Domestic infows into mutual fund schemes in the last couple of years played a significant role in driving the Indian stock market to record highs. In recent times, MFs have especially profited from betting heavily on non-banking finance companies (NBFC). But on September 21, something unexpected occurred which sent investors in NBFC stocks into a tizzy.
The panic started when rumours started doing the rounds that Dewan Housing Finance (DHFL) may have defaulted on one of its debt payments. The reason for this rumour: DSP Mutual Fund had sold short term DHFL paper at a significant discount. Dealers with domestic banks said the fund house sold DHFL's 1-year commercial paper, due to mature in June next year, at a yield of around 11 percent.
This sparked concerns about DHFL's ability to raise money from the market at a feasible rate. For one, DSP was finding it quite challenging to find takers for the instrument, even at 11 percent. If a fund house is forced to sell 1-year commercial paper at 11 percent, there is apparent that no one is willing to buy it. As a result, investors' outlook on DHFL's stock weakened and they started selling its shares in panic, pulling it down by over 55 percent intraday.
Doubts about DHFL eventually spread to other housing finance companies and later to other non-banking finance companies (NBFCs). Stocks of Indiabulls Housing Finance and LIC Housing Finance were also down by over 20 percent and 15 percent, respectively, at one point. Shares of Bajaj Finance and Bajaj Finserv too took a hit.
"The initial reaction was that this has something to do with DHFL," said a dealer at a state-owned bank. "But it did not make sense because logically, DHFL could not have defaulted. The nature of their business itself takes care of that."
Other dealers Moneycontrol spoke to said what actually prompted DSP MF to sell the securities at a discount was an urgent need of cash. The fund house has a significant amount of IL&FS' debt on its books, and given the current crisis surrounding the latter, it apparently wanted to shore up its liquidity position in case it faces any kind of redemption pressure in the near future.
"There is nothing fundamentally wrong with DHFL because most of its debtors pay monthly instalments for the loans they take, which means it won't have any problem repaying anything that it owes to investors," said Dwijendra Srivastava of Sundaram Asset Management.
DSP MF later clarified it had sold Rs 200-300 crore worth of DHFL paper last week, but that the move was aimed at bringing down the average maturity of securities in its portfolio. Its Chairman Hemendra Kothari told CNBC TV-18 that the fund house wanted to position itself to take advantage of the rising interest rate cycle that is in play at the moment. In a press statement, the fund house said it had 'sold securities across issuers in the last few months' for various reasons.
Impact on other NBFCs and housing finance companiesThe crisis surrounding IL&FS has, quite visibly, spooked a lot of investors. What amounted to nothing more than a self-protective strategy by DSP MF, resulted in a hammering of stocks of NBFCs and housing finance companies on Friday.
This kind of reaction, although not unheard of, is rare for any market unless there are other major factors at play. And the one factor that has made most investors a bit nervous is the fact that even a 1-year commercial paper issued by a company like DHFL, which is one of the more trusted and popular issuers in the market, could not immediately find takers at a yield of 11 percent.
"The primary concern here is liquidity," Ajay Manglunia of Edelweiss Financial Services told Moneycontrol. "Although it is by no means a solvency crisis, there will be some doubt about whether or not these NBFCs will be able to continue borrowing at a viable rate from the market," he said.
Expectedly, DHFL's stock recovered on September 24 and was trading around 14 percent higher at the time of publishing. However, most other NBFC and HFC stocks were trading down, extending their losses from last week. DSP MF, in a recent conference call, said it continues to hold securities of DHFL and other companies in the sector and that it hoped that the IL&FS' liquidity crisis does not turn into a solvency crisis. The fund house clarified that no DHFL paper was sold from its credit risk fund and that the fund continues to have ample liquidity.
According to data from Morningstar, DSP MF's total exposure to IL&FS debt stood at Rs 629 crore as on August 31.
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