By Andy Mukherjee
Just a year ago, India’s third-largest mortgage lender was bragging about how it had shrunk its financing costs by replacing bank loans with market borrowings. Now, Dewan Housing Finance Corp. is confronting the fallout of that seemingly clever strategy, one that many of its peers face as well: a dangerously high exposure to India’s struggling developers.
At the end of March 2018, Dewan had brought its cost of funds down to 8.4 percent, a reduction of almost 2 percentage points in three years. Like other Indian shadow banks, Dewan had ratcheted up sales of bonds and commercial paper to yield-hungry mutual funds, taking the share of debt-market financing to 40 percent from 28 percent. With their market shares slipping, banks, too, had no choice but to offer better terms. After all, this was an established, highly rated borrower expanding its liabilities by a compounded annual rate of 24 percent when there was very little demand for credit to put up new factories.
Then, after sudden defaults by infrastructure operator-financier IL&FS Group last September, Dewan’s share price went into a tailspin. While the lender had no direct links with IL&FS, all shadow banks that were relying on short-term money-market financing to finance long-term assets – either bridges or homes – came under scrutiny.
Dewan has since cut its liabilities by $2.5 billion, aggressively securitized and sold assets to investors such as Oaktree Capital Management, hit the brakes on torrid growth and tried to stabilize its portfolio at a little under $18 billion. Meanwhile, Cobrapost, an investigative journalism website, ran an expose alleging that the family of Dewan Chairman Kapil Wadhawan had siphoned off more than 310 billion rupees ($4.3 billion) of public money for private gains. The lender denied the allegations as a “mischievous misadventure” to sully its reputation. Nevertheless, with the stock falling further, Care Ratings and Brickwork Ratings downgraded the lender’s triple-A issuer credit ratings by a notch.
Scrambling, Dewan and its parent, Wadhawan Global Capital, recently sold a specialist lender for low-income earners to Blackstone LP. To further regain investors’ trust, the Mumbai-based firm is looking for a strategic partner to infuse fresh equity.
It’s a race against time. Ever since the IL&FS crisis made the funding markets nervous, analysts have started looking more closely at what companies like Dewan actually do. Yes, they lend a lot to individual borrowers looking to buy homes, which has been a great business of late because the government of Prime Minister Narendra Modi offers subsidies on affordable housing so lenders can offer attractive rates. (By the end of last year, such subsidies added up to more than $250 million for Dewan).
The risky part of the business, though, is lending to builders. Leaving aside the relatively safe avenue of lease-rental discounting, India has about 3.4 trillion rupees ($47 billion) of outstanding developer loans, according to Jefferies analysts Bhaskar Basu and others. Blinded by falling funding costs, shadow banks raised their exposure to property firms by 46 percent over three years even as bank loans to builders grew by a far more cautious 4 percent. Stock markets saw the financiers’ high returns on equity and ignored the risks. In December, Jefferies analysts estimated 81 percent of the loan book of Piramal Enterprises Ltd.’s housing-finance subsidiary to be made up of advances to 134 construction accounts.
For Dewan, which is more of a retail operation than Piramal, the lumpy developer loan book was still significant at 20 percent of the total in September, according to Care Ratings, which says the lender will lower that vulnerability to 10 percent by March.
Trouble is, what’s good for one may be disastrous for all. Between them, the top seven Indian cities have 673,000 unsold homes. About 85,000 are ready to move in, according to ANAROCK Property Consultants. Buyers are spoiled for choice. To quickly finish and clear the remaining inventory, builders will need more money at a time when Dewan and other financiers are shunning them. If that retrenchment forces developers into bankruptcy, lenders’ profits will take a further hit and capital may erode. Instead of improving their access to funding markets, deleveraging might just end up making matters worse.
India recently announced tax breaks on second-home purchases to encourage buying. Developers, too, will get an extra 12 months’ reprieve on the tax they need to pay on the notional rent from unsold homes. The property industry’s funding crunch may ease somewhat, though it’s hard to predict if the improvement will be adequate and adequately helpful across micro markets. Dewan and its peers can’t relax yet.