Public Sector Banks Helped DHFL Stay Afloat Through Large Loan Purchases

India's public sector lenders have bought out nearly Rs 12,000 crore in loans from stressed non-bank lender Dewan Housing Finance Ltd. since September 2018, said three people familiar with the transactions while speaking on condition of anonymity.

The loan purchases, done through the bilateral ‘direct assignment' route, helped DHFL generate much needed liquidity to repay dues as it struggled to raise fresh financing from the debt markets following the collapse of Infrastructure Leasing and Financial Services Ltd. in September.

The largest purchases have been by State Bank of India, which has bought approximately Rs 4,000 crore in housing loans since September, and Bank of Baroda, which concluded a Rs 3,000-crore loan purchase in June, said the people quoted earlier. The two banks are also among the largest lenders to DHFL. In addition, Bank of India and Oriental Bank of Commerce have bought Rs 1,000 crore and Rs 1,440 crore worth retail loans respectively, the people cited earlier said.

Emails sent to State Bank of India, Bank of Baroda and Bank of India were not answered. DHFL declined to comment.

As part of the loan purchase deal between Bank of Baroda and DHFL, which happened in early June, the bank's loan exposure to DHFL has been brought down, the third person quoted earlier said. Typically, when a bank purchases a loan pool from an NBFC, it simply pays for the assets, which adds to its books. The NBFC can then use these funds to either lend further or retire any old debt, the person explained. In this case, the funds were used to retire existing DHFL debt with Bank of Baroda. Mint newspaper had first reported this on Monday.

Securitisation To The Rescue

According to a company statement on June 11, DHFL has paid back liabilities of over Rs 36,000 crore without availing any fresh funding since September. Most of this liquidity to repay dues has been generated through securitisation.

Banks typically purchase securitised loan portfolios from NBFCs under two routes, pass through certificates or direct assignments. While the former includes investing in rated certificates of pools of loans, the latter includes direct purchase of loans by banks.

Most of the loan portfolios purchased by state-owned banks from DHFL have been under the direct assignment route. However, these banks have stayed away from purchasing any corporate loans under such arrangements, two of the three people quoted earlier said. This could reduce the risk in such purchases for the banks.

Apart from selling its retail loan portfolio, DHFL has also been trying to sell project loans to funds such as SC Lowy and Oaktree Capital.

Still Not Enough

While the loan purchases helped DHFL make good on bond repayments for some time, the lender missed payment deadlines at least twice in June.

Owing to the delay in repayments, the domestic lenders to DHFL have started working on a resolution plan for the company under the Reserve Bank of India's latest restructuring guidelines. The banks met earlier this week to discuss the future course of action and agreed to sign an inter-creditor agreement by July 5. The 30-day review period to begin work on restructuring the account ends on July 7, a person close to the developments said on condition of anonymity.

BloombergQuint had reported earlier that the restructuring plan could include conversion of debt to equity and sale of DHFL's slum rehabilitation project loans.

Banks have appointed SBI Capital Markets to advise on the restructuring proceedings, while DHLF has appointed EY. The banks will have a 180-day period to finalise and implement the restructuring plan.

The housing finance company has outstanding dues of about Rs 1 lakh crore as of December 2018, with 38 percent of this raised from banks and 47 percent from debt capital markets. DHFL is yet to report its financials for the January-March quarter and has delayed a scheduled board meeting to July 13, according to a stock exchange notification.