| Fullerton India Credit Company Limited | ||||||||||||||
| Long-term rating continues on 'Watch Developing'; CP reaffirmed | ||||||||||||||
| Rating Action | ||||||||||||||
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| 1 crore = 10 million | ||||||||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings on the bank facilities and debt instruments of Fullerton India Credit Company Limited (FICCL) continue to be on ‘Rating Watch with Developing Implications’. The rating on the commercial paper is reaffirmed at ‘CRISIL A1+.
The rating had been earlier placed on watch with developing implications on July 9, 2021 based on the announcement made by FICCL on July 6, 2021, that Sumitomo Mitsui Financial Group Inc (SMFG; rated ‘A-/Stable’ by S&P Global) and Fullerton Financial Holdings Pte Ltd (FFH) have reached an agreement for SMFG to acquire a 74.9% stake in FICCL from FFH, subject to regulatory approvals. SMFG will eventually acquire 100% of FICCL. FICCL’s subsidiary, Fullerton India Home Finance Company Ltd (FIHFCL) will continue to be a wholly-owned subsidiary of FICCL.
The rating continues to be on watch as the transaction is subject to applicable regulatory approvals. In addition, CRISIL will further evaluate SMFG group’s strategy for India and the focus segments. The plans to reflect brand association with SMFG and Board representation will also be a critical factor. The necessary applications has been filed with the Reserve Bank of India (RBI) and the Competition Commission of India (CCI) on July 30, 2021 and August 3, 2021, respectively. CCI has approved the transaction on September 23, 2021. Approval from RBI is still awaited. Meanwhile, FICCL has also converted its certificate of registration with RBI from Deposit taking NBFC to Non Deposit taking NBFC on September 27, 2021.
SMFG is amongst the largest financial group in Japan offering a broad range of financial services centred on banking. They are also engaged in the leasing, securities, credit card, investment, mortgage securitisation, venture capital, and other credit-related businesses. India is one of the focus markets for SMFG and the proposed transaction will drive the retail strategy of the group.
The existing ratings on FICCL factor in the strong linkages with, and expected support from, the parent, FFH, which is a step-down subsidiary of Temasek Holdings Private Limited (Temasek; rated ‘AAA/Stable’ by S&P Global). If the proposed transaction were to go through, FFH would, initially hold 25.1% stake and eventually will exit the company. Therefore, once the transaction is completed, the analytical approach would not factor in the expectation of support from FFH and instead the rating will have to factor in the support from SMFG. CRISIL Ratings will track the progress on the transaction in terms of approvals and have discussions with SMFG’s management to understand their strategy, business plan for India and brand association with the legal entity. CRISIL Ratings will resolve the Rating Watch once it has clarity on the above aspects.
Nevertheless, till the transaction is completed, the existing ratings will continue to centrally factor in the strong support from the current parent, FFH.
CRISIL has also withdrawn its rating on the non-convertible debentures of Rs. 237.3 crore and long term principal protected market linked debentures of Rs. 53.2 crore (See Annexure 'Details of Rating Withdrawn' for details) on confirmation from the debenture trustee as they are fully redeemed. The rating is withdrawn and is in line with CRISIL's policy. |
Analytical Approach For arriving at the ratings, CRISIL has analysed the consolidated business and financial risk profile of FICCL. Till the transaction is consummated, the ratings also continue to centrally factor in the strong support it is expected to continue to receive from, its current parent, FFH. Post completion of the transaction, the analytical approach would not factor in the expectation of support from FFH but will be evaluated based on expected support from SMFG.
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:
Till the transaction is completed, the ratings will continue to factor in expectation of strong support from FFH, a step down subsidiary of Temasek (rated ‘AAA/Stable’ by S&P Global). FFH has senior level representation on the Board and various committees of FICCL, and is involved in key decisions taken by the company. Currently, FICCL’s compliance, finance, treasury, business and risk management functions are aligned with the global standards of FFH.
FFH has demonstrated its commitment towards FICCL during stressed times. From 2007 till date, FFH has infused over Rs 2,700 crore with over Rs 600 crore being infused in 2009-2010 during the then stressed environment. More importantly, even last year in April 2020 at the start of the pandemic, Rs 750 crores of equity capital was infused as a confidence capital and to also ensure adequate capital buffers.
