Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ rating to the Rs 500 crore non-convertible debentures (NCD) issue of HDFC Credila Financial Services Ltd (HDFC Credila) and has reaffirmed its ratings on the existing debt instruments at ‘CRISIL AAA/Stable/CRISIL A1+’.

 

The ratings continue to reflect strong expectation of managerial, financial, and operational support from the parent, Housing Development Finance Corporation Ltd (HDFC: rated ‘CRISIL AAA/FAAA/Stable/CRISIL A1+’), experienced management with strong processes and systems, and an adequate resource profile. These strengths are partially offset by overall small scale of operations.

 

In line with RBI's measures for Covid-19 pandemic, HDFC Credila had given moratorium to its borrowers. While the collection efficiency was impacted during the initial months of the moratorium, collections have gradually improved towards pre-Covid levels. However, the second wave of Covid-19 pandemic has resulted in intermittent lockdowns and localised restrictions. This could lead to some delays in collections in upcoming months due to impact on the underlying borrower cash flows. Further, any change in the behaviour of borrowers on payment discipline can affect delinquency levels.

 

HDFC Credila did witness an inch up in overall delinquencies over the last few quarters. Its gross stage 3 (GS3) assets increased to 0.60% as on March 31, 2021 from 0.12% as on March 31, 2020. It further increased 0.66% as on June 30, 2021. While a part of the increase in GS3 assets was attributed to the macro-environment related challenges, close to 60% of the GS3 assets, as on June 30, 2021, are restructured assets under the RBI Resolution Framework 1.0 and 2.0 and have been conservatively classified as GS3 assets. Overall, under the RBI’s Resolution Framework 1.0 for COVID-19-related Stress, the company has implemented restructuring on around 0.6% of its portfolio. Further, there may be marginal increase in the restructuring under Resolution Framework 2.0, which has a timeline till September 30, 2021 for invocation. Going forward, with the second wave of Covid-19 pandemic, HDFC Credila’s ability to manage collections and asset quality will remain a monitorable.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has considered the standalone business and financial risk profiles of HDFC Credila and has factored in the support expected from the parent, HDFC.

Key Rating Drivers & Detailed Description

Strengths:

Strong expectation of managerial, financial and operational support from the parent

HDFC views education loans as a segment with high growth potential in the long term; HDFC Credila, India's first dedicated non-banking financial company (NBFC) offering education loans, is the vehicle to target this segment.. Although HDFC Credila has an overall small scale of operations, the strong involvement of HDFC clearly reflects its confidence in the growth potential of the education loan business and plans to ramp-up HDFC Credila's operations commensurately. Currently, there are three directors on the company’s board from HDFC; these directors, along with the rest of the board, take an active interest in the formulation of the company's business strategies. Moreover, HDFC Credila benefits from its association with HDFC and its established branch network and infrastructure in the sourcing of business.

 
HDFC has infused around Rs 250 crore in fiscal 2020, Rs 50 crore in fiscal 2019 and Rs 80 crore in fiscal 2018 as additional capital into HDFC Credila. Since December 12, 2019, the company became a wholly owned subsidiary of HDFC post-acquisition of balance shares from the original promoters.

 

Experienced management with strong processes and systems

With HDFC taking over full ownership of HDFC Credila, Mr Arijit Sanyal has been appointed as the Chief Executive Officer on December 12, 2019 and taken over the reins from the erstwhile promoters, Mr Ajay Bohora and Mr. Anil Bohora. The company has an experienced management team with veterans from the banking and financial services industry. Moreover, it benefits from being the first education loans-focused NBFC in a segment that is predominantly dominated by banks. It has also built strong systems and processes over the past many years that help mitigate asset quality risks of this segment. The company has a large database of colleges and over 200,000 courses which it uses for taking decisions on loans. The company has developed credit scoring models for disbursing loans to borrowers of which around 41% are backed by collateral and all loans have a co-borrower. The company is likely to remain a strong player in the education loan industry.

 

Adequate resource profile

The strong parentage helps HDFC Credila access a large pool of investors, and raise debt at competitive costs. As on June 31, 2021, the company had total borrowing worth Rs 5,187 crore raised at a competitive borrowing cost. It has been able to gradually diversify its resource profile and reduced the dependence on bank borrowing. As on June 30, 2021, bank borrowing constituted 36% of the total borrowing. The company has also been able to raise USD 100 million external commercial borrowing in the fiscal 2020. It is expected to increase the proportion of capital-market borrowing and continue to diversify the resource mix over the medium term depending on market conditions.

 

Adequate capitalisation

HDFC Credila had adequate capitalisation with a networth and a gearing of Rs 1188 crore and 4.4 times, respectively, as on June 30, 2021.  Historically, HDFC Credila has operated at a relatively high gearing levels. Its gearing was 7.6 times as on March 31, 2019, and 8.3 times as on March 31, 2018. Nevertheless, supported by capital infusion aggregating to Rs 250 crore by HDFC in fiscal 2020, the gearing improved to 5.9 times as on March 31, 2020. On account of lower disbursements and higher prepayments, loan book growth has remained muted in the last 18 months due to the on and off lockdowns and restrictions on international travel during the ongoing Covid 19 pandemic, resulting in gearing further improving to 4.4 times as on June 30, 2021 (4.6 times as on March 31, 2021). While the leverage levels are expected to gradually inch-up over the medium term with scale up in operations, CRISIL Ratings understands from the management that the company will maintain a steady-state gearing of 6 times.

 

Further, adequate internal cash accrual (consistent with a return on equity of more than 14% over the past five fiscals) coupled with equity infusions as and when required from the parent, is expected to support capitalisation.

 

Weaknesses

Small scale of operations with limited seasoning of the loan book

Scale of operations is small, however the business has seen significant growth over the past few years. The four-year compound annual growth rate was 27% during fiscals 2016 to 2020. However, on account of lockdowns related to the pandemic, disbursements have been impacted in fiscal 2020. Lower disbursements and high prepayments led to a flat loan book in fiscal 2021 to Rs 6267 crore as on March 31, 2021 from Rs 6257 crore as on March 31, 2020. Nevertheless, disbