as the bestbrains in India’smodern-
isedandinnovative post-liberalisa-
tion financial sector, allowed to
continue theseactivities for as long
as theydid,evenaftera whistle-
blowerhadrevealedthatall wasnot
wellwiththefirm?Howdidthose
whodesignedandexecuted these
fraudulentactivitiesescapetheat-
tentionof majorshareholders,in-
cluding the Life Insurance
Corporation, leading accounting
firms,ratingagencies ranking debt,
theReserve Bankof Indiaandthe
Ministryof Finance?Andhow,even
afterthecrisis broke,didthelarger
economy-wideramificationsof that
crisisremainconcealed, leading to
its beingimplicitlycategorisedas an
instance of large-scale fraudby a few
roguemanagers?
WhattheDHFLcrisisindicates
is thathowever muchpartsof the
publicnarrativeon IL&FSare true,
thereis moreto theissuethanis
beingrevealedto thepublic eye.
Whilethe DHFL has thusfar defaul-
ted(in principle) onsomeof its
loans,the realissueis thatthe com-
panywouldbe hardputto deliver
paymentson therestof whatin its
casetoois an estimatedcloseto
Rs.1,00,000 crore of debt.DHFL,
unlikeIL&FS,is nota government-
sponsoredentityset up in thefirst
instance withequitysupportfrom
publicentitiessuchas Central Bank
of IndiaandUnitTrustof India,
amongothers,andlaterfromLIC.
Thegovernmenthadan important
handin its creationas a market-
drivenalternativeto thedevelop-
mentfinancialinstitutions(suchas
IFCI,IDBIandICICI)thatwerebe-
ingdoneawaywithas partof the
financial liberalisation agenda. It
wasarguedthatthoseinstitutions,
beingspeciallyfundedby theFin-
anceMinistryandthecentralbank
to pursuespecified developmentob-
jectivesandsocialmandates, were
distortingtheplayingfield andpre-
venting therealisationof the“effi-
ciency”gainsto be derivedfromthe
freeoperationof themarket mech-
anism. So the argumentthatthe gov-
ernment’s implicit sanction
encouraged corruption and fraud
cannotbe appliedto DHFL,which,
too,is beingaccusedof illegitimate
practices in theformof an alleged
siphoning out of fundsto the benefit
of the promoters.SHORTAGEOF‘LIQUIDITY’?
In the post-DHFL defaultsituation,
the fraudexplanationfor the unrav-
ellingcrisisis supplementedwitha
newtheorysummarised in theview
thatthe crisisis oneof a shortageof
“liquidity”. When thisratheropaque
languageis renderedtransparent, it
appears thatthe crisisis being attrib-
utedto the inabilityof NBFCsto ac-
cessnewloans from themarket.
Banksandotherfinancial playersare
seenas havingturnedcautiousand
holdingbackon newlending,having
burnttheirfingers in the IL&FSepis-
odeandgiventheirownNPAbooks.
Thisis makingit difficult for the likes
of DHFL to borrowmoneyto carry
on theirbusiness.Hence,theyare
unableto servicethe loans theyhad
takenearlier.
To the uninitiated, eventhisneed
notbe too clear. Afterall, DHFLhas
exposure to a hugevolumeof hous-
ingandrealestateassets,including
in TierII andTierIII cities.If those
assets,in theformof loansto indi-
vidualsanddevelopers,areprovid-
ing their promised returns, why
shouldthe absenceof newloanslead
to default?Andthe emphasison ac-
cessto liquidityas the mainproblem
clearlysuggests thatlarge-scalede-
faultson the loans it has providedare
notbeing seenas the sourceof DH-
FL’stroubles.
To cut the storyshort,it appears
thatDHFLhas borrowedshort-term
andlentoutlong-term,so thatre-
turnson its lendingcannothelpclear
all of its short-term loanswhenthey
falldue.It needs to keeprenewing
thoseloansandobtainnewloansto
sustain and expand its business,
whichif keptgoingwoulddeliverre-
turnshigherthanthe costof capitalandcostof operationsto ensurea
profit. Becauseof the liquidityprob-
lemresultingfromthe banksturning
tight-fisted, DHFL is beingsqueezed
out of the market for credit,so thatit
is not ableto securethe funds to meet
its paymentcommitmentsandkeep
its business going.It wouldspell
troubleif DHFLwasnotearning
enoughto meetits interest payment
commitments.Butit cannotbe ex-
pectedto earnenoughto meetall the
capitalpaymentcommitmentsfall-
ing duewithoutaccessto newcredit.
Thus, the NBFC crisis stems
fromtwodifferent sources.First, as
happened in the caseof IL&FS,there
is thepossibility that projectsthat
werefundedwithborrowingwent
bador didnotdeliverthereturns
they were expected to generate.
Thingsworsened when,in orderto
preventtheseloansfromgoingbad
andaffectingthe solvencyof the in-
stitutionconcerned,moreloanswere
advanced, eitherto the defaulting
firm or to otherswhomovedthose
fundsto the potentialdefaulter in the
formof investmentsor paymentsso
thattheloancouldbe serviced.The
NBFCin turn,in orderto remainin
businessandservicethe loanswhich
helpedfinancetheseprojects, bor-
rowsmore.Thespiralof debtun-
winds.Thesecondsourceof trouble,
whichseemsto be relevant to DHFL,
is thatevenwhentheprojectsfin-
ancedby the NBFCmaynot be going
bad,thefactthatit is using short-
term borrowing to provide long-
termloansto its clientsrequiresit to
rolloverits owndebt,or borrow
again,to sustainits operationswhile
repayingold loansthatfall due.If, for
somereason,the marketis unwilling
to rolloverloansandadvanceaddi-
tionalloansfor expansion, the NBFC
facesa liquidityproblem.Beingtied
intolongmaturityassets, it does not
havethemoney to repayits own
loans,leading to default.The DHFL wouldbe hardput to
deliver payments on an estimated
Rs.1,00,000crore of debt.