After DHFL fiasco, banks may turn cautious while lending to NBFCs, says Kotak Securities

Even as India’s major private housing finance major DHFL continues to reel under liquidity crisis, banks may turn increasingly cautious to lend money to NBFCs in the near-term.

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Even as India’s major private housing finance major DHFL continues to reel under liquidity crisis, banks may turn increasingly cautious to lend money to NBFCs in the near-term, noted Kotak Securities. The bank’s credit growth in NBFC’s has witnessed a sharp decline in the recent months, amid the ongoing fiasco. Notably, DHFL is undergoing an unprecedented financial stress, and it has suffered consistent downgrades in its credit ratings since February 2019. “The Company’s ability to raise funds has been substantially impaired and the business has been brought to a standstill with there being minimal/virtually no disbursements. These developments may raise a significant doubt on the ability of the Company to continue as a going concern,” DHFL said, while releasing the quarterly results recently. On July 13, the housing finance company reported a loss of Rs 2,224 crore for the quarter ended March 31. This compares to a profit of Rs 134.35 crore in the year-ago period.

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DHFL had total debt of nearly Rs 1 lakh crore as of end-March, including around Rs 40,000 crore to banks. The country’s largest lender SBI and subsidiaries have an exposure of Rs 19,000 crore to the company. Out of the total exposure, banks’ direct exposure to DHFL is 0.45% and overall exposure to NBFCs is 7% in 3QFY19, noted Kotak Securities.

“We expect banks to opt for a far more prudent approach in lending to NBFCs with longer-duration assets, especially HFCs, although they may relatively prefer retail entities,” Kotak Securities noted.  Bank credit to NBFCs has declined from the peak of ~60% in November 2018 to 40% in May 2019 and may reduce further. As these exposures are mostly classified as standard in the books of the banks and any deterioration in these accounts could result in marginal increase in NPLs for banks, said Kotak Securities. 

After a steep fall witnessed yesterday, following auditor resignations amnd reports or corporate governance lapses, the shares recovered on Tuesday after the firm said that it is working with the lenders to towards a resolution. “We are closely working with the stakeholders/creditors to ensure that there is a comprehensive resolution, without any haircut to the lenders, as has been speculated by few sections of the media,” DHFL said in a regulatory filing on Monday. Further, DHFL said the sectoral stress is well known for months, the company withstood intense pressure and continues to remain strong and solvent. 

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