Detailed Rationale CRISIL Ratings’ ratings on the debt instruments of Edelweiss Retail Finance Limited (ERFL) continue on ‘Rating Watch with Negative Implications’
CRISIL Ratings has withdrawn its rating on Rs 100 crore of subordinated debt (See Annexure 'Details of Rating Withdrawn' for details), on client’s request as same is unutilised. The withdrawal is in line with CRISIL Ratings’ withdrawal policy
The ratings were placed on watch following material supervisory concerns raised by the Reserve Bank of India (RBI) via its press release dated May 29, 2024, on ECL Finance Ltd (ECLF) and Edelweiss Asset Reconstruction Company Ltd (EARC).
The RBI ordered ECLF to cease and desist, with immediate effect, from undertaking any structured transactions with respect to wholesale exposures other than repayment and/or closure of accounts in its normal course of business. EARC was ordered to cease and desist from acquisition of financial assets, including security receipts (SRs) and reorganising the existing SRs into senior and subordinate tranches.
CRISIL Ratings understands based on discussions with the management that the companies have submitted their remedial plans to RBI and are continuously engaging with the regulator. RBI’s report on the same is awaited.
With respect to the ECLF book, retail continues to be in focus. However, some slowdown has been witnessed in this book in the first quarter due to slower traction in fund raising. The book stood at Rs 863 crore as on June 30, 2024 as compared to Rs 872 crore as on March 31, 2024 and Rs 703 crore as on March 31, 2022. The company had discontinued the wholesale lending business as on 1st Jan 2024- its residual wholesale loan portfolio is low at Rs 396 crore as at March 31, 2024, which further reduced to Rs 350 crore as on June 30, 2024. However, the entity carries Rs ~3650 crore of SRs on its balance sheet.
With respect to EARC, the company’s focus was primarily on retail acquisitions since fiscal 2023. Given their retail focused strategy, the embargo on new acquisitions would not translate into a significant impact on AUM in the short term given retail assets are not very AUM accretive. Revenues are also largely derived from recoveries from EARC’s existing book with new retail business contribution to overall profit after tax (PAT) at less than Rs 6 crore in fiscal 2024, of overall PAT of Rs 355 crore. Decline in AUM to Rs 29,905 crore as on June 30, 2024 from Rs 37,500 crore as on March 31, 2023 (31,590 crore as on March 31, 2024) is majorly on account of lower corporate NPA available in market as compared to past as well as limited stock of retail NPA available for sale and healthy recoveries from earlier acquisitions.
Nevertheless, a prolonged restriction on acquisitions would have a bearing on EARC’s business risk profile. The company reported a PAT of Rs 85 crore in quarter ended June 30, 2024 as against a PAT of Rs 80 crore in quarter ended June 30, 2023.
Aside from the direct business and financial impact for both ECLF and EARC, these developments could have a second order impact on fund raising for the group given the confidence sensitive nature of the funding environment for non-banking financial companies (NBFCs) and asset reconstruction companies (ARCs). Although the group has been able to roll over Rs 450 crore of commercial paper and raise Rs 358 crore, out of which Rs 144 crore has been raised through structured product and Rs 214 crore via NCDs post the RBI supervisory action on May 29, 2024, traction in fund raising continues to be a key monitorable over the medium term. Further, if the restrictions are not lifted for a prolonged period, there would be an impact on the business and financial risk profile, especially for EARC, which in turn would impact the group profitability given its sizeable contribution to the same.
As on August 22, 2024, the group had liquidity of Rs 1,795 crore of which Rs 1,125 crore was in the form of bank balances, fixed deposits and investments in mutual funds, Rs 626 crore in the form of exchange margin (unencumbered) and Rs 44 crore in the form of undrawn lines. This is expected to be sufficient to meet debt obligations and operating expenses for ~3 months, even assuming nil business inflows and no incremental fund raising. The group’s liquidity position is expected to be further supported by contractual receivables from the retail book and recoveries from wholesale exposures.
Additionally, the group also has divestment plans in pipeline of its stakes in Nuvama Group, housing finance business and alternate assets businesses, which act as additional cushion. Timing of these divestment initiatives will be crucial to meet the planned debt reduction by the group.
CRISIL Ratings will continue to closely monitor traction in fund raising, the company and group’s liquidity position, as well as await updates from the regulator on lifting of restrictions placed on the two companies. The watch will be resolved once greater clarity emerges on all these aspects.
The ratings continue to be supported by the group’s adequate capitalisation, and its diversified business profile with good market position in asset reconstruction and asset management businesses. Growth in retail (including MSME) lending has, however, been relatively slow. The ratings are constrained by lower-than-expected revival in core profitability, and continued high level of unprovided monitorable portfolio. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Edelweiss Financial Services Limited (EFSL) and its subsidiaries (including ERFL). This is because these entities, collectively referred to as the Edelweiss group, have significant operational, financial and managerial linkages.
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, supported by multiple capital raises The Edelweiss group has demonstrated its ability to raise capital from global investors across businesses, despite the tough macroeconomic environment. The group has raised Rs 4,400 crore since 2016 across lending, wealth management and asset management businesses. This has helped maintain its capital position, despite elevated credit costs and absorb asset-side risks. At the group level, networth stood at Rs 6052 crore as on June 30, 2024 as against Rs 6309 crore as on March 31, 2024 (Rs 8581 crore as on March 31, 2023). The networth reduced as ~30% Nuvama’s networth was distributed to the shareholders of Edelweiss Financial Services Limited as part of the demerger. It further reduced due to the final tranche of payment of compulsorily convertible debentures (CCD).
Gearing stood at 3.3 times (excluding CBLO, gearing was 2.9 times) as on June 30, 2024, against 3.2 times (2.9 times) as on March 31, 2024 (2.5 times as on March 31, 2023, and 2.6 times as on March 31, 2022). With increased focus on fee-based businesses, and strategy to grow in credit business through an asset-light model, the incremental debt requirement will be low. The group has plans to divest its remaining stake in the Nuvama group, and fully or partly exit housing, alternate assets and general insurance businesses, which will further aid in unlocking capital and debt reduction.
Demonstrated ability to build significant competitive position across businesses The Edelweiss group is a diversified financial services player, with presence in four verticals i.e. credit (wholesale and retail), insurance (life and general), asset management, and asset reconstruction. The group has attained leading positions in the alternate asset and asset reconstruction businesses and is focusing on building market position in other businesses too, which should lend greater stability to earnings over a period of time.
The asset management business comprises mutual fund and alternate asset businesses. The group is a leading player in the alternate asset segment and its mutual fund AUM has been growing steadily. The asset management AUM grew to Rs 1,92,350 crore as on June 30, 2024, from Rs 1,81,700 crore as on March 31, 2024.
In the distressed assets segment, EARC is the largest ARC in India, with total securities receipts managed at Rs 29,905 crore as on June 30, 2024 as against Rs 31,590 crore as on March 31, 2024 (Rs 37,100 crore and Rs 40,200 crore as on March 31, 2023, and March 31, 2022). From being largely corporate focused, the ARC has, in the recent past, started focusing on retail and micro, small and medium enterprises (MSME) segments. The share of retail is expected to grow over the medium term.
In the lending business, while the wholesale book is under run down, the group is focusing on growth in retail through the asset-light model. The key product offerings in the retail credit book would be mortgage and MSME loans. The group has entered into agreements with various co-lending partners for retail product offerings, which are large domestic and foreign banks, for both the priority and non-priority sector portfolios. Although the retail AUM picked up pace in fiscal 2024, the growth has been relatively slow, due to delay in operationalising the onboarding and underwriting process with the co-lending partners. The retail AUM grew to Rs 5,368 crore as on March 31, 2024, from Rs 4,879 crore as on March 31, 2023. However, it stood at Rs 5,320 crore as on June 30, 2024.
The group also houses the life and general insurance businesses, which are gaining scale and are expected to break even over the medium term.
However, with the rundown of wholesale credit, divestment of the wealth management business, and planned stake sale of the housing finance and general insurance businesses, the diversity in the business risk profile is a monitorable.
Weaknesses: Subdued profitability for current size and scale considering presence in multiple businesses The group’s profitability is lower than other large, financial sector groups. However, most of the businesses have been reporting profit since the last quarter of fiscal 2021
The group reported PAT of Rs 528 crore in fiscal 2024 (excluding any one-off items) as against PAT of Rs 406 crore in fiscal 2023. However, profitability in 2023 was supported by a one-off item of revaluation gains (and also accelerated provisions made basis the one-off gain), excluding which profit would have been Rs 248 crore in fiscal 2023.
In first quarter of fiscal 2025, the group reported PAT of Rs 85 crore as against PAT of Rs 78 crore in the corresponding quarter of fiscal 2024 (Rs 36 crore in the first quarter of fiscal 2023). Return on average assets (ROA) was 0.8% for the first quarter of fiscal 2025 against 1.2% for fiscal 2024, 0.9% for fiscal 2023 and 0.5% for fiscal 2022. The group’s overall profitability is weighted down by losses in the insurance businesses, however, excluding insurance profit stood at Rs 145 crore for the first quarter of fiscal 2025 as against Rs 144 crore for the first quarter of fiscal 2024 and Rs 808 crore for fiscal 2024 (Rs 730 crore for fiscal 2023).
Of the various businesses, the asset reconstruction and asset management businesses, mainly alternate assets, remain the largest contributors to overall profitability forming 74% of overall PAT[1] for quarter ended June 30, 2024. The profitability of the credit business has improved from the past levels with credit costs reducing, however remains muted with retail lending yet to gather pace. However, additional provisioning is likely to be required on the monitorable book based on the pace and extent of recovery from underlying assets. The insurance businesses are expected to breakeven only over the next 2-3 years. Profitability at a group level is expected to be impacted by restrictions on acquisitions on EARC as well as some slowdown expected in the lending business due to slowdown in bank funding. The alternate assets business should continue to support profitability. Going ahead, the group’s ability to scale up the retail lending business while managing overall credit costs will be important and this remains a key monitorable.
Asset quality monitorable with elevated level of monitorable portfolio The group’s overall gross loan book (excluding monitorable portfolio net of on-book gross stage III assets) stood at Rs 5,447 crore as on June 30, 2024, against Rs 5,537 crore as on March 31, 2024, and Rs 7548 crore as on March 31, 2023. Of this, retail on book stood at Rs 4,321 crore (Rs 4,261 crore and Rs 3,795 crore) and the remaining was wholesale book.
The group has been consciously running down the wholesale portfolio through various modes. While recoveries have contributed to this, the reduction has been primarily due to sell-down to ARCs (both internal and external) and alternative investment funds (AIFs). Given the RBI restrictions, this process is likely to be slower than earlier.
The Edelweiss group has retained risks and rewards on a large portion of this and hence, CRISIL Ratings tracks the monitorable portfolio to assess the asset quality of the group. This includes gross stage III accounts in the lending book (Rs 733 crore), security receipts held by the group (including in EARC) pertaining to sell down (Rs 6878 crore) and loans sold down to AIFs (Rs 1,685 crore). Overall monitorable portfolio stood at Rs 9,296 crore as on June 30, 2024. While the monitorable portfolio has reduced from Rs 12,097 crore as on March 31, 2022(Rs 11,383 crore as on March 31, 2021), it remains elevated. CRISIL Ratings notes that although majority of this monitorable portfolio is on-book exposure of the Edelweiss group, some part pertains to exposure of external ARC or AIF wherein the group has extended a put option.
The group has made provisions against the monitorable portfolio, and therefore, the net monitorable portfolio stood at Rs 6,018 crore as on March 31, 2024 and Rs 5,937 crore as on June 30, 2024. Based on management estimates, there is a reasonable level of collateral cover on most of this portfolio.
The overall gross stage III assets in the lending business stood at Rs 733 crore (13.1% of loans) as on June 30, 2024 as against Rs 720 crore (13%) as on March 31, 2024, Rs 794 crore (10.5%) as on March 31, 2023, Rs 930 crore (8.9%) as on March 31, 2022, and Rs 1,601 crore (10.9%) as on March 31, 2021. Retail book gross stage III was Rs 98 crore (2.3%) as on June 30, 2024 as against Rs 78 crore (1.84%) as on March 31, 2024, and Rs 124 crore (3.3%) and Rs 182 crore (2.7%) as on March 31, 2023, and March 31, 2022, respectively.
However, any challenges in effecting recoveries as per plan could necessitate higher provisioning and put pressure on profitability and hence, this remains a key monitorable for the rating. [1] Excluding both insurance and corporate entities, which are currently loss making |
Liquidity: Adequate As on August 22, 2024, the group had liquidity of Rs 1,795 crore of which Rs 1,125 crore was in the form of bank balances, fixed deposits and investments in mutual funds, Rs 626 crore in the form of exchange margin (unencumbered) and Rs 44 crore in the form of undrawn lines. This is expected to be sufficient to meet debt obligations and operating expenses for ~3 months, even assuming nil business inflows and no incremental fund raising. The group’s liquidity position is expected to be further supported by contractual receivables from the retail book and recoveries from wholesale exposures. |
Rating sensitivity factors Upward factors
Downward factors
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About the Company
ERFL reported Profit after tax of Rs 14 crore on total income (net off interest expense) of Rs 66 crore for fiscal 2024 against PAT of Rs 28 crore on total income of Rs 65 crore in fiscal 2023. For quarter ended June 30, 2024, the company reported PAT of Rs 0.1 crore on total income of Rs 17 crore. |
About the Group The Edelweiss group comprised 28 subsidiaries and associates as on March 31, 2024. The number of companies has come down from 74 as on March 31, 2016, because of multiple factors such as sale, windup and merger among others. The group had 293 offices (including 10 international offices in 6 locations) in around 136 cities as on March 31, 2024. Furthermore, as part of streamlining its operating structure, the group has restructured the businesses into four verticals namely credit, insurance, asset management and asset reconstruction.
The group is present across various financial services businesses, including loans to individuals, mortgage finance - loans against property and small-ticket housing loans, MSME finance, alternative and domestic asset management, and life and general insurance. In addition, the Balance sheet Management Unit (BMU) focuses on liquidity and asset-liability management.
On a consolidated basis, the group reported PAT of Rs 528 crore on a total income (net off interest expense) of Rs 6,815 crore for fiscal 2024, as against PAT of Rs 405 crore on a total income of Rs 6.058 crore for fiscal 2023.
For the quarter ended June 30, 2024, the group reported PAT of Rs 85 crore on a total income of Rs 1636 crore as against a PAT of Rs 78 crore on a total income of Rs 1316 crore during similar period in previous fiscal |
Key Financial Indicators EFSL (consolidated)
^refers to gross stage III of the on balance sheet loan book. The reported gross stage III assets as per annual report is Rs 13,155 crore as on March 31, 2023 and Rs 12,368 crore as on March 31, 2022. Net Stage III was Rs 8313 crore and Rs 8681 crore respectively. These include stage III assets in EARC on monitorable book sold down by ECL Finance, interest accrued on non-performing assets and stage III assets held by group entities other than NBFCs on trade and general-purpose advances.
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
# Yet to be issued * Public issue of retail NCDs ^ There has been a change in the terms of instruments and new ISIN has been allotted against old ISIN (New ISIN INE528S07169 against Old ISIN INE528S08076). CRISIL Ratings has replaced old ISIN INE528S08076 in the rating rationale with new ISIN INE528S07169 on the basis of confirmation received from the issuer.
Annexure - Details of Rating Withdrawn
# Yet to be issued |
Annexure – List of entities consolidated
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Criteria Details
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