Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ to Rs 75 crore Subordinated Debt - Tier II Non Convertible Debentures of BoB financial Solutions Limited and has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ rating on the other debt instruments of BOB Financial Solutions Limited (BFSL).

 

The ratings centrally factor in the company’s strategic importance to, and the expectation of strong support from, its parent, Bank of Baroda (BoB; rated ‘CRISIL AAA/Stable/CRISIL AA+/Stable'‘). The ratings also factor in adequate capitalisation. These strengths are partially offset by a small, though increasing, scale of operations, and modest asset quality metrics and earnings.

Analytical Approach

For arriving at the ratings, CRISIL has factored in support expected from its parent, Bank of Baroda.

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 BFSL 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; BFSL is the platform through which the credit cards business is undertaken. A professional management team has been put in place and the company is working on building capabilities and improving its credit card offerings. The company has also launched in-house application for better customer experience. The technology investment which is aimed at enhancing the capacity building will help to penetrate the market through the brick and mortar channel as well as the digital channel.

 

Board-level oversight from BoB is expected to remain strong and operational synergies would increase. The company’s board of directors comprises senior personnel from BoB, including the chairman, Mr Sanjiv Chadha (Managing Director and Chief Executive Officer of BoB), and all strategy formulation is undertaken at the board level.

 

Currently, BoB holds 100% stake in BFSL and it has infused Rs 575 crore since inception, of which Rs 300 crore was infused in June 2022. As the business scales up, BFSL may bring in a strategic investor. However, CRISIL Ratings expects BoB to continue to maintain majority stake and will have complete management control over the company.

 

* Adequate capitalisation

BFSL’s capitalisation metrics was adequate with tier 1 ratio and total capital ratio of 18.5% and 21.8% respectively as on September 30, 2022. The company had a gearing of 3.1 times as on September 30, 2022, as against 3.95 times as on March 31, 2022 and 3.48 times as on March 31, 2021. However, the sharp increase in business operations necessitated equity capital infusion. BoB infused Rs 300 crore in June 2022 taking the total equity infusion to Rs 575 crore since inception. The infusion is expected result in improvement in the gearing metrics. The steady-state gearing is expected to remain below 5 times. The parent will continue to infuse further capital over the medium term to support BFSL growth.

 

Weakness:

* Improving asset quality metrics

The gross NPA improved to 4.8% in first half of fiscal 2023 as against 7.6% in fiscal 2022 and 7.5% in fiscal 2021 given the scale up in the portfolio and increasing share of salaried customers in the portfolio. Amidst the high provision cover of 81.5%, the net NPAs remained low at 0.87% as on September 30, 2022 (1.18%  as on March 31, 2022)under IND-AS accounting standards. The company has not done any restructuring under the RBI covid resolution framework, thereby taking one time hit on its book. In terms of collections also, the collection efficiency[1] has remained comfortable in the range of 91-93% across months.

 

Over the period, BFSL 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

Earnings remain modest marked by losses as the company focuses on scaling up its operations. The company primarily generates revenue from credit card and merchant acquisition operations. The company reported a net loss of Rs 9.3 crore in the first half of fiscal 2023 as against net loss of Rs. 10.4 crore in fiscal 2022 and net loss of Rs 9.6 crore in fiscal 2021. The loss reported was due to high expenditure on advertisement and other promotional activities, technology upgradation, and employee benefits and high credit costs due to company’s policy of not offering restructuring and also maintaining high provision on its GNPAs.

 

Nevertheless, over the past few years, the company has been able to bring down its operating expenses, with cost to income ratio reducing to 71% in first half of fiscal 2023 as against 72% in fiscal 2022 from 92% in fiscal 2019. The reduction in operating expenses has been supported by the deep integration with the Bank of Baroda systems and movement towards the digitization, which has ultimately helped to bringing down the cost of acquisition.

 

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

BFSL continued its strong growth in cards in force with outstanding cards at 15.02 lakh as on September 30, 2022, registering an increase of 72.3%(annualized). The gross card receivables too increased significantly to Rs 2435 crore as on September 30, 2022, as against Rs 1428 crore in fiscal 2022 and Rs 877 crore in fiscal 2021. 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 BFSL 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

Liquidity: Strong

The liquidity profile is expected to remain strong on the back of financial support in the form of bank lines that can be extended by BoB in case of any exigency. On a standalone basis, as on December 31, 2022, BFSL had unutilised bank lines worth Rs 783.9 crore, including Rs 133.9 crore from the parent Bank of Baroda. In addition to this, given the nature of credit card business, the company had enough short-term receivables, with monthly average receivable of Rs 1037 crore. Against this, total debt repayments of the company stood at Rs 2065 crore to be repaid over the period of three months (January 2023 – March 2023). Out of this, loan amounting to Rs 1675 crore are CC/WCDL loans and Rs 390 crore was against commercial paper.

Outlook Stable

CRISIL believes BFSL will continue to receive strong support from BoB given the increasing strategic importance, and the ownership and name sharing. Capitalisation is also expected to remain comfortable.

Rating Sensitivity factors

Downward Factors:

* Downgrade in the credit rating of Bank of Baroda by 1 notch or higher

* If there is a significant diminution in the stake held by, or the support expected from the parent

About the Company

Wholly owned by BoB, BFSL (formerly, BOBCARDS Limited) was incorporated in September 1994 as a credit card issuing non-banking financial company (NBFC). Its main business has been credit card issuance. Additionally, it was also providing support to BoB in managing debit card operations for domestic and overseas territory/subsidiaries. The work included providing back-office support for issuance and reconciliation of debit card transactions.

 

However, in July 2017, the domestic debit card operations were transferred back to BoB. This was done to enable BFSL to concentrate its efforts towards the credit card business and merchant point-of-sales (POS) operations.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Non-convertible debenture*	NA	NA	NA	200	Simple	CRISIL AAA/Stable
NA	Commercial Paper	NA	NA	7-365	500	Simple	CRISIL A1+
NA	Subordinated Debt - Tier II Non Convertible Debentures*	NA	NA	NA	75	Complex	CRISIL AAA/Stable

*Yet to be issued