A woman walks past a signboard of Dewan Housing Finance Corporation Ltd. (DHFL) outside its office on the outskirts of Mumbai, January 31, 2019. REUTERS/Francis Mascarenhas/File Photo

Liquidity worries of non-banking finance companies (NBFC) might worsen further with Dewan House Finance Limited (DHFL) rating cut triggering an erosion of net asset values (NAV) of a number of mutual funds. The financial services sector is already facing a meltdown caused by a liquidity squeeze in Infrastructure Leasing &Financial Services (IL&FS) that has tainted several reputed audit firms.

Investors in mutual funds holding DHFL debt paper have suffered heavily because of the worst single-day erosion in net asset value (NAV), media reports say. A day after agencies cut DHFL rating to 'default' following the lender's default on interest payments of Rs 960 crore.

NAV of several debt schemes fell by 6 per cent to 53 per cent, reflecting the marked-down value of their holdings in DHFL paper, a report says. A loss of 53 per cent in NAV would mean the erosion of 5-6 years of scheme returns, as investors typically earn 8-9 per cent in a year in debt schemes, a report in the Economic Times said. DHFL Pramerica Medium Term Fund, with assets of Rs 35 crore, suffered worst with its NAV plunging 52.99 per cent. The fund has the highest holding of DHFL paper at 37.42 per cent.

The NAV of DHFL Pramerica Floating Rate Fund – with assets of Rs 13 crore –plummeted 48.4 per cent, with one-year returns dipping to 44.2 per cent. The NAV Tata Corporate Bond, with assets of Rs 184 crore, fell 29.7 per cent, with the one-year return at a negative 30.16 per cent. As many as 10 debt schemes saw their NAVs erode by more than 10 per cent on Tuesday, according to the report.

The value of the DHFL share plunged more than 15 per cent in morning trade on Thursday to Rs 95 after opening at Rs 100. The share opened gap down fate closing on Tuesday at Rs 111.

IL&FS-led NBFC liquidity crisis has been a wake-up call for the RBI
The IL&FS office building in Mumbai. The Reserve Bank of India (RBI) has cut repo rates for the third successive time to infuse liquidity into the economy as the NBFC crisis is threatening to slow down the country's economic growth. Wikipedia

DHFL had missed interest payments of Rs 960 crore due on Tuesday forcing fund houses to value the security using standard haircut rules, and change the rating to "default." "As per valuation norms, we have marked down our investments in DHFL bonds by 75 per cent," the report says quoting an unidentified fund manager, who holds the paper in his portfolio, as saying .On Wednesday, three rating agencies downgraded its commercial paper to "default", citing the delay in payments for nonconvertible debentures.

DHFL's woes began in late September after DSP Mutual Fund sold a portion of the housing finance firm's securities at a higher yield. The transaction, along with the fiasco involving IL&FS, triggered worries that DHFL could be facing liquidity issues, the report said. This soon spread to other NBFCs, especially in the housing finance segment.

According to an estimate, about 22 mutual funds together owned DHFL paper worth Rs 5,236 crore across 163 debt schemes as on April 30, 2019. In 10 schemes, the holding of DHFL paper has crossed the single-issuer exposure limit of 10 per cent mandated by the Securities and Exchange Board of India (Sebi). The repo rate cut of 25 basis points on Thursday by the Reserve Bank of India (RBI) Monetary Policy Committee (MPC) was in part to address the liquidity crunch of the economy caused in part by the ailing NBFC sector.