Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

* Strategic importance to, and expectation of strong support from, parent Bank of Baroda

Strong support is expected from BoB given the company’s increasing strategic importance to the parent and the latter’s strong moral obligation given the ownership and name sharing. The rating also factors in BoB’s articulation of its intention to maintain majority shareholding in BOBCARD and support it in case of any future stress or exigencies.

While the current scale of operations is small, the strategic importance is increasing with greater focus on the credit cards business; BOBCARD is the platform through which the credit cards business is undertaken. A professional management team has been put in place and the company has already upgraded its card management system for better customer experience, credit monitoring and payments. The technology investment which is aimed at enhancing the capacity building will help to penetrate the market through open market channel as well as the digital channel. Board-level oversight from BoB is expected to remain strong and operational synergies would increase.

Currently, BoB holds 100% stake in BOBCARD and it has infused Rs 975 crore since inception, of which Rs. 400 crore was infused in March 2023 and Rs 300 crore was infused in July 2022.

CRISIL Ratings understands the BOBCARD continues to remain as a core strategic subsidiary for BOB given that the company runs the agenda of the credit card business for the bank which is core to the banks’ retail strategy. CRISIL Ratings also understands that the company is the preliminary stage with regards to receipt of expression of interest for the proposed divestment. The intent of getting in a strategic investor is to only strengthen the growth prospects of BOBCARD. Further, name and brand sharing, operational, managerial and board oversight from BOB is expected to continue even post the divestment. Also, even post the divestment, BOB will continue to hold a majority stake in BOBCARD. Same will continue to remain a key monitorable.

* Adequate capitalisation

BOBCARD’s capitalisation metrics is adequate with total capital ratio of 18.9% as on December 31, 2023. It has declined from 30.5% as on March 31, 2023 following the revision in risk weights for consumer loans, as per RBI’s directive in November 2023. Similarly, the gearing also increased to 3.9 times as on December 31, 2023, as against 2.2 times as on March 31, 2023. The steady-state gearing however is expected to remain below 5 times.

Capitalisation is supported by timely equity infusion by the parent. BoB had last infused Rs 400 crore in March 2023 and Rs 300 crore in July 2022 taking the total equity infusion to Rs 975 crore since inception. The parent will continue to infuse further capital over the medium term to support BOBCARD growth.

CRISIL Ratings has also taken note of the recent measures by Reserve Bank of India (RBI) covering the Banking and NBFC sector. Firstly, on the asset side for NBFCs, there is an increase in risk weights for unsecured consumer loans (including credit card receivables), by 25 percentage points to 125% from 100% earlier. This regulation applies to all retail loans except housing loans, vehicle loans, educational loans, loans against gold and microfinance/SHG loans. The increase in risk-weighted assets will lead to a decrease in the capital adequacy ratio of BOBCARD by around 6.4% as compared to Sep 2023. However, parent support will continue to aid capitalisation.

Secondly, there is an increase in risk weights for Bank’s exposure to NBFCs by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs is below 100%. Herein, loans to HFCs, and loans to NBFCs which are eligible for classification as priority sector are excluded. This development may potentially lead to an increase in cost of bank borrowings for NBFC sector. This could lead to diversification in the borrowings mix with higher share of capital market instruments and securitisation, amongst others. Ability of NBFCs to pass on the potentially higher borrowing costs will be monitored.

Weaknesses

* Improving asset quality metrics

The gross NPA improved to 4.7% in first nine months of fiscal 2024 as against 5.1% in fiscal 2023 and 7.6% in fiscal 2022 given the scale up in the portfolio and increasing share of salaried customers in the portfolio. The net NPAs stood at Nil as on December 31, 2023 and remained as low as 0.7% as on March 31, 2023 under IND-AS accounting standards.

In terms of collections also, the collection efficiency [1] has remained comfortable in the range of 90-93% from Apr 2023 to Dec 2023.

Over the period, BOBCARD has made its risk management practices more stringent, in terms of sourcing customers. Also, the company has implemented strong transaction monitoring and fraud prevention systems,, which will have a positive impact on the overall portfolio performance of the company. Nevertheless, given the segment of operations and amidst the economic environment, the ability of the company to manage its asset quality would remain a key monitorable.

* Modest earnings profile

The company primarily generates revenue from credit card business. After reporting losses until fiscal 2022, company started making profits thereafter, supported by increasing scale of operations. The company reported PAT of Rs 53.5 crore in the first nine months of fiscal 2024 as against PAT Rs. 1.5 crore in fiscal 2023 and net loss of Rs 10.4 crore in fiscal 2022.

This is also evident from lowering Cost to Income % which stood at 64.5% in 9M of fiscal 2024 as compared to 67.7% and 69% in fiscal 2023 and fiscal 2022 respectively. Going forward, as the company achieves scale, the operating expenses are expected to normalise.

Nevertheless, ability of the company to manage profitability while scaling up of the portfolio remains a key monitorable.

* Small, though increasing, scale of operations

BOBCARD continued its strong growth in cards in force with outstanding cards at 22.4 lakh as on December 31, 2023, registering an increase of 20.31% (annualized). The company generates majority of its business by leveraging on the existing customer base of 140 million of Bank of Baroda. Around 90% of the leads are generated through BoB branches. In order to further expand its operations, the company has been making significant investments in technology and systems and procedures, which will not only reduce the turnaround time, but will also result in reduced cost of acquisition, which will ultimately help the company to gain market share over the long term. However, despite the sharp growth. the market share of BOBCARD in terms of number of cards outstanding remains low at just 2% and hence it is likely to remain a relatively small player in the credit card market space over the medium term.

[1]Collection efficiency = Amount Due/Amount Resolved