Rating Rationale
December 07, 2023 | Mumbai
Canbank Factors Limited
Ratings reaffirmed at 'CRISIL AA/Negative/CRISIL A1+'
 
Rating Action
Total Bank Loan Facilities RatedRs.500 Crore
Long Term RatingCRISIL AA/Negative (Reaffirmed)
 
Rs.400 Crore Commercial PaperCRISIL A1+ (Reaffirmed)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Negative/CRISIL A1+’ ratings on the bank facilities and commercial paper of Canbank Factors Ltd (Canbank Factors).

 

The ratings continue to reflect the significant financial and managerial support that Canbank Factors receives from Canara Bank ('CRISIL AAA/Stable/CRISIL A1+'), The strength is partially offset by the weak, albeit improving, asset quality and earnings of Canbank Factors, and its modest scale of operations.

 

The negative outlook reflects the limited buffer over the regulatory capital adequacy ratio (CAR) requirement which may constrain business growth.

 

CRISIL Ratings has taken note of the announcement by Canara Bank pertaining to approval received from the Reserve Bank of India (RBI) to divest its complete shareholding (70%) in Canbank Factors. The existing analytical approach factors in support from Canara Bank given the strong linkages in terms of operations, management, treasury and infrastructure. If there is a change in the shareholding, CRISIL Ratings will revise the analytical approach and discontinue factoring in the support and will consider the standalone credit risk profile of Canbank Factors and benefits, if any, emanating from the incoming shareholder. CRISIL Ratings understands that till any such transaction is completed, Canara Bank will continue to support Canbank Factors.

Analytical Approach

CRISIL Ratings has considered the standalone credit risk profile of Canbank Factors and factored in strong managerial and financial support from the parent, Canara Bank. Canbank Factors is likely to, in case of exigencies, receive distress support from Canara Bank for timely repayment of debt, considering its strategic importance and the parent’s high moral obligation on account of majority shareholding and shared brand.

Key Rating Drivers & Detailed Description

Strength:

  • Support from parent: The ratings are centrally based on the strong moral obligation of Canara Bank to support Canbank Factors, given its majority ownership (70% stake as on September 30, 2023), shared brand and management control. Senior Canara Bank employees are deputed to key managerial positions in Canbank Factors. Any significant decline in the strategic importance of Canbank Factors, majority ownership by and support from Canara Bank remain monitorable.

 

Weaknesses:

  • Weak, albeit improving, asset quality and earnings: Asset quality remains under pressure on account of legacy bad loans. Gross non-performing assets (GNPAs) as a percentage of total funds in use (FIU) improved from 11.9% as on December 31, 2022, to 10.8% as on March 31, 2023, supported by technical write-offs of Rs 12 crore and recoveries of Rs 5 crore during fiscal 2023, and to 9.1% as on September 30, 2023, on account of higher recoveries in the first half of fiscal 2024. While there has been no further slippage since, ability to contain incremental slippages and recover NPAs remains a key monitorable.

 

The company has nil restructuring as on September 30, 2023. Ability to manage collections and asset quality in the current environment will remain monitorable.

 

Though profitability had improved in the past few fiscals, Canbank Factors reported modest profit after tax (PAT) of Rs 5 crore during fiscal 2023 against loss of Rs 7 crore for fiscal 2022. The loss was on account of elevated provisioning costs towards a single account. The company reported PAT of Rs 4 crore in the six months ended September 30, 2023. Ability to sustain the improvement in profitability remains monitorable.

 

  • Modest scale of operations: Canbank Factors scaled down business to comply with the regulatory CAR requirement. Its factoring turnover dropped to Rs 1,116 crore for the first six months of fiscal 2024 from Rs 2,339 crore for fiscal 2023, and FIU inched up to Rs 591 crore as on September 30, 2023, from Rs 502 crore as on March 31, 2023. The company had CAR of 16.2% as on September 30, 2023, with a limited buffer of 120 bps over the regulatory requirement. This renders the credit profile vulnerable to any significant deterioration in asset quality and constrains business growth.

Liquidity: Strong

Liquidity position is supported by positive cumulative mismatch in all buckets as on September 30, 2023. Canara Bank has sanctioned bank line of Rs 480 crore, which includes working capital demand loan of Rs 430 crore and overdraft facility from Canara bank. Of the sanctioned line, Rs 30 crore was unutilised as on September 30, 2023, with nil debt obligation as the company rolls over the existing lines.

Outlook: Negative

CRISIL Ratings believes the limited buffer for Canbank Factors over the regulatory CAR requirement may constrain business growth.

Rating Sensitivity factors

Upward factors:

  • Increased strategic importance to the parent
  • Significant improvement in market position, asset quality and profitability, with return on assets (RoA) beyond 3% on a sustained basis

 

Downward factors:

  • Lack of timely support from Canara Bank
  • Delay in recovery from delinquent accounts, leading to write-offs and sustained impact on profitability (RoA < 0)

About the Company

Established in 1991, Canbank Factors is promoted by Canara Bank, with Small Industries Development Bank of India and Union Bank (erstwhile Andhra Bank) holding 20% and 10% stake, respectively. The company is registered with the RBI as a non-deposit-taking, non-banking financial company. It provides domestic factoring services to small and medium enterprises.

Key Financial Indicators

As on/for the year ended

 

September 2023

March 2023

March 2022

Total assets

Rs crore

642

553

681

Total income

Rs crore

25

49

43

Profit after tax

Rs crore

4

5

-7

Gross NPA

%

9.1

10.8

10.0

Gearing

Times

3.5

2.9

4.0

Return on assets

%

1.2

0.99

-1.1

Any other information: Not Applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name of the instrument Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue size
(Rs.Crore)		 Complexity
Level		 Rating assigned
with outlook
NA Commercial paper NA NA 7-365 days 400 Simple CRISIL A1+
NA Overdraft facility NA NA NA 480 NA CRISIL AA/Negative
NA Proposed long-term bank loan facility* NA NA NA 20 NA CRISIL AA/Negative

*Interchangeable with short-term bank facility

Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 500.0 CRISIL AA/Negative 02-02-23 CRISIL AA/Negative 12-08-22 CRISIL AA/Watch Negative 29-11-21 CRISIL AA/Negative 31-08-20 CRISIL AA/Negative CRISIL AA/Negative
      --   -- 16-05-22 CRISIL AA/Watch Negative 17-08-21 CRISIL AA/Negative   -- --
Commercial Paper ST 400.0 CRISIL A1+ 02-02-23 CRISIL A1+ 12-08-22 CRISIL A1+ 29-11-21 CRISIL A1+   -- --
      --   -- 16-05-22 CRISIL A1+ 17-08-21 CRISIL A1+   -- --
Short Term Debt ST   --   --   --   -- 31-08-20 CRISIL A1+ CRISIL A1+
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Overdraft Facility 80 Canara Bank CRISIL AA/Negative
Overdraft Facility 400 Canara Bank CRISIL AA/Negative
Proposed Long Term Bank Loan Facility* 20 Not Applicable CRISIL AA/Negative
*Interchangeable with short-term bank facility
Criteria Details
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Finance Companies
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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