InvestorQ : I saw a lot of business channels calling Dewan Housing as a Systemic Risk. What does this mean how would it impact markets?
Arya Nanda made post

I saw a lot of business channels calling Dewan Housing as a Systemic Risk. What does this mean how would it impact markets?

Answer
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Deepa Salunkhe answered.
1 year ago


A systemic risk is when the problem in a particular company impacts the entire financial market due to its connectedness. You will remember 11 years back how the whole world took a hit when Lehman Brothers defaulted and went bust. Dewan Housing is systemically important because it has borrowed Rs.100,000 crore from banks, pension funds and mutual funds. Banks will have to write off more NPAs and mutual pension funds and mutual funds will have lesser returns to pay investors. In some cases, they may also lead to losses and that could impact flows into mutual funds.

A recent analysis by Japanese Broker, Nomura, has highlighted the need to separate the solvency issues in such NBFCs from the liquidity issues. Liquidity can be infused, but solvency is more fundamental in nature. Both IL&FS and DHFL are more a case of solvency than of liquidity. The contagion could manifest in a number of ways. Here are some of the systemic risks that Dewan could create in the markets.

· Last year, IL&FS default separated the better managed NBFCs from the vulnerable NBFCs. If the Dewan Housing contagion spreads, then the government may not be in a position to offer any bailout.

· The onus is on the government and the RBI to intervene and ring-fence the assets quickly so that the realization on such assets can be maximized. The longer such assets are allowed to fester, the less valuable they become.

· A line of liquidity for the solvent NBFCs and rapid liquidation of the insolvent NBFCs could be the best way of preventing the contagion.

· The contagion could go beyond banking and mutual funds and hit other beneficiary sectors like autos, housing, realty projects, SMEs etc.

The markets are worried that while IL&FS was still manageable, DHFL may be much quicker to implode. With serious corporate governance issues also being raised, time may be fast running out for the company and also for the regulators to attack the issue! One of the reasons for the slowdown in GDP was these kinds of liquidity issues and needs to be addressed urgently.