Update on the financial stress – the deeper problem in real estate

INDIA - Report 12 Jun 2019 by Ila Patnaik

Dewan Housing ("DHFL"), which has a balance sheet of about Rs.1.3 trillion, has defaulted. By September 2018, this firm was on the shortlist of stressed financial firms, and now we have the default. This will be a difficult default to address, as India does not have a resolution process for financial firms. In this, it will be similar to the problems faced with IL&FS (although IL&FS was a bit bigger than this). About Rs.50 billion of DHFL debt paper is with mutual funds, with many pockets of over-optimistic valuation, and we may see the usual spiral of NAV markdowns and investor exit from mutual funds.

In other news, Fitch downgraded the long term issuer default rating for Axis Bank and ICICI Bank to speculative grade, reflecting a modified assessment of the Indian operating environment. This may have a small impact upon NBFCs who are seeking to obtain debt from abroad.

Finally, we re-emphasize the links between the current financial stress and the real estate business (both developers and households).

Now read on...

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