijayraj feels this could go miles in boosting the sentiment for the sector.

This is why, with the Covid-19 pandemic having displaced some of the smaller NBFCs, it’s in the system’s interest that DHFL is resolved successfully.