Cash-strapped mortgage lender Dewan Housing Finance Corporation Ltd.’s (DHFL) stock tanked 29% on Monday after the lender reported a ₹2,223 crore loss in the January-March quarter of 2018-19 on Saturday.
The lender, while announcing its earnings, disclosed that housing finance regulator National Housing Bank (NHB), in a letter dated July 3, 2019, observed that the company’s capital adequacy ratio had reduced to 10.24%, as on March 31, 2019. Regulations mandate housing finance companies to have a minimum capital adequacy ratio of 15%.
“The management does not concur with the observation of the NHB and will provide an appropriate response within the stipulated time,” DHFL said.
Documentation flaws
Admitting certain discrepancies in loan documentation in certain projects and mortgage loans, DHFL said, “the management is actively engaged with the loanees to remediate certain lacunae in loan documentation and expects to complete this exercise by September 2019.” Also, there were documentation deficiencies with respect to grant/roll-over of inter-corporate deposits, which are being rectified, it said.
The mortgage lender further said it no longer held the project loans, SRA (slum rehabilitation authority) loans and wholesale mortgage loan portfolio for the purposes of solely collecting the principal and interest, and aimed to monetise the wholesale loan portfolio.
As a result, such loans of ₹34,818 crore had been reclassified as Fair Value Through Profit or loss (FVTPl) as on March 31, 2019.
“As required under Ind AS 109, these assets have been fair-valued as on March 31, 2019, based on internal valuations which involve management’s judgment and assumptions, at ₹31,628 crore, and the resultant fair value loss aggregating ₹3,190 crore has been charged to the statement of profit and loss,” it said, citing the reason for the loss.
Following a rating downgrade to default grade in June, its ability to raise funds had been substantially impaired and business had been brought to a standstill with minimal or virtually no disbursements, DHFL said.
It said the ability of the company to continue as a going concern was “predicated upon its ability to monetise its assets,” and secure funding from the bankers, investors, restructure its liabilities and recommence its operations.
“In view of all the actions that are currently under way, these financial statements have been prepared on the basis that the company is a going concern.”
Following the stock price collapse, the home financier issued a statement saying, “the entire set of management notes are basis our intent to be prudent and conservative in adequately providing for in our results,” and the company continued to remain strong and solvent. Reiterating that the company had made repayments of over ₹41,800 crore since September 2018, chairman and managing director Kapil Wadhawan said, “The process of identifying a strategic investor is also nearing completion, which will bring in an equity investor into DHFL to bolster its capital base.”
He added that the board would meet in the next two weeks to look through potential proposals and decide on the way forward.
Resolution process
Banks have also started the process for resolution of DHFL loans of about ₹40,000 crore. Banks have signed an inter-creditor agreement and asked DHFL to submit a resolution plan.
Mr. Wadhawan said the company was at an advanced stage of submitting its resolution process and firming up the terms of the resolution process by July 25, 2019, and making it operational before September 25, 2019.
The housing finance company further added that it was working with creditors to ensure that there was a comprehensive resolution, without any haircut to the lenders. DHFL stock ended the day at ₹48.50 on the BSE, down 29.15% from its previous close.
