It was a dark September for India’s financial markets when they quaked under the debt repayment defaults by Mumbai-headquartered Infrastructure Leasing & Financial Services Limited (IL&FS) and there were fears that the housing finance sector would be convulsed by a resultant liquidity crunch. The ominous Rs91,000 crore ($12.8 billion) bankruptcy of the country’s leading infrastructure development and finance company wiped out Rs8.48 lakh crore ($119.43 billion) in investor wealth and caused tremors amongst its investors, which included banks, insurance companies, and mutual funds, as also its on-going works in India and overseas. The peril was amplified because IL&FS straddles as many as 169 subsidiaries, associates, and joint ventures. IL&FS owed as much as Rs57,000 crore of its Rs91,000 crore debt largely to public sector banks, and the disaster jolted the shares of housing finance companies (HFCs) like Indiabulls Housing Finance Ltd (IBHFL), Dewan Housing Finance Ltd (DHFL), PNB Housing Finance Ltd (PNBHFL) and LIC Housing Finance Ltd (LICHFL). DHFL shares nosedived 60 percent intra-day on 21 September when news of the IL&FS collapse broke out. Within a month, the share prices of IBHFL had plunged by 21 percent, PNBHFL by over 33 percent, and LICHFL by 13 percent. It was a domino effect triggered by DSP Mutual Fund selling about Rs300 crore of its shareholding in DHFL, raising concerns of tight liquidity and of the possible inability of the home financier to raise funds at lower rates.
Foreign portfolio investors pulled out and there were also worries that HFCs could default on outstanding bond re-payments. The government acted swiftly to contain the contagion, superseding the company’s board of directors and instituting an inquiry by the Serious Fraud Investigation Office (SFIO), the corporate fraud investigating agency controlled by the Ministry of Corporate Affairs (MCA). The SFIO inquiry included the scrutiny of management failure, and the National Company Law Tribunal (NCLT) too was assigned to monitor the company’s turnaround plan. The crisis also prompted a review of the health status of the housing finance segment that gets critical refinancing support from the National Housing Bank (NHB), an arm of the RBI. But a preliminary survey showed no stress in the 97 housing finance companies (HFCs) in the country. Market sentiments were also buoyed by the move by the NHB to raise its refinancing target by 25 percent to Rs30,000 crore upto June 2019. NHB, however, does not finance IL&FS projects, as it is mandated to provide support primarily to HFCs and hence considers housing refinance distinct from infrastructure refinance.
Home loans are usually secured loans, backed by property or collateral, and are thus also called collateral loans, while infrastructure financing and refinancing are not usually backed by such assets and hence carry higher interest rates. Crisis-ridden IL&FS ran into another dilemma on 3 December when NCLT issued an interim order for attaching all movable and immovable properties of nine of its former directors, who were also directed to disclose their securities and bank accounts within the country and overseas. An interim SFIO report also sought to implead six former directors of IL&FS. Ex-chairman Ravi Parthasarathy, Hariharan, and Arun Saha were the three other former directors whose properties have been seized. Sixty-six-year-old Parthasarathy resigned as chairman in July, citing health issues. He served IL&FS for close to 30 years, having joined the company as its CEO in 1989, but even at the time he stepped down, IL&FS was challenged by high leverage and the complexity of managing its vast web of businesses. The MCA counsel contended in court: “IL&FS used a circuitous way to pay off loans of its own entities to meet RBI guidelines and used this method to obtain a high credit rating and high managerial remuneration.” He pointed out that while Parthasarathy’s remuneration had increased by 144 percent in 2017-18, the average increase in salaries of employees that year had been 4.44 percent. The tremors in India expectedly buffeted even IL&FS works overseas, with seven of its Indian workers in Ethiopia being held hostage by local workers since 25 November as they demanded their dues related to three road projects operated through a joint venture of IL&FS Transportation Network Ltd and Spain’s Elsamex Maintenance Services Ltd. The company has not cleared the dues of around 600 Ethiopian employees.
A spokesperson of Indiabulls Housing Finance Ltd (IBHFL) said it was “fear” rather than an actual liquidity crunch that made the markets react as they did to the IL&FS crisis. He explained that though interest rates were climbing over the previous six months, liquidity was adequately available to all NBFCs/HFCs, especially to better-rated companies like IBHFL. “The IL&FS default created panic among debt market participants, which resulted in redemption pressure for mutual funds,” he mentioned. “Post the crisis, which started on 21 September, home loan rates have been increased by 20 bps from 8.6 to 8.8 percent (best rate) and this is consistent throughout the industry.” According to him, this led to the tightening of the liquidity situation for the NBFC/HFC industry, as market participants feared a risk of contagion. What the markets failed to realize was that IL&FS was not a classic NBFC that extended loans to end retail customers, small businesses, and corporates, but largely a core investment company that borrowed money for lending to its own group companies or co-investing with them and which are mainly in the business of infrastructure development. Hence, he deemed IL&FS’s comparison with an NBFC/HFC wrongly placed, as an NBFC/HFC’s risks were well-diversified through their broad retail customer base.
The IBHFL spokesperson pointed out that since the crisis broke out, the NBFC/HFC industry has repaid its CP (commercial paper) dues in a timely manner, with the underlying liquidity with mutual funds remaining strong and the situation pretty much returning to normal. “Over the period of this crisis, the housing demand has not been affected in any adverse way,” he observed. “The demand for housing in India is structural in nature – urbanization, 2/3rd population below 35 years of age, nuclearisation of families – aided by increasing affordability – stagnant property prices, steady real wage inflation – and lower effective interest rates, due to tax incentives and PMAY subsidy.” PMAY is the Pradhan Mantri Awas Yojana, which is a government initiative for affordable housing for the urban poor.
Most HFCs continued to disburse retail loans even during the liquidity tightness, and banks, which in normal course continue to lose market share to HFCs, have used this opportunity to achieve considerably higher home loan disbursals during this period. “The liquidity situation has now started to normalize as IBHFL raised more than Rs23,000 crore since 21 September through different instruments from various financial institutions, amply proving that there was no effect on the home loan industry or to prospective home buyers during the crisis period,” the spokesperson stressed. “While this liquidity crisis led home loan rates to rise by a few basis points, the effective home loan rate, after factoring in applicable tax deductions and PMAY subsidies, where eligible, compares very favorably to rental yields, especially in the mid-income affordable housing segment.” It is now clear that the IL&FS default led to a crisis of confidence amongst market participants on liquidity management and thereby asset-liability management principles of NBFCs and HFCs, which consequently led to the liquidity squeeze. The sell-off and the plunge in share prices that followed were a direct and ongoing outcome of this crisis of confidence.
The NBFC/HFC industry has, however, punctually repaid all its debt obligations since the crisis, underscoring its core strength. Confidence has returned with the fading of liquidity concerns. “Better rated HFCs like IBHFL, as those with strong parentage and with higher vintage, are seeing an easing liquidity situation,” the Indiabulls representative said. To buttress his view that the home loan demand continues to remain strong, the IBHFCL spokesperson estimates that housing sales across the top seven Indian cities recorded a 15 percent year-on-year (YoY) jump in the second quarter of 2018-19, with Mumbai, Pune, Bengaluru, and Kolkata witnessing an over 20 per cent surge in YoY sales. It must be explained that home loan demand is normally raised with a lag of two to six months from the time of home sale. Strong housing sales in Q2 have hence sustained home loan demand in the current quarter, and the volume of home loan demand is similar to that before the interest rate hike. By Sarosh Bana, Executive Editor | Business India