Today shares of DHFL hit a low of  ₹107.15 on the BSE
Today shares of DHFL hit a low of 107.15 on the BSE

DHFL shareholders fret over lock on deposits, no big scare for non-banks

  • Dewan Housing Finance Corp. falls more than 9% after it stops premature refund of deposits
  • Most non-bank finance company shares are unscathed as there is no large-scale worry

MUMBAI: India’s non-banking financial companies (NBFCs) faced a fresh wave of investor distrust on Wednesday after Dewan Housing Finance Corp. Ltd (DHFL) decided to stop premature withdrawal of deposits.

But unlike the previous episode in September, the collateral damage was limited. Out of the 35 NBFC stocks that are part of the Nifty 500 index, only 17 ended in the red. Of these, only four fell over 2%. While shares of most escaped bruises, DHFL’s stock ended 9.6% lower on Wednesday.

Investors seem to realize that a liquidity crunch need not resurface for every non-bank lender, and that those who can weather the storm have already proven they can do so in their March quarter results. As the chart alongside shows, shares of some large non-bank lenders even gained on Wednesday.

Investors are right to not panic and sell off non-bank lenders en masse in response to DHFL’s new trouble. Data from the National Housing Bank shows that 18 housing finance companies accept public deposits. In the listed space, just seven NBFCs accept deposits, of which DHFL is one. Also, public deposits are a small part of the total borrowings of these NBFCs. DHFL, for instance, had 10,000 crore worth of deposits as of December, which is roughly 10% of the company’s borrowings.

Premature withdrawals are typically sudden and the firm’s liquidity position is not strong enough to handle them. But it is unlikely that premature withdrawals would total up to the entire deposit amount of 10,000 crore. The fact that DHFL felt it could struggle to pay up even 10% of its liabilities shows how its situation has worsened.

Recall that the company had been repaying all of its debt obligations on time, even after it got mired in a liquidity crunch in September. It had paid back 30,000 crore worth of obligations up to April 2019.

That said, DHFL’s move to not allow premature withdrawal of deposits shows that in a precarious situation, non-bank lenders would be hard-pressed to deal with a liquidity crunch.

Karthik Srinivasan, group head (financial sector ratings), Icra Ltd, said that entities that weathered the liquidity crunch continue to do well. “It depends on the entity. Many are able to raise money. Some have been able to pass on the rates, but balance sheet growth has been affected," he added.

Also, much of the impact on balance-sheet growth has already been priced into NBFC stocks.

For DHFL, the going is tough as rating downgrades have shut the door on raising deposits and made it extremely difficult to raise money from debt instruments. The value erosion of its stock since September, of over 80%, has put paid to the lender’s efforts to raise reasonable money through a stake sale.

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