Rating Rationale
June 05, 2019 | Mumbai
Dewan Housing Finance Corporation Limited
Rating downgraded to 'CRISIL D'; removed from 'Watch Negative' 
 
Rating Action
Rs.850 Crore Commercial Paper CRISIL D (Downgraded from 'CRISIL A4+'; Removed from 'Rating Watch with Negative Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its rating on the commercial paper (CP) of Dewan Housing Finance Corporation Limited (DHFL) to 'CRISIL D' from 'CRISIL A4+'. The rating has been removed from 'Rating Watch with Negative Implications'.
 
The downgrade reflects delays in debt servicing by DHFL on some of its non-convertible debentures (NCDs) - not rated by CRISIL - because of inadequate liquidity. The payments were due on June 4, 2019. DHFL has Rs 850 crore of outstanding CPs of which Rs 750 crore is due in June 2019. The first CP maturity is on June 7, 2019. With liquidity inadequate as on date to service debt and visibility very low on timely fund raising, CRISIL expects the CP to be in default on maturity.

Analytical Approach

For arriving at the rating, CRISIL has evaluated the standalone business and financial risk profiles of DHFL.

Key Rating Drivers & Detailed Description
Weakness:
* Delay in debt servicing due to inadequate liquidity
DHFL has delayed debt servicing on some of its non-convertible debentures (NCDs) - not rated by CRISIL - because of inadequate liquidity. The payments were due on June 4, 2019. DHFL has Rs 850 crore of outstanding CPs of which, Rs 750 crore is due in June 2019. The first CP matures on June 7, 2019. With liquidity inadequate as on date to service debt and visibility very low on timely fund raising, CRISIL expects the CP to be in default on maturity.
 
* Modest capital position
Reported networth and capital adequacy ratio were Rs 10,750 crore and 17.74%, respectively, as on December 31, 2018 (Rs 10,401 crore and 16.19%, respectively, as on September 30, 2018). Reported gearing was 9.3 times. Gearing adjusted for securitisation also remained high at 12.1 times.
 
* Modest earnings
Return on managed assets, though stable at 1.3% during the first nine months of fiscal 2019, was lower than that of peers (reported return on assets was 1.4%), primarily because of intense competition resulting in low spreads, and high operating expenses on account of large branch network and small ticket size of loans.
 
Strengths:
* One of the large players in housing finance industry
DHFL has been in the housing finance industry for more than 30 years. On a standalone basis, it had assets under management (AUM) of Rs 126,720 crore as on December 31, 2018 (Rs 130,182 crore as on September 30, 2018). The company also has a large presence in the affordable housing finance segment, and remains focused on providing funding options primarily to low- and middle-income customers in Tier II and Tier III cities (which comprised a majority of its network of 352 branches as on December 31, 2018). In terms of AUM mix, around 57% loans were towards housing, 21% towards loans against property (LAP), 17% towards project loans, and 5% towards loans to small and medium enterprises (SMEs).
 
* Reported asset quality metrics are low so far; to be monitored going forward
Based on reported numbers as on December 31, 2018, DHFL has low gross non-performing assets (GNPAs) of 1.12% (0.96% as on September 30, 2018). On a two-year lagged basis, GNPAs stood at 1.6% as on December 31, 2018. Asset quality in the housing loan segment is supported by a relatively low-risk, granular loan book because of focus on low- and middle-income customers-average ticket size is Rs 15 lakh.
 
Given the pressure on fund-raising and liquidity at the industry level, asset quality in segments such as loans to SMEs, loan against property (LAP), and real estate developer loans will be the key monitorables going forward. That is because of the sensitivity of the borrowers in these segments to a prolonged funding crunch. So, while current delinquencies are not high, if the funding situation for non-banks does not stabilise over time, asset quality challenges could manifest. However, CRISIL notes that DHFL's reported asset quality metrics have remained healthy till date.
 
