DHFL or Dewan Housing Finance Corporation Ltd. is a Non-bank financial company, which provides home loans.
It defaulted on its payment obligations. So, the RBI decided to refer the company to the insolvency court (established under the Insolvency and Bankruptcy Code).
[You may also read: The Insolvency and Bankruptcy Code Explained]
The company will be India’s first NBFC to be taken to the insolvency court.
What is the DHFL mess all about?
In June 2019, DHFL defaulted on its interest payments worth Rs.960 crores.
The crisis in the company came to surface last year in 2018 when IL&FS went bust.
[You may also read: Everything you wanted to know about IL&FS crisis]
After the IL&FS defaulted on its payments, in September 2018, DSP Mutual funds sold over Rs.300 crore worth of commercial papers of DHFL at a discount. This is because DHFL had major exposure to IL&FS. It had lent Rs.649 crores to IL&FS.
Apart from that, after the IL&FS crisis, there was a major cash crunch. The banks became wary of lending to the NBFCs, which impacted DHFL. It had trouble raising further loans from the financial market.
This problem was compounded due to asset-liability mismatch in the balance sheets of NBFCs. Simply put, short-term liabilities were used to finance long-term assets. In other words, DHFL relied on short term loans from banks to give out loans to home buyers.
These short-term loans from banks dried up after the IL&FS crisis.
However, the DHFL defended these charges.
Nevertheless, in June 2019, it defaulted on its interest payments. The rating agencies began to downgrade the company.
Finally, in November, the RBI decided to intervene and initiate insolvency proceedings against the company.
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