The stock of Dewan Housing Finance Ltd (DHFL), which has been in the eye of the NBFC/HFC storm over the past several months, took a sharp knock of nearly 30 per cent on Monday, post its March quarter results release (after months of delay). Aside from the company’s dismal performance — loss of ₹2,223 crore in the March quarter — the commentary by the management in the notes to account also spooked the market.

Since August last year, before the mayhem began, the stock of DHFL has lost over 91 per cent in value. What’s more, the prospects of the once-fancied housing finance company appear bleak, unless it is able to monetise its assets, secure funding from bankers /rope in a strategic partner and restart its operations (disbursements).





Dismal quarter

Over the past four quarters, the performance of the company has been severely impacted. From quarterly disbursements of ₹13,500-13,800 crore in the first half of FY19, the company’s disbursements shrank sharply to about ₹500 crore in the December quarter. There is now minimal, or no, disbursement, according to the management. The performance has also been dismal owing to a sharp rise in provisioning in the March quarter.

‘Provisions and net loss on fair value’ stood at ₹3,280 crore (sharply up from ₹383 crore in the same quarter last year) eating into earnings. There are two key components of this — fair value loss and expected credit loss.

Loans aggregating ₹34,818 crore have been reclassified as Fair Value Through Profit or loss (FVTPl) under Ind AS 109; the resultant fair value loss of ₹3,190 crore has been charged to P&L. Marking down the value of these loans (wholesale) imply that the management expects some stress in these loans. For instance, it has stated that loans of about ₹16,487 crore relate to those where cheques received from the borrowers were accounted for as receipts, but were later not banked.

Further mark-downs in the fair value of such loans in the coming quarters cannot be ruled out.

The company’s expected credit loss (ECL) has also gone up sharply. As against the RBI-prescribed asset classification and provisioning norms, based on 90-day past-due concept, Ind AS ECL approach is forward looking. It follows a three-stage approach, under which provisioning is measured either on ‘12-month ECL’ (performing assets) or ‘Lifetime ECL’ (under-performing or non-performing assets). NBFCs/HFCs (under Ind AS) have to provide for loss, not only based on their historical loss experience, but also by factoring in future expectations.

DHFL’s provision for ECL has gone up from ₹132 crore in the December quarter to ₹729 crore in the March quarter.

Others concerns

The company stated that according to National Housing Bank (NHB) observations, DHFL’s capital adequacy ratio as of March 31, 2018, should have been 10.24 per cent (against the reported 15.3 per cent). But after the fair value charge to P&L, the company believes that NHB’s observations may not have implications.

Post the Cobrapost allegations, the report by independent chartered accountants looking into the charges highlighted certain procedural and documentation lapses (end-use monitoring of the funds loaned not performed). The company’s actions in regard to such loans are pending. There is also some lacunae in the documentation of project/mortgage loans amounting to ₹20,750 crore. Aside from the risk of further write-offs/mark-downs, these pending actions also cast a shadow on the ability of the company to monetise these assets.

Way forward

The company has sold portfolio of loans of over ₹30,000 crore so far to meet its debt obligations. The question is: can the company monetise its residual assets going ahead (particularly wholesale assets). Also, the increasing share of its non-housing loans is a cause for concern. LAP, project loans and SME loans constitute about 43 per cent of DHFL’s portfolio (as of December 2018). These segments are more vulnerable to stress and may not find ready takers.

DHFL is in discussions with the consortium of bankers to restructure its borrowings. How this progresses will be critical for the future operations of the company.

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