Detailed Rationale

CRISIL Ratings has removed its rating on the long-term bank facilities and debt instruments of Fullerton India Home Finance Company Limited (FIHFCL) from 'Rating Watch with Developing Implications' and reaffirmed the existing ratings at ‘CRISIL AAA/CRISIL A1+’. while assigning a 'Stable' outlook to the long-term rating.

 

The ratings factor in expectation of strong support from Sumitomo Mitsui Financial Group Inc (SMFG; rated ‘A-/Stable’ by S&P Global) on an ongoing basis and in the event of distress. The rating watch has been resolved following clarity on the expected brand association with SMFG, high operational and managerial oversight by SMFG and overall strategy for India market. CRISIL Ratings understands that SMFG is working on a defined timeline plan to change the name of Fullerton India Credit Company Limited (FICCL) and FIHFCL so as to reflect association with SMFG post receipt of required regulatory approvals. SMFG also fully consolidates FICCL, being a subsidiary, in its financial statements. SMFG is also committed to providing equity capital or liquidity to support Fullerton group’s growth plans or in the event of any exigency.

 

On July 9, 2021, CRISIL Ratings had placed the long-term ratings of FIHFCL on 'Rating Watch with Developing Implications' following announcements 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 transaction was completed on November 30, 2021 post receipt of all regulatory approvals and execution of share-transfer agreement.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has analysed the consolidated business and financial risk profile of FICCL and its wholly owned subsidiary FIHFCL, together referred to as Fullerton group. The companies have strong operational and financial linkages, common senior management, and shared brand. Post the consummation of the transaction, the ratings factor in strong support expected from, the parent, SMFG given that strategic importance of Fullerton Group to SMFG, the majority ownership, complete management control and expected shared brand.

Key Rating Drivers & Detailed Description

Strengths:

• Strategic Importance to, and strong expectation of support from, SMFG

The rating factors in expectations of strong support from SMFG (rated ‘A-/Stable’ by S&P Global) on an ongoing basis and in the event of distress. Post the consummation of the transaction, SMFG has senior level representation on the Board and various committees of FICCL and is involved in key decisions taken by the company. Further, Fullerton’s group will also be consolidated at a global level with SMFG.

 

India is one of the focus markets for SMFG Group and they have presence in the country today via Sumitomo Mitsui Banking Corporation (SMBC) which is more entrenched towards large corporate lending. The acquisition of FICCL will allow SMFG to build a comprehensive financial service offering and also cater to the retail segment.

 

CRISIL Ratings understands that SMFG is working on a defined timeline plan to change the name of FIHFCL so as to reflect association with SMFG post receipt of required regulatory approval. SMFG also fully consolidates FICCL, being a subsidiary, in its financial statements.

 

SMFG is also committed to providing equity capital or liquidity to support Fullerton group’s growth plans or in the event of any exigency. CRISIL Ratings also expects that Fullerton Group's borrowings profile and costs will benefit both directly and indirectly due to the association with SMFG. Any material disruption in Fullerton Groups business could, in CRISIL Rating’s view, have a significant impact on the reputation and franchise of the parent.

 

Any material deviation from the proposed brand sharing between Fullerton Group and SMFG will remain a key monitorable.

 

• Healthy Capitalisation:

On a standalone basis, the Networth of FIHFC improved to Rs 662 crores as on December 31, 2021 as compared to Rs 655 crores as on March 31, 2021 primarily driven by improved earnings. The gearing metrics improved with adjusted gearing at 5.8 times as on December 31, 2021, as against 6.5 times as on March 31, 2021. The improvement in the gearing metrics stemmed from the degrowth in the AUM leading to lower borrowing requirements.

 

Capitalisation metrics have been supported by regular and timely equity infusions by FICCL. The company has received high quantum of initial capital and subsequently more equity infusion from parent to support its growth plans. The parent has infused Rs 710 crore since inception of which Rs 200 crore was infused in July 2019.

