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*Game over for #DHFL* @finshots
After many twists and turns, it seems as if the DHFL saga is finally coming to a close. But before we get to the story here’s a quick recap
Back in September 2018, DSP, a mutual fund house offloaded DHFL’s bonds at a discount.
I know you’re not following this. So here’s a nice translation- DSP had loaned out considerable sums of money to DHFL. And then one day there was an epiphany it seems. They no longer wanted to wait for DHFL to pay them back.
So they begged someone else to take the burden off of them by offering a huge discount. They said this was routine. But come on. Who are we kidding right?
When news of the sale spread, DHFL stock crashed 60%🔻.
Everybody was now thinking “Why did DSP do it? What’s wrong with DHFL? Is everything alright at DHFL? I am panicking now, please help!!!”
And then all the banks and the fund houses that ever loaned money to DHFL took a back seat and said “
Yeah… This is bad. We probably have to take a hit as well”
At the same time, there were also allegations that the promoters (owners) of the company were siphoning funds to enrich themselves. Eventually, though the allegations fizzled out
and the company went back to assuring investors that they would never default on their payments.
Until they finally defaulted in June 2019.
It was at this point that the company finally stated that it was going through substantial financial stress.
It even confessed that its ability to raise more money was considerably impaired and its future existence, now doubtful.
So what went wrong?

A root cause analysis will reveal that DHFL, much like other NBFCs was running what bankers call an “asset-liability mismatch”.
A housing finance company like DHFL disburses loans that have repayment periods of about 20 years. Despite the unusually long repayment periods, the loan is a rather safe bet. The company generates reasonable interest income and if the consumer were to default on his payments,
DHFL will still have a house they could liquidate to help recoup a part of their investment. So there is little concern on the lending side. It’s the borrowing bit that’s slightly more complicated.
In an uber-competitive scenario, DHFL would want to make an extra penny by trying to borrow at cheap rates. But borrowing at cheap rates comes with a caveat — You can’t take 20 years to pay back the loans.
DHFL’s lenders will gladly offer loans at lower interest rates if they promise to repay the loan sooner. How soon? 3–6 months would be optimal. But DHFL is poised to receive its funds over the course of 20 years. How then could you expect it to pay back its dues within 3–6 months
This is a problem referred to as the Asset Liability Mismatch.
But it has a rather simple workaround nonetheless. DHFL borrows funds with short repayment periods by issuing a contract note. In banking parlance, they call this a Commercial Paper (CP).
Once the repayment period is complete and the CP is due after 6 months, the company simply issues a new set of commercial papers and borrows once again. And again. And again. This way the company can keep “rolling over” funds to meet their short-term obligations.
Now all this works exceedingly well until there’s somebody on the sidelines willing to refinance your loans. But when there’s no one willing to back you, that’s when things quickly spiral out of control. First, it’s just one default. You promise to honor all your other obligation
But almost instantaneously you find out that nobody wants to lend to you anymore. You quickly run out of cash. And before you know it, you’re defaulting almost every day.
Long story short, DHFL was running out of time.
And since they couldn’t reach a resolution plan with their lenders any more, RBI decided to intervene yesterday. The plan now is to take DHFL to bankruptcy court and see if DHFL's lenders can reach an amicable resolution.
If they don't, the company will be liquidated and the assets sold to the highest bidder. And until the lenders get paid in full, there's little hope for the stock price to recover.
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