Detailed Rationale

CRISIL Ratings on the bank facilities and non convertible debentures of Fullerton India Home Finance Company Limited (FIHFCL) continue to be on ‘Rating Watch with Developing Implications’.  The rating on the commercial paper is reaffirmed at ‘CRISIL A1+. The rating action follows a similar rating action on FIHFCL’s parent, Fullerton India Credit Company Ltd (FICCL).

 

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 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 centered 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 FIHFCL factor in the strong support FICCL and its ultimate 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 in FICCL 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 FICCL and current ultimate parent, FFH.

Analytical Approach

For arriving at the rating, CRISIL Ratings has analysed the standalone business and financial risk profile of FIHFCL. Additionally, expectation of support from its ultimate parent FFH, both on an ongoing basis, and in the event of distress has been factored into the rating. Till the transaction is consummated, the ratings will continue to centrally factor in the strong support it is expected to continue to receive from, its current ultimate 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.

Key Rating Drivers & Detailed Description

Strengths:

* Expectation of continued support from parent group till the transaction is completed

Till the transaction is completed, the ratings will continue to factor in expectation of strong support from parent group, FFH holds 100% stake in FIHFCL via its subsidiary FICCL. 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 FIHFCL through regular capital infusions that it has received since inception (Rs 710 crores, of which Rs 200 crores was infused in fiscal 2020) and Board oversight with FFH and FICCL both having strong presence on the Board. FIHFCL adopts similar policies in terms of liquidity and risk management as FICCL and has regular interactions with FFH on the same.

 

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.

 

* Healthy capitalisation

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. Consequently, the adjusted gearing[1] has remained adequate in the range of 4.5 to 6.0 times over the last 3 years till fiscal 2020. Overall capital adequacy ratio (CAR) too has been comfortable with tier 1 CAR itself being over 20% over the last 3 years.

 

However, in fiscal 2021, due to the impact of the pandemic on asset quality, FIHFCL reported a drop in networth to Rs 655 crore as on March 31, 2021 from Rs 711 crore a year ago. This was largely due to significantly high provisioning on account of Covid -19 impact which resulted in a loss of Rs 55.5 crore for fiscal 2021. Consequently, the adjusted gearing1 stood higher at 6.5 times as on March 31, 2021 (5.7 times previous year). FIHFCL also 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. The company had planned to maintain a target gearing of under 8 times on a steady state basis. With the expected change in parentage, the policy around capital profile to be followed by SMFG will be a key monitorable.

 

Weakness:

* Moderate asset quality

On the asset quality front, in the initial years, the company witnessed elevated slippages mainly attributed to few geographies where it faced challenges. However, the company took corrective actions and has since then focused on strengthening the internal processes and systems. While the GNPA increased to 3.8% (Ind AS) as on March 31, 2020, compared to 2.1% (IGAAP) as on March 31, 2019, the inching up was primarily on account of slippages from the old book i.e. book originated pre-April 2018. The new book had been performing well with limited delinquencies. As on March 31, 2020 too, for the new book the performance was comfortable with 30+ dpd being at around 2.2%.

 

However, during fiscal 2021, the pandemic-induced challenges, localised lockdowns and associated impact on cashflows of borrowers resulted in deterioration in asset quality. FIHFCL reported GNPA of 5.6% as on March 31, 2021 (3.8 % as on March 31, 2020). CRISIL Ratings notes that FIHFCL has also restructured around 2.8% of their loan book. Hence, the overall stressed assets (GNPA + OTR/restructuring) is around 8.5%. The months of April and May 2021 have 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.

 

* Moderate scale of operations

FIHFCL commenced lending operations in December, 2015 and is in its nascent stage of operations with fiscal 2017 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 4,191 crore. Of this, housing loans constituted the bulk at 59% followed by LAP at 40% and construction finance which was under 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.