 

In terms of capital adequacy ratio (CAR), as on December 31, 2021, FIHFC’s overall CAR stood at 20.2% with tier 1 CAR at 16.9% well above the regulatory requirement.

 

• Strong Liquidity Management Practices:

The group maintains liquidity in excess 3 months of outflows. Including fee-paying committed and undrawn CC/WCDL lines, this increases further to 3-5 months of outflows. This liquidity cushion was higher during periods of stress as was seen during the pandemic period when the group was 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. 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. CRISIL Ratings also expects that Fullerton Group's borrowings profile and costs will benefit both directly and indirectly due to the association with SMFG.

 

Weaknesses:

• Weak asset quality metrics:

For FIHFC, as on December 31, 2021, AUM stood at Rs 4,270 crore. Of this, housing loans constituted the bulk at 61% followed by LAP at 38% and construction finance which was around 1%.

 

Post the economic implications linked to the covid pandemic, the asset quality metrics for the company deteriorated with reported GNPA increasing to 8.1% as on December 31, 2021, as compared to 5.6% as on March 31, 2021 (3.4% as on March 31, 2020). As on December 31, 2021, restructured book (including OTR) of the company accounted for 2.6% of the AUM; however, the company has adequately provided for the same at around ~45%.

 

Further, the collection efficiencies for the company have improved to about 99% in December 2021 after witnessing a drop post the second wave of the pandemic. Over the years, risk management processes and data analytics capability have been strengthened. Underwriting norms and monitoring mechanisms have been reinforced. The 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. In the past too, the group has managed these segments as reflected during demonetisation wherein the management was able to enforce corrective actions and report upgrades and recoveries.

 

Nevertherless, the ability to manage collections and improve asset quality metrics is a critical monitorable.

 

• Moderate scale of operations:

FIHFC commenced lending operations in December 2015 with FY17 being the first full year of operations. The company had managed to scale up its operations with assets under management (AUM) reaching Rs 4,302 crore on March 31, 2020, from Rs 3,065 crores as on March 31, 2019. However, due to lower disbursements amidst the pandemic, the AUM de-grew to Rs 4270 crore as of December 31, 2021. Of this, housing loans constituted the bulk at 61% followed by LAP at 38% and construction finance which was around 1%. Going forward, the company plans to maintain housing loans at around 55-60% of the portfolio with developer loans to be capped at 10% of the portfolio on a higher side. The remaining would be constituted by loans against property. Nevertheless, the company is expected to remain a small player in the overall housing finance market in the near term.

 

• Moderate profitability metrics due to high ECL provisioning:

Historically, the earnings profile for FIHFC has been constrained by elevated operating expenses and credit costs. The company reported net profit and return on managed assets (RoMA) of Rs 13.9 crore and 0.3% for fiscal 2020. However, over the past couple of years, amidst the impact of the pandemic, credit costs have remained elevated amidst the aggressive provisioning done by the company. The company’s ECL stage 3 provisioning was at 50.2% and stage 2 provisioning too was at around 18.0%. For overall restructured assets too, FIHFC has provided for around 45% of the restructured loan (including OTR) book. Consequently, the overall credit costs stood at around 3.6% of total managed assets in fiscal 2021. The same has improved to 1.1% for the nine months ended December 31, 2021, on account of aggressive provisioning done in the previous year. Consequently, FIHFC reported profits at Rs 10 crores for the nine months ended December 31, 2021, as against losses of Rs 56 crores for full fiscal 2021. Nevertheless, ability of the company to improve its profitability metrics whilst scaling up its portfolio remains a key monitorable.

Liquidity: Superior

The liquidity profile of FIHFC is comfortable with positive cumulative mismatches across all short term ALM buckets (upto 1 year) as on September 30, 2021. 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 January 31, 2022 , the group had total principal debt repayments of Rs 3,907 crore till June 2022. 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 4,109 crore.

