Detailed Rationale

CRISIL Ratings’ rating on the short-term bank loan facilities of Centrum Broking Limited (CBL) continues to be on ‘Rating Watch with Developing Implications’.

 

On June 29, 2021, CRISIL Ratings had placed its ‘CRISIL A2+’ rating on the short-term bank loan facilities of CBL on ‘Rating Watch with Developing Implications’. The rating action followed the announcement by Centrum Capital Ltd (CCL), holding company of the Centrum Group on June 18, 2021 with respect to Reserve Bank of India (RBI) issuing an in-principle approval to Centrum Financial Services Limited (CFSL) to establish a Small Finance Bank (SFB). CFSL is the NBFC arm of Centrum group and is a subsidiary of Centrum Capital. As per the press release of RBI, the in-principle approval was in specific pursuance of CFSL’s offer with respect to expression of interest sought by Punjab & Maharashtra Co-operative Bank Ltd (PMC). Resilient Innovations Pvt Ltd (BharatPe) was to be an equal partner in the SFB.

 

In August 2021, the consortium of CFSL and BharatPe incorporated an SFB as Unity Small Finance Bank (USFB) and, on October 12, 2021, the RBI issued the SFB license to USFB. Subsequently, CFSL and Bharatpe infused a capital of Rs 1105.1 crore in the USFB, as against a minimum capital requirement of Rs 200 crore for an SFB, and Centrum group transferred its non-banking finance company (CFSL) and micro-finance businesses to the USFB, with business transfer agreements effective from November 01, 2021.  On November 22, 2021, RBI released a draft amalgamation scheme for USFB and PMC bank for public comments till December 10, 2021. As part of the draft amalgamation scheme, there is a staggered pay-out to the depositors of PMC bank, which augurs well for the liquidity profile of the SFB. Further, the capital infusion of Rs 1105.1 crore is expected to support the capital profile of the SFB.

 

CRISIL Ratings understands that the final scheme of amalgamation of the SFB with PMC bank has to be approved and notified by the Government of India (GoI) after the draft is recommended by RBI.

 

CRISIL Ratings believes that this is a critical step for the final amalgamation. Further, the Centrum group is also in a process to finalise its strategy around the business and key target segments for the SFB. CRISIL Ratings will resolve the watch and take final rating action once the final approvals are in place and CRISIL Ratings has detailed information with respect to the business strategy and complete organisational structure of the SFB.

 

The rating continues to factor in adequate capitalisation and well-diversified product offerings of the Centrum group across the financial services domain. These strengths are partially offset by the modest earnings profile and exposure to uncertainties inherent in capital market-related businesses.

 

The Centrum group has presence across the fee-based services such as broking, wealth management, investment banking, and asset management, and fund-based businesses including housing finance and banking. Given the nature of business, income from fee-based businesses tend to be volatile in-sync with the capital market activities and hence in the current difficult macro environment, on account of Covid-19, the performance of the group will remain monitorable

 

In line with Reserve Bank of India’s (RBI's) measures for the Covid-19 pandemic, lending business of the Centrum group had given moratorium to its borrowers. While the collection efficiency was impacted during the initial months of the moratorium, collections have inched up since then. However, the second wave of the pandemic has resulted in intermittent lockdowns and localised restrictions. This could lead to some delays in collections in upcoming months due to impact on the underlying borrowers’ cash flow. Furthermore, any change in the behaviour of borrowers on payment discipline can affect delinquency levels.

Analytical Approach

For arriving at the rating, CRISIL Ratings has combined the business and financial risk profiles of CBL, its parent and the group’s flagship company, Centrum Capital Ltd (CCL), and CCL’s other subsidiaries including Centrum Wealth Management Ltd (CWML), Centrum Housing Finance Ltd (CHFL) and Unity Small Finance Bank (USFB). This is because of managerial, business and financial integration amongst the companies, collectively referred to as the Centrum group.

 

Please refer Annexure – List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Adequate capitalisation

CRISIL Ratings believes the Centrum group is adequately capitalised for its current and proposed scale up of operations over the medium term. Adjusted net worth of the group stood at Rs 644 crore as on September 30, 2021 (Rs 681 crore as on March 31, 2021). Adjusted gearing increased to 3.2 times as on March 31, 2021, (from 2.8 times, as on March 31, 2021) and with the scale up in operations, adjusted gearing is expected to increase from the current levels over the medium term. Nevertheless, it is expected to remain in line with peers with a steady state gearing for the non-banking financial company (NBFC) and housing finance company (HFC) business at 4-5 times and 6-7 times, respectively. The impact of the group’s earnings on its capitalisation levels will, however, continue to be a key rating monitorable. 

Well-diversified product offerings across financial services domain

The Centrum group is present across various segments, including institutional business (investment banking, institutional broking), wealth management (private wealth, insurance broking), lending (affordable housing, MSME and microfinance) and asset management. 

 

The group has a well-diversified business profile, with an established presence in fee-based businesses. It offers credit for affordable housing through CHFL and to MSME and Microbusinesses through USFB. This diversification should help the group expand its reach and customer base and providing increased opportunity of cross-selling its offerings.