The shared brand will also continue during this period which also enhances the expectation of support from FFH, if needed. Any material disruption in FICCL business could, in CRISIL’s view, have a significant impact on the reputation and franchise of the parent.
CRISIL Ratings will track the progress on the transaction and have discussions with SMFG’s management to understand their strategy and business plan for India. The plans around change in the company name to reflect association with SMFG and Board representation will also be a critical factor.
On standalone basis, FICCL reported a drop in networth to Rs 4,244 crore as on March 31, 2021 from Rs 4,648 crore a year ago. This was largely due to significantly high provisioning for non-performing assets (Gross NPA) as well as restructured accounts which resulted in a loss of Rs 1,157 crore for fiscal 2021. However, the equity capital infusion of Rs 750 crore in April 2020 provided some support. Similarly on consolidated basis too, the networth was lower at Rs 4,132 crore (Previous year of Rs 4,592 crore). The company was cautious on disbursements during fiscal 2021 and hence the overall assets under management (AUM) at FICCL reduced by around 16% during the year. Consequently, with lower borrowing requirement for business, the adjusted gearing[1] was adequate at 4.5 times (standalone) and 5.8 times (consolidated) as on March 31, 2021. In terms of capital adequacy ratio (CAR), as on March 31, 2021, FICCL’s overall CAR stood at 19.8% with tier 1 CAR at 14.8%. Similarly, FIHFCL reported tier I and overall capital adequacy ratios of 21.3% and 24.3%, respectively, as on March 31, 2021 well above the regulatory requirement.
FICCL had so far followed a conservative capitalisation policy. It maintained a buffer over the regulatory capital requirement; the buffer is based on a stress test conducted in line with FFH policies. With the expected change in parentage, the policy around capital profile to be followed by SMFG will be a key monitorable.
Liquidity management policy is strong with FICCL needing to maintain cash and liquid investments to the extent of at least one month of outflows at all points in time. However, in practise the company maintains in excess of policy. Including fee-paying committed and undrawn CC/WCDL lines, this increases further to 4-6 months of outflows. This liquidity cushion is higher during periods of stress as can be seen now during the pandemic period as the group is having liquidity cover for over 6 months of debt repayment outflows as on June 30, 2021. This was also visible during demonetisation period. In addition, the diversified lender base, low reliance on short term funding (commercial paper) and well-matched asset-liability to minimise tenor and refinancing risks provide support. FICCL has also raised foreign currency loans and foreign currency bonds in fiscal 2020, thereby diversifying its funding profile further. Additionally, even during the past one year, the company continued to raise funds at optimal costs. The group is thus likely to be well-placed to withstand any liquidity pressure in the market. Nevertheless, with the expected change in parentage, the policy around liquidity buffers to be followed by SMFG will be a key monitorable
Weaknesses:
At consolidated level, as on March 31, 2021, AUM stood at Rs 25,049 crore, of which around 48% comprised unsecured loans (mainly personal loans including rural group loans), which are vulnerable to economic cycles. The group has managed these segments in the past as reflected during demonetisation too wherein the management was able to enforce corrective actions and report upgrades and recoveries. However, during fiscal 2021, the pandemic-induced challenges, localised lockdowns and associated impact on cash flows of borrowers resulted in deterioration in asset quality. FICCL on standalone basis reported GNPA of 9.6% as on March 31, 2021 (2.1% as on March 31, 2020) while FIHFCL reported GNPA of 5.6% as on March 31, 2021 (3.8% as on March 31, 2020). CRISIL Ratings notes that the FICCL and FIHFCL have also implemented resolution plan for COVID related stress under RBI framework dated 6th August, 2020 and normal restructuring of around 9.4% and 2.8% of their loan book. Of the same, more than 50% of the accounts have been classified as NPA / Stage 3 assets. Hence, the overall stressed assets (GNPA + residual restructuring) is around 12.8%. Additionally, CRISIL notes that the group also has aggressive write-off policies. During fiscal 2021, the FICCL’s write-off as proportion of AUM was at 7.0% of loan book (4.0% during fiscal 2020).