Outlook: Stable

CRISIL believes FIHFC will remain strategically important to, and continue to receive support from, SMFG, and will sustain its growth momentum while maintaining its healthy financial risk profile

Rating Sensitivity factors

Downward Factors:

• If there is a significant diminution in the stake held by, or the support expected from, SMFG, or a change in SMFG’s ratings by S&P Global by 1 notch or higher
• Downgrade in the credit rating of Fullerton India Credit Company Ltd (FICCL) by 1 notch or higher
• Continued deterioration in asset quality of `FIHFCL’s loan book with weak standalone earnings profile on a sustained basis

About the Company

The company started its operation in December 2015; offering home loan and loan against property in the affordable segment to the salaried and self-employed professionals. FIHFC is a 100% owned subsidiary of FICCL. Following the consummation of transaction between SMFG and FFH, 74.9% shares in FICCL are held by SMFG while FFH which in turn is a wholly owned subsidiary of Temasek continues to hold the balance stake. Product offerings include secured products which comprise primarily of mortgages/loans against property, and commercial vehicle loans. It currently operates out of 78 branches out of which 26 branches are self and the rest are shared with FICCL

Key Financial Indicators

As on / for the year ended		December 31, 2021	March 31, 2021*	March 31, 2020*
Total Assets (Reported)	Rs crore	4,652	4,759	4,488
Total income	Rs crore	367	525	541
Profit after tax	Rs crore	10	(55.5)	13.9
Gross NPA	%	8.1	5.6	3.8
Adjusted Gearing@	Times	5.8	6.5	5.7
Return on assets^	%	0.2	(1.1)	0.3

^based on total managed assets

*IND-AS

@ Direct Assignment is included in Borrowings for calculation of Adjusted Gearing

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size  (Rs.Cr)	Complexity Levels	Rating outstanding with outlook
INE213W07152	Non-Convertible Debentures	14-Sep-20	6%	14-Oct-22	100	Simple	CRISIL AAA/Stable
INE213W07160	Non-Convertible Debentures	26-Mar-21	3 Months TBILL Linked	26-Sep-23	125	Simple	CRISIL AAA/Stable
INE213W07186	Non-Convertible Debentures	13-Dec-21	3 Month TBILL	13-Dec-24	100	Simple	CRISIL AAA/Stable
NA	Non-Convertible Debentures*	NA	NA	NA	779	Simple	CRISIL AAA/Stable
INE213W07129	Non-Convertible Debentures	12-Feb-20	8.65%	12-Feb-25	121	Simple	CRISIL AAA/Stable
INE213W07137	Non-Convertible Debentures	18-May-20	7.95%	18-May-23	175	Simple	CRISIL AAA/Stable
INE213W07145	Non-Convertible Debentures	29-Jun-20	7.20%	29-Jun-23	100	Simple	CRISIL AAA/Stable
NA	Subordinated debt*	NA	NA	NA	405	Complex	CRISIL AAA/Stable
INE213W08028	Subordinated debt	01-Jan-21	7.63%	01-Jan-31	40	Simple	CRISIL AAA/Stable
INE213W08010	Subordinated debt	08-Jun-20	8.50%	07-Jun-30	30	Complex	CRISIL AAA/Stable
INE213W08036	Subordinated debt	12-Aug-21	7.70%	12-Aug-31	25	Complex	CRISIL AAA/Stable
NA	Commercial Paper	NA	NA	7-365 days	500	Simple	CRISIL A1+
NA	Cash Credit & Working Capital demand loan	NA	NA	NA	25	NA	CRISIL AAA/Stable
NA	Term Loan 1	NA	NA	24-Sep-21	50	NA	CRISIL AAA/Stable
NA	Term Loan 2	NA	NA	24-Sep-21	200	NA	CRISIL AAA/Stable
NA	Term Loan 3	NA	NA	24-Sep-21	100	NA	CRISIL AAA/Stable
NA	Term Loan 4	NA	NA	23-Aug-21	200	NA	CRISIL AAA/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	1425	NA	CRISIL AAA/Stable

*Yet to be issued