CRISIL also notes that the current challenges in the overall credit profile of DHFL has not yet impacted collections. As per management, DHFL's current collection efficiency till March 2019 remains above 99%, in line with past trends. Further, their collections are primarily in non-cash mode and their ECS repayment return rates over the last six months are similar to pre-September levels. CRISIL will continue to monitor closely DHFL's collection efficiency and asset quality metrics.
Liquidity

DHFL has weak liquidity as reflected in the delays in debt servicing. DHFL has Rs 850 crore of outstanding CPs of which Rs 750 crore are due in June 2019. The first CP maturity is on June 7, 2019. With liquidity inadequate to service debt and visibility very low on timely fund raising, CRISIL expects the CP to be in default on maturity.
 
Scheduled aggregate cash outflows (including loan repayment and securitisation payouts) till July 2019 remains high at an estimated Rs 6,200 crore. CRISIL understands that many of the investors in NCDs with acceleration clauses have not yet exercised their acceleration rights. With this delay, CRISIL believes there is heightened risk of acceleration, thereby materially increasing the debt servicing commitments of DHFL. DHFL estimates collection from loan assets at Rs 2,200 crore per month.

About the Company

Incorporated in 1984, DHFL primarily provides housing finance to low- and lower-middle-income groups in Tier II and Tier III cities. The company also offers non-housing loans such as LAP, developer loans, and SME loans. In December 2010, it acquired Deutsche Post Bank Home Finance Ltd (DPBHFL) to enter the middle- and upper-middle-income segments in Tier I cities. DPBHFL was renamed First Blue Housing Finance Ltd and was merged with DHFL in March 2013. DHFL has a pan-India presence through 352 customer touch points as on December 31, 2018.
 
Profit after tax (PAT) and total income (net of interest expense) stood at Rs 1,172 crore and Rs 2,500 crore, respectively, during fiscal 2018, against PAT (including one-time gain from sale of investment) and total income (net of interest expense) of Rs 2,896 crore and Rs 4,173 crore, respectively, in fiscal 2017.
 
For the nine months ended December 31, 2018, PAT was Rs 1,187 crore and total income (net of interest expense) was Rs 2,407 crore.

Key Financial Indicators (Standalone)
As on/for the period ended Unit Dec 31, 2018
(9 months)		 March 31, 2018 March 31, 2017
Total assets Rs cr 1,10,953 1,07,572 92,298
Total income Rs cr 8,922 10,465 10,827
Profit after tax Rs cr 1,187 1,172 2,896
Gross NPAs % 1.12 0.96 0.94
Gearing (excluding off-book) Times 9.3 10.5 10.2
Gearing (Including off-book) Times 12.1 12.7 11.7
Return on assets (reported) % 1.4* 1.2 1.2
*On an annualised basis

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Instrument Date of allotment Rate of
interest (%)		 Date of
redemption		 Issue size
(Rs.Cr)		 Rating assigned
with outlook
NA Commercial Paper NA NA 7-365 days 850 CRISIL D
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  850.00  CRISIL D  11-05-19  CRISIL A4+/Watch Negative  30-11-18  CRISIL A1+  27-10-17  CRISIL A1+    --  -- 
        17-04-19  CRISIL A3+/Watch Negative  06-11-18  CRISIL A1+           
        22-03-19  CRISIL A2+/Watch Negative  07-05-18  CRISIL A1+           
        27-02-19  CRISIL A1/Watch Negative               
        02-02-19  CRISIL A1+/Watch Negative               
Short Term Debt  ST              11-07-17  CRISIL A1+  07-07-16  CRISIL A1+  CRISIL A1+ 
Short Term Deposit  ST    --  22-03-19  Withdrawal  30-11-18  CRISIL A1+  27-10-17  CRISIL A1+  07-07-16  CRISIL A1+  -- 
        27-02-19  CRISIL A1/Watch Negative  06-11-18  CRISIL A1+  11-07-17  CRISIL A1+       
        02-02-19  CRISIL A1+/Watch Negative  07-05-18  CRISIL A1+           
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Finance Companies
CRISILs Criteria for rating short term debt

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