Over the years, risk management processes and data analytics capability have been strengthened. Underwriting norms and monitoring mechanisms have been reinforced. The unsecured lending business has also been supported through investments in risk analytics and technology. Underwriting and collection norms have been tightened based on portfolio performance trends and early warning indicators. While the pandemic related challenges were unprecedented, the company is putting in renewed efforts to recover from delinquent accounts.
The months of April and May 2021 again brought forth risks to asset quality due to the second Covid-19 wave. The company’s ability to manage collections and asset quality metrics will be a key monitorable.
Historically, earnings profile was supported by a large proportion of high-yield businesses and competitive borrowing costs. This helped FICCL report high net interest margin and pre-provisioning profits over the past 5 years till fiscal 2020. Hence, despite credit costs being in the range of 1.8% to 4.0% over the same period, the return on total managed assets (RoMA) of FICCL on standalone basis was healthy at 1.6% to 3.7% over the past 5 years. However, during fiscal 2021, FICCL reported a loss of Rs 1157 crore. This was due to high write-offs and aggressive expected credit loss provisioning across stages on account of pandemic. FICCL’s write-off as proportion of AUM was at 7.0% of loan book (4.0% during fiscal 2020). More importantly, the company’s ECL stage 3 provisioning was at 77% and stage 2 provisioning too was at around 55%. The company also recognised more than 50% of restructured accounts as part of stage 3 assets. For overall restructured assets too, FICCL has provided for more than 76% of the restructured loan book. Consequently, the overall credit costs stood at around 12% of loan book. CRISIL Ratings notes that there was also a decrease in interest income due to deterioration on credit profile of portfolio.
Similarly, FIHFCL’s ECL stage 3 provisioning was at 53% and even for restructured accounts (recognised as stage 2), the total provisioning cover was at 41%. Consequently, FIHFCL too reported loss of Rs 55.5 crore in fiscal 2021.
While the provisioning cover is high, the company is putting in renewed efforts to recover from delinquent accounts. With such high cover, CRISIL Ratings believes that the company could benefit from recoveries due to roll-backs or enforcement of security during fiscal 2022. [1] Direct Assignment is included in Borrowings for calculation of Adjusted Gearing |
Liquidity: Superior The liquidity profile of FICCL is comfortable with positive cumulative mismatches across all short term ALM (provisional) buckets (upto 1 year) as on August 31, 2021 even with exclusion of committed lines at standalone level. At a consolidated level, the group continues to demonstrate ability to raise timely funds. Consequently, the liquidity position for the group too remains comfortable. As on September 26, 2021, the group had total principal debt repayments of Rs 2510.7 crore till December 2021. Against this, they had liquidity (in the form of cash and cash equivalents, unutilised cash credit/working capital demand loan lines and unutilised committed bank loan line) of Rs 6565 crore. On standalone basis, FICCL had Rs 5491 crore of liquidity against the debt repayments of Rs 2126.8 crore till December 2021. |
Rating Sensitivity factors Downward Factors:
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About the Company FICCL was formed in December 2005 through the acquisition of Dove Finance (DF) by Asia Financial Holding Pte, Singapore (through its investment arm, Angelica Investment Pte Ltd). After the acquisition, the name was changed to First India Credit Company Ltd, which was then renamed to Fullerton India Credit Company Ltd deriving its name from the parent.
FICCL is wholly owned by FFH, which in turn is a wholly owned subsidiary of Temasek. Product offerings include secured products which comprise primarily of mortgages/loans against property, and commercial vehicle loans. The unsecured product offerings comprise of personal loans and rural group loans. The company operates through 629 branches. |
Key Financial Indicators
^based on total managed assets *IND-AS @ Direct Assignment is included in Borrowings for calculation of Adjusted Gearing |
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. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
^yet to be issued
Annexure - Details of Rating Withdrawn
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||
| Facility | Amount (Rs.Crore) | Rating |
| Proposed Long Term Bank Loan Facility | 7600 | CRISIL AAA/Watch Developing |
| Term Loan | 400 | CRISIL AAA/Watch Developing |
Criteria Details
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