There is a subprime market in India and it is not retail. It is formed of risky realtors with dodgy credit who got loans from lenders greedy enough to take risks they were not meant to take.

The first possible casualty is Dewan Housing Finance Ltd (DHFL), a large mortgage lender that happened to have lent unwisely to developers.

DHFL now feels it may not be able to survive because no one wants to give it funds. “These developments may raise a significant doubt on the ability of the Company to continue as a going concern," the company said citing financial stress, downgrades besides lack of funding as factors behind its fear. DHFL shares were trading 31% lower at 11:20 am at 47.4 a piece. The reason funding has dried up for the housing finance company is that investors are no longer confident of its risk management and lending practices.

There are valuable lessons to learn from this debacle:

Risk is risk

Risk cannot be substituted by anything. Risky loans are in any other form still risky. DHFL’s book was largely loans to developers and the prolonged slowdown in real estate should have made the lender more cautious. But DHFL doesn’t seem to have priced this rising risk appropriately. Hence, its gross bad loans have surged to 2.74% although stressed assets would ideally be as high as 21%.

Pooled risk is still risk

Investors are now realising that the pooled loans DHFL has sold to raise money from banks may not be kosher. DHFL in its results said that there is no documentation in the case of 20,750 crore worth of loans. It is not clear whether part of these loans were sold or are still on the lender’s books. Brickwork Ratings had downgraded a pooled loan transaction of DHFL to C from BBB last month.

Equity is as equity does

DHFL’s March quarter loss is 2223 crore, greater than its market capitalisation that stood at 2149.53 crore on Friday. That is now down more as the stock plummeted 10% today. There is worry that the company has not stated the full extent of stress on its books. Then there is the case of missing documentation on its loans. All in all, equity investors are perhaps the hardest hit.

The big short

Non-bank lenders especially those like DHFL believed that they would be able to roll over their short term borrowings endlessly. This emboldened them to get into a risky asset liability mismatches. Now they know better that this condition hinges on trust which is fragile in a slowing economy.

Speed is of essence

There is still a chance for DHFL to survive. The biggest lesson for lenders now seeking to keep DHFL alive through a resolution plan is that they need to move quickly. This is hard given that the company’s lenders comprise of thousands of bond holders apart from banks and mutual fund houses. Building consensus around a resolution plan is a tall ask but DHFL’s survival may depend on it.

Finally, the regulator needs to pull up its socks and begin to examine non-bank lenders more closely. National Housing Bank (NHB) noted that DHFL’s capital adequacy ratio was below regulatory minimum in FY18. Why the regulator did not take any action is bizarre.