THE DHFL CRISIS

Think some companies are 'TOO BIG TO FAIL'? The story of DHFL proves you wrong!

DHFL (Dewan Housing Finance Limited) is a major player in the non-banking financial sector for years. They basically provide long term housing loans. DHFL does not collect deposits from public like the banks. Instead they borrow from the insurance companies, mutual funds and other financial institutions by issuing commercial papers (CP) and other short term instruments. This process of issuing on a long term basis and borrowing on a short term basis is called asset liability mismatch. The EMIs and installments that their borrowers pay is also a source of fund. So their primary profit is the difference between the interest they collect from the borrowers and the interest they pay to their lenders.

Everything goes fine when they keep issuing CPs and repay the previous CPs and collect money from their borrowers on time. But the problem starts when any of this process comes to a halt.

Due to the IL&FS crisis in 2018, the banks and the other major lenders tightened their norms and were hesitant to lend to the NBFCs. This resulted in a major liquidity crisis. There were no takers for commercial papers and on the other hand the repayments and dues kept piling up.

Adding to this heat was the news by Cobrapost that DHFL was involved in “India’s biggest financial scam”, that the banks have lent 31,000cr. without due diligence and the promoters used this money in their own businesses.

The credit rating agencies changed their ratings to ‘D’ overnight. The stock price plummeted. The once leading player and king which was thought as ‘too big to fail’ has hit the ground hardly.

Take away: *There is no company that is too big to fail.
                   *Don't invest in companies just by their great credit ratings.