On Thursday, the stock markets saw their worst fall of 2019. Global markets were fairly stable and the rupee too was steady. What then led to the plunge of nearly 553 points on the Sensex?
NBFC crisis re-emerges
Dewan Housing Finance's (DHFL) credit rating was downgraded to default By Crisil and ICRA, after reports that the company missed an interest rate payment on Non Convertible Debentures. The Commercial paper of the company has also been downgraded and there is paper coming up for payment in the month of June.
There are worries that the problems in the NBFC space may lead to collateral damage. Banks have significant exposure to DHFL and so do mutual funds.
In fact, DHFL Pramerica,UTI Mutual Funds and a few other mutual funds have larger exposure to DHFL. In fact, the NAVs of several debt funds dropped, due to their exposure to Dewan Housing.
Banks have huge exposure to DHFL
Government and private sector banks have a huge exposure to DHFL as well. According to reports State Bank of India has the maximum exposure to the company of about Rs 8,800 crores, followed by Bank of Baroda at about Rs 4,400 crores and Yes Bank, which has an exposure of Rs 3,700 crores.
Bank of India, Canara Bank, Syndicate Bank are other companies that have exposure to DHFL. According to rough estimates the exposure of all these banks put together could be around Rs 50,000 crores.
This is by no means a small amount and unless issues are addressed it could snow-ball into a larger problem
RBI fails to address liquidity problems
The RBI which delivered its monetary policy on Thursday, failed to address any of the concerns of the NBFC sector, including liquidity issues. In fact, stocks from the sector plunged, with L&T Finance Holdings, DHFL, Indiabulls Housing Finance seeing a substantial drop in their share price.
Promoters of DHFL sell stake to raise money
The promoters of the company have been busy selling their stake to raise money. Wadhawan Global has announced stake sale in Aadhar Housing to Blackstone. Wadhawan Global Capital had entered into a definitive agreement with an affiliate of the Warburg Pincus Group to sell its entire 49.04 percent stake in its education finance subsidiary Avanse Financial Services Ltd.
The promoters would now continue to look to sell stake, as liquidity conditions continue to remain tight. In the coming weeks what impact it would have on the NBFC sector is difficult to say. However, the government should step in to prevent a crisis.