 

* Profitability impacted due to high ECL provisioning on account of pandemic

Historically, the earnings profile 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, during fiscal 2021, due to the impact of the pandemic FIHFCL reported a loss of Rs 55.5 crore. This was due to aggressive expected credit loss provisioning across stages. The company’s ECL stage 3 provisioning was at 52.7% and stage 2 provisioning too was at around 22.8%. For overall restructured assets too (classified as stage 2), FIHFC has provided for around 36% of the restructured loan book. Consequently, the overall credit costs stood at around 3.6% of total managed assets.

 

[1]Direct Assignment is included in Borrowings for calculation of Adjusted Gearing.

Liquidity: Superior

The liquidity profile of FIHFCL is comfortable with positive cumulative mismatches across all short term ALM (provisional) buckets (upto 1 year) as on June 30, 2021 even with exclusion of committed lines at standalone level.

 

As on September 26, 2021, FIHFCL has outstanding debt payments of Rs 383.9 crores till December 2021. Against the same, FIHFCL had cash equivalents and investments of Rs 714 crore and unutilised lines of Rs 360 crore.

Rating Sensitivity Factors

Downward factors:

• If there is any change in support from parent during this period till the completion of transaction with SMFG
• Downgrade in the credit rating of Fullerton India Credit Company Ltd (FICCL) by more than 1 notch
• Significant deterioration in asset quality of FIHFCL’s loan book on sustained basis post pandemic

About the Company

FIHFCL started its operation in December 2015; offering home loan and loan against property in the affordable segment to the salaried and self-employed professionals.  FFH currently holds 100% in the HFC via its subsidiary FICCL. The company leverages on the existing infrastructure of FICCL with branch sharing. It currently operates out of 70 branches out of which 12 branches are self and the rest are shared with FICCL.

Key Financial Indicators

As on/for the period/ for the year ended as per INDAS	Unit	March 31,2021*	March 31,2020*
Total Assets	Rs crore	4,759	4,488
Total income	Rs crore	525	541
Profit after tax	Rs crore	(55.5)	13.9
GNPA	%	5.6	3.8
Adjusted Gearing^	Times	6.5	5.7
Return on managed assets	%	(1.1)	0.3

*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/Watch Developing
INE213W07160	Non-Convertible Debentures	26-Mar-21	3 Months TBILL Linked	26-Sep-23	125	Simple	CRISIL AAA/Watch Developing
NA	Non-Convertible Debentures*	NA	NA	NA	879	Simple	CRISIL AAA/Watch Developing
INE213W07129	Non-Convertible Debentures	12-Feb-20	8.65%	25-Feb-21	121	Simple	CRISIL AAA/Watch Developing
INE213W07137	Non-Convertible Debentures	18-May-20	7.95%	23-May-21	175	Simple	CRISIL AAA/Watch Developing
INE213W07145	Non-Convertible Debentures	29-Jun-20	7.20%	23-Jun-21	100	Simple	CRISIL AAA/Watch Developing
NA	Subordinated debt*	NA	NA	NA	405	Complex	CRISIL AAA/Watch Developing
INE213W08028	Subordinated debt	01-Jan-21	7.63%	01-Jan-31	40	Simple	CRISIL AAA/Watch Developing
INE213W08010	Subordinated debt	08-Jun-20	8.50%	07-Jun-30	30	Complex	CRISIL AAA/Watch Developing
INE213W08036	Subordinated debt	12-Aug-21	7.70%	12-Aug-31	25	Complex	CRISIL AAA/Watch Developing
	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/Watch Developing
NA	Term Loan 1	NA	NA	24-Sep-21	50	NA	CRISIL AAA/Watch Developing
NA	Term Loan 2	NA	NA	24-Sep-21	200	NA	CRISIL AAA/Watch Developing
NA	Term Loan 3	NA	NA	24-Sep-21	100	NA	CRISIL AAA/Watch Developing
NA	Term Loan 4	NA	NA	23-Aug-21	200	NA	CRISIL AAA/Watch Developing
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	1425	NA	CRISIL AAA/Watch Developing

*Yet to be issued