Just a year ago, India’s third-largest mortgage lender was bragging about how it had shrunk its financing costs by replacing bank loans with market borrowings. Now, Dewan Housing Finance Corp. is confronting the fallout of that seemingly clever strategy, one that many of its peers face as well: a dangerously high exposure to India’s struggling developers.

At the end of March 2018, Dewan had brought its cost of funds down to 8.4 per cent, a reduction of almost 2 percentage points in three years. Like other Indian shadow banks, Dewan had ratcheted up sales of bonds and commercial paper to yield-hungry mutual funds, taking the share of debt-market financing to 40 percent from 28 per cent. With their market shares slipping, banks, too, had no choice but to offer better terms. After all, this was an established, highly rated borrower expanding its liabilities by a compounded annual rate of 24 percent when there was very little demand for credit to put up new factories.

Then, after sudden defaults by infrastructure operator-financier IL&FS Group last September, Dewan’s share price went into a tailspin. While the lender had no direct links with IL&FS, all shadow banks that were relying on short-term money-market financing to finance long-term assets – either bridges or homes – came under scrutiny.

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For Dewan, which is more of a retail operation than Piramal, the lumpy developer loan book was still significant at 20 percent of the total in September, according to Care Ratings, which says the lender will lower that vulnerability to 10 percent by March.

Trouble is, what’s good for one may be disastrous for all. Between them, the top seven Indian cities have 673,000 unsold homes. About 85,000 are ready to move in, according to ANAROCK Property Consultants. Buyers are spoiled for choice. To quickly finish and clear the remaining inventory, builders will need more money at a time when Dewan and other financiers are shunning them. If that retrenchment forces developers into bankruptcy, lenders’ profits will take a further hit and capital may erode. Instead of improving their access to funding markets, deleveraging might just end up making matters worse.