 

CCL is a merchant banker with presence in the debt capital markets with clients such as public sector units, banks, state-level undertakings, private corporates and provident funds. The groups’ wealth management business has witnessed healthy traction in recent years with assets distributed and managed increasing to ~ 25000 crore as on March 31, 2021 (Rs 23,000 crore as on March 31, 2020).  The wealth management business offers distribution, investment advisory and family office advisory services across asset classes, such as equity, fixed income, real estate and alternate investments. The group also has an insurance intermediation business, which placed new business premium in excess of Rs150 crore in fiscal 2021 (125 crore in fiscal 2020). The group launched the asset management business in fiscal 2018. The equity broking operations (carried out through CBL) remains small with a low market share. However, its broking volume has also witnessed an improvement over the past few fiscals.

 

The group started its lending businesses (NBFC, HFC and MFI) about 4 years ago. To scale up these new businesses, the group has a team of experienced professionals and has also inorganically grown through acquisition of portfolios from other players. The group offers various products like supply chain finance, structured finance, mid-corporate finance, real estate finance, MSME business loans, affordable housing finance and micro-finance. The group has slowed down on the disbursements on the wholesale book and is focused on growing the retail and small business loans. Consolidated loan book were flat at ~ Rs 1800 crore as on March 31, 2021 (Rs 1,787 crore as on March 31, 2020). Gross NPAs were at 1.7% as on March 31, 2021 (1.4% as on March 31, 2020). As part of the formation of USFB, the group has transferred its NBFC and MFI business to the SFB. However, the portfolio is not well seasoned and asset quality performance as the portfolio seasons further will be a monitorable

 

CRISIL Ratings believes that while the group’s foray into fund-based businesses will provide cross-selling opportunities and diversification to the group, its ability to scale up the same successfully will be a monitorable.

 

Weaknesses

Modest earnings

Overall earnings profile of the group, historically supported by the foreign exchange business which was divested in fiscal 2019, has been muted in the last two fiscals. For fiscal 2021, the group reported a loss of Rs 42 crore on a total income (net of interest expense) of Rs 275 crore. As against this, PAT of Rs 0.7 crore (including an exceptional item of Rs 68 crore) was reported on a total income (net of interest expense) of Rs 282 crore, for fiscal 2020. For the half-year ended fiscal 2022, the group reported a loss of Rs 18.7 crore on a total income of Rs 293 crore.

 

Revenue and core earnings continue to be muted in fiscal 2021, on account of low growth in the lending business. Revenue of the wealth management business increased to Rs 90 crore in fiscal 2021 (from Rs 77 crore in fiscal 2020) and turned in a small profit as opposed to loss in fiscal 2020. Despite a flat loan book and higher credit costs, all three lending businesses have reported profits in fiscal 2021. Nevertheless, on account of challenging macro-economic environment, the ability of the management to manage the asset quality and limit the credit the cost will remain a monitorable.

 

Exposure to uncertainties inherent in capital market-related businesses; nascent stage of operations of lending business

The group’s capital market businesses remain susceptible to economic, political, and social factors that drive corporate and investor sentiment. Trading volume and earnings depend heavily on the level of trading activity in capital market. Global events also influence fortunes of the domestic market. Turnover and volume in the broking business move in tandem with market sentiments.

 

Lending businesses of the group are at early stages. However, the group has focused on putting in place sound credit appraisal and risk management processes to support ramp-up, over the medium term. Ability to grow the loan book and manage asset quality, as the portfolio seasons, will be key monitorables.

Liquidity: Adequate

The group had cash and cash equivalents of Rs 263 crore as on September 30, 2021.

Rating Sensitivity Factors

Upward Factors

• Substantial and sustained improvement in market position across businesses while maintaining credit quality metrics
• Improvement in earnings profile with the group reporting RoA>1% over an extended period

Downward Factors

• Deterioration in asset quality leading to increase in the credit costs impacting the capitalisation of the group
• Subdued earnings profile with the group reporting losses at core earnings level (RoA<0%)

About the Group

The Centrum group is being led by Mr. Jaspal Bindra, who is the Executive Chairman of Centrum group. The centrum group has presence across various segments including institutional business (investment banking, institutional broking), wealth management business (private wealth, insurance broking), lending businesses (affordable housing, NBFC and microfinance) and asset management business. As on March 31, 2021, NBFC, HFC and MFI had a loan book of Rs 875 crore, Rs 473 crore and Rs 427 crore, respectively. Now, the group has transferred its NBFC and MFI business to USFB.

 

CBL is the Brokerage arm of Centrum Group that offers brokerage, equity research, portfolio management services, depository participant and financial product distribution services to non- institutional clients. it also offers research, brokerage and placement services to institutional clients. The Company is a member of BSE and NSE (Equities & Currency segments), a Depository Participant (of CDSL), SEBI Registered Research firm and a Portfolio Manager. CCL ultimately hold 96.7% in CBL.

 

Centrum group reported a loss of Rs 42 crore (including an exceptional gain of Rs 68 crore) on a total income of Rs 513 crore in fiscal 2021 as against a profit of Rs 0.7 crore (including an exceptional item of Rs 68 crore) on a total income of Rs 480 crore in the corresponding period previous fiscal. For the half-year ended fiscal 2022, the group reported a loss of Rs 18.7 crore on a total income of Rs 293 crore.

 

CBL had total income and profit of Rs 53.5 crore and Rs 0.4 crore, respectively, in fiscal 2021 as against total income and loss of Rs 62 crore and Rs 1 crore, respectively, in fiscal 2020.

Any other information: Not applicable