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DHFL Shares Tank On Rating Cuts, Raising Worries On India's Shadow Banking Crisis

ICRA, an affiliate of Moody's, and Standard & Poor's local unit CRISIL, on Wednesday downgraded DHFL's commercial paper to their lowest level after the lender missed payments on bonds which were due this week.

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Shares of Indian mortgage lender Dewan Housing Finance Corporation Ltd (DHFL) plunged 18% on Thursday after its credit ratings were downgraded, sparking worries of growing distress in the country's shadow banking sector.

ICRA, an affiliate of Moody's, and Standard & Poor's local unit CRISIL, on Wednesday downgraded DHFL's commercial paper to their lowest level after the lender missed payments on bonds which were due this week. That implied DHFL was nearing or in default already.

DHFL, which last month also stopped taking new deposits and blocked premature withdrawals, said it found the rating action "extremely surprising", adding it was taking steps to ensure there were no defaults on any of its obligations. "This is a delay and not default," the company said.

Following the rating downgrades, some Indian debt mutual fund schemes with exposure to DHFL took a significant hit as they marked down their investments, leading to steep decline in their net asset values this week. 

"This fear has to be removed from the system. There will be a crisis and it can spread if the regulator does not step in to make changes," said Samrat Dasgupta, CEO at Esquire Capital Investment Advisors.

The unfolding crisis, however, has again highlighted the deteriorating health of shadow banks in India. Last year, the government took control of Infrastructure Leasing and Financial Services after its defaults triggered fears about contagion in India's financial sector.

There are more than 10,000 shadow banks, or so-called non-banking financial companies (NBFCs), in India with a combined balance-sheet of about $304 billion. They typically raise short-term funds through commercial paper and lend for long-term purposes such as housing loans. 

"Things had begun to settle down and ease out in the NBFC sector. Now, suddenly that confidence is shaken again with this event," said an Indian debt fund manager who declined to be named.

Shares of DHFL were down 13% at 97.1 rupees at 0650 GMT. The stock has fallen 55.19% so far this year, as worries about the NBFC sector rose.

The struggles of the NBFC sector come at an awkward time for Prime Minister Narendra Modi, who won a strong election mandate last month but faces several economic challenges. India's economic growth slipped to 5.8 percent in the January-March quarter, marking the lowest rate in more than four years.

Analysts say the NBFCs may face an uphill task to redeem up to 1 trillion rupees that become due in the next 3-4 months. Concerns about the sector means raising funds through commercial paper is becoming expensive and difficult.

DHFL was in talks to meet its over 10 billion rupees  ($144.19 million) obligation before the seven-day grace period and its financing could come in by the end of this week, the Economic Times reported. 

CRISIL said its ratings downgrade of DHFL was driven by   low visibility in raising funds and the agency's belief that liquidity levels will remain subdued.

(Reuters)


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