Rating Rationale
October 30, 2023 | Mumbai
Fedbank Financial Services Limited
Rating reaffirmed at 'CRISIL A1+'
 
Rating Action
Rs.1000 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 A1+’ rating on the commercial paper (CP) of Fedbank Financial Services Ltd (Fedfina).

 

The rating continues to factor in the strong support that Fedfina receives from its majority shareholder, The Federal Bank Ltd (Federal Bank; ‘CRISIL A1+’). Majority ownership, strategic importance and shared brand imply a strong moral obligation on Federal Bank to support Fedfina both on an ongoing basis as well as in the event of distress. The rating also factors in Fedfina’s comfortable capitalisation. These strengths are partially offset by moderate, albeit growing, scale of operations and limited seasoning of the portfolio.

 

Fedfina filed Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India for an initial public offering (IPO) in July 2023. The proposed IPO consists of fresh issue (up to Rs 750 crore) and offer for sale by Federal Bank (up to 1.6 crore shares) and True North (up to 5.4 crore shares). The exact contours of the IPO will likely be made public closer to the completion date, which is at the management’s discretion. Nevertheless, Federal Bank has stated that it will retain majority shareholding even after completion of the proposed IPO.

Analytical Approach

CRISIL Ratings has assessed the standalone credit risk profile of Fedfina and continues to factor in strong managerial and financial support from the parent, Federal Bank. The parent will continue to provide strong support to Fedfina, considering the strategic importance of the entity and the high moral obligation on account of majority shareholding and shared name.

Key Rating Drivers & Detailed Description

Strengths:

  • Strategic importance to, and strong expectation of support from, the parent: Fedfina is a subsidiary of Federal Bank and an integral part of its business strategy and will therefore remain strategically important to the bank. Overall, Federal Bank’s equity contribution is Rs ~456 crore, for a 73% stake as on June 30, 2023. The remaining 26% is held by True North, a private equity firm. Apart from equity capital, Federal Bank has extended a working capital facility of around Rs 100 crore, term loan of about Rs 532 crore, and Tier-II capital of around Rs 250 crore as on June 30, 2023, to Fedfina. The parent has its senior management on the board of Fedfina and extends treasury support to the subsidiary. The parent’s funding, operational and management support will continue.                           

 

  • Comfortable capitalization: Overall capital adequacy ratio (CAR) stood at 19.7%, as on June 30, 2023. Tier 1 ratio and CAR stood at  15.1% and 17.9%, respectively, as on March 31, 2023. Networth stood at Rs 1,356 crore as on March 31, 2023 (Rs 1,415 crore as on June 30, 2023) and has increased from Rs 1,154 crore as on March 31, 2022, supported by both internal accrual as well as rights issue of Rs 200 crore in June 2021. The company had earlier raised capital through rights issue of Rs 79.2 crore in fiscal 2021, and Rs 80 crore in fiscal 2020. Both the shareholders participated in all these right issues.

 

Fedfina has filed a DRHP for its IPO by way of fresh issue (up to Rs 750 crore) and offer for sale by Federal Bank (1.6 crore shares) and True North (5.4 crore shares), contours of which will be finalised as the process nears completion. Nevertheless, Federal Bank has stated that it will retain majority shareholding even after completion of the proposed IPO.

 

Adjusted gearing[1] was 6.1 times (5.4 times on-book gearing) as on June 30, 2023, against 6.0 times (5.3) as on March 31, 2023. While it is expected to inch up as operations gain scale, gearing will remain below 6.5 times over the medium term.

 

Weaknesses:

  • Moderate, albeit growing, scale of operations: The company primarily operates in the retail loan segments such as gold loan (33% of asset under management [AUM] as on June 30, 2023), medium ticket LAP (25%), unsecured business loans (16%), affordable mortgage (24%; comprising housing loans [6%] and small ticket LAP [18%]), and others (1%). AUM increased 47% to Rs 9,069 crore as on March 31, 2023 (Rs 9,434 crore as on June 30, 2023) from Rs 6,187 crore as on March 31, 2022. Growth in fiscal 2023 was driven by affordable mortgage, small ticket LAP and unsecured business loans. While the AUM growth is expected to be broad based, Fedfina is likely to remain a small player in the non-banking financing space in the near term.

 

Top three states, Karnataka, Tamilnadu, and Maharashtra, accounted for around 54% of the AUM, with Karnataka leading at 19% as on March 31, 2023. The management plans to expand its branch network in the next few fiscals. However, ability to scale up while maintaining delinquency levels will be closely monitored.

 

  • Limited portfolio seasoning: While gold loans are of shorter tenure (average of 9 months), other products such as unsecured business loans (around 3 years), medium and small ticket LAP (13-14 years), and housing loans (around 18 years) are of long tenure. Also, many of these segments cater primarily to self-employed borrowers. Fedfina began offering a few of these products only recently, and hence, these loans are not seasoned and have not witnessed a complete credit cycle. Overall gross non-performing assets (GNPAs) moderated to 2.03% as on March 31, 2023, from 2.23% as on March 31, 2022. GNPAs increased in fiscal 2022 largely due to slippages in LAP, unsecured business loans, and one construction finance account. The increase in GNPA also included around 50 basis-point impact from the implementation of revised NPA recognition norms released by the Reserve Bank of India on November 12, 2021. GNPA were at 2.26% as on June 30, 2023.

 

Fedfina had Rs 151 crore (1.6% of AUM) as on June 30, 2023, under COVID-19-related restructuring. Nevertheless, ability to manage collections and delinquencies will remain a key monitorable.

[1] Ratio of on-book borrowings and off book (direct assignment) divided by networth

Liquidity: Strong

The asset-liability management profile was comfortable, with positive cumulative mismatches in the maturity bucket of up to one year as on August 31, 2023. Fedfina had Rs 7,136 crore in borrowings as on March 31, 2023, comprising bank borrowings (77%; 5% is from the parent) and capital market (12%; non-callable debentures 9% and CPs 3%), with non-bank financing companies (NBFCs) accounting for the remaining.

 

The company has Rs 827 crore debt maturing in September-November, 2023, for which it has Rs 911 crore available in unutilised bank line (Rs 360 crore), mutual fund investments (Rs 98 crore), other liquid investments (Rs 272 crore) and cash and bank balance (Rs 181 crore). Short-term nature of gold loans (less than one year), which was 33% of the AUM as on June 30, 2023, offers healthy collections. Liquidity is cushioned by funding support extended by the parent, Federal Bank.

Rating Sensitivity factors

Downward factors:

  • Decline in support from Federal Bank, either by way of decline in ownership in Fedfina below 51% or in the strategic importance of the company to the parent
  • Significant and continuous increase in delinquency, impacting profitability

About the Company

Fedfina started operations as a wholly-owned subsidiary of Federal Bank. True North, a private equity firm, infused Rs 169 crore in November 2018 for 17.4% stake, and Rs 112 crore in September 30, 2019 for 8.6%, and now owns 25% stake in the company. It had the option to acquire upto 45% stakes in the company as per the agreement.

 

Fedfina initially distributed of automobile and home loans for Federal Bank. It received a NBFC license in 2010, after which, it started offering gold loans in 2011, LAP finance in 2012 and construction finance in 2014. It started unsecured business loans and home loans in fiscal 2020. The company has reoriented its loan book from wholesale loans to retail loans. The proportion of the wholesale book has reduced to 1% as on June 30, 2023 from 26% as of March 31, 2017 .

 

The company has 575 branches in 16 states, and AUM of Rs 9,069 crore as on March 31, 2023.

 

Reported profit after tax (PAT) increased to Rs 180 crore in fiscal 2023 (Rs 54 crore in the three months ended June 30, 2023), from Rs 103 crore in fiscal 2022. Return on managed assets (RoMA) improved to 2.1% in fiscal 2023 from 1.6% in fiscal 2022, driven by better lower credit cost of 0.6% vs 1.3%.  Annualised RoMA for the three months ended June 30, 2023, was 2.1%, on the back of lower credit cost of 0.4%, it was 0.6% in fiscal 2023.

Key Financial Indicators

As on / for the fiscal year ended March 31,

Unit

2023

2022

Total assets

Rs crore

9,071

6,556

Total income (net of interest expense )

Rs crore

743

536

PAT

Rs crore

180

103

Gross Stage 3 assets

%

2.03

2.23

Return on managed assets

%

2.1

1.6

 

 

As on / for the three months ended June 30,

Unit

2023

2022

Total assets

Rs crore

9,412

7,004

Total income (net of interest expense)

Rs crore

204

158

PAT

Rs crore

54

44

Gross Stage 3 assets

%

2.26

2.05

Return on managed assets

%

2.1

2.4

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 1000 Simple CRISIL A1+
 

 

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
Commercial Paper ST 1000.0 CRISIL A1+ 28-09-23 CRISIL A1+ 30-09-22 CRISIL A1+ 25-01-21 CRISIL A1+ 23-11-20 CRISIL A1+ CRISIL A1+
      --   -- 28-01-22 CRISIL A1+   --   -- --
All amounts are in Rs.Cr.
Criteria Details
Links to related criteria
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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