DHFL fights to stay afloat: From wooing banks to managing brand name

Dewan Housing Finance (DHFL), India’s second-largest housing finance company (HFC), finds itself in a peculiar quandary. It is now seeing its credit ratings coming down at a time when banks are not willing to lend and raising money from retail investors is not an option any more.

In many ways, it is the reflection of the larger non-banking finance company (NBFC) sector fighting a liquidity crisis. But DHFL is a special case.

The company first came into focus when its stock was hammered down about 50 per cent in September last year.

DSP Mutual Fund tried to sell a DHFL bond in the secondary market, but buyers were scarce. This created an impression that the HFC was suffering from liquidity issues.

With banks closing the credit line, DHFL is facing liquidity crunch. Selling its subsidiaries (Aadhar Housing Finance), searching for a strategic partner in the holding company Wadhawan Global Capital, and selling down securitised loans are keeping it afloat for now. But that won’t last beyond a few months, say analysts. Indeed, company officials also acknowledge that they need to convince banks to open the lines of credit.

A company spokesperson claimed that DHFL has started disbursing loans, but observers say these are loans that have been committed. No fresh loan is being disbursed at any of the DHFL branches, say people in the know. In fact, it is the case with most HFCs now, say observers.

DHFL is still a strong brand name in tier II cities and below. DHFL and other HFCs’ decision to stop giving loans means that the biggest losers are the customers in the loan bracket of Rs 5 lakh to Rs 15 lakh for whom bank branches are still alien territory. These borrowers are key beneficiaries of the Pradhan Mantri Awas Yojana, or housing for all scheme, and due to their informal income pattern, players like DHFL are the key loan giver.

DHFL, through its rural and semi-urban branches, has the expertise in evaluating this demographic and have some expertise in maintaining land records of areas where the branches are located in, says a company executive.  

However, Cobrapost allegations against DHFL regarding unlawful use of DHFL money by the promoters have dented the company’s reputation. To address the veracity of this, an audit committee of independent directors has ordered a special audit report.

“Till the audit committee comes out with its report, banks will not be willing to lend to DHFL. It will also be difficult for the company to raise money from other investors,” says an analyst.

Investors’ reluctance to give money to DHFL and the lack of a deep corporate bond market is roiling the NBFC sector and DHFL. Ultimately, analysts expect, the promoters could be left with only the core HFC, albeit with a partner.

The parent company plans to induct a director soon once a partner is secured, while redesignating its Chief Executive Officer Harshil Mehta last month.

Till then, the company will have to survive selling its other assets. It has been selling down its retail portfolio through securitisation. It also sold its wholesale portfolio worth Rs 1,375 crore to global alternate investment fund Oaktree Capital Management, L.P., in January.

“While fresh funding had practically dried for the whole sector, the only route to make cash available and lower our liabilities was through sell-down of the wholesale or retail assets. Accordingly, the company sold down its strategic retail assets, including Aadhar (Housing), to ensure there was adequate liquidity. As a result, the company has sufficient cash reserves and investments today, equivalent to about Rs 4,500 crore,” says Kapil Wadhawan, chairman and managing director of DHFL, in a statement.

The company denied selling its education finance arm Avanse Financial Services.

The company has a liability of Rs 14,500 crore over the next six months. Between September and December, it has already repaid Rs 18,500 crore of its liability. The company is raising funds through securitisation of its project finance portfolio.

The total redemption due in commercial papers in the next six months is Rs 1,425 crore. The total payment due in one year is Rs 1,525 crore in commercial papers, Rs 9,148 crore in debentures, Rs 7,306 crore in term loans, and deposits would be maturing of Rs 5,155 crore.

Rating agency Icra though considers the company’s financial flexibility constricting and its ability to refinance limited. Accordingly, the rating agency downgraded DHFL’s commercial paper rating to A2+, from A1+.

Wadhawan reacted strongly against the rating downgrade.

The next challenge to the company is to stabilise the company, opening up credit and lending lines, and find a suitable strategic investor. Also, it has to manage its brand image in cities, though in tier II and below, DHFL’s name is strong enough.

The average ticket size is Rs 18 lakh and the branches maintain niche expertise of dealing with small-ticket clients, have an understanding of customers’ informal cashflows, and maintaining proper land records.

But if the company continues scaling down its lending operation, the market share gained over the past 30 years can be vacated in favour of competitors. However, DHFL is optimistic.

“DHFL is of the opinion that once this phase of industry-wide liquidity crunch is over, companies with strong fundamentals, customer goodwill, and a solid pedigree will have an edge,” says a spokesperson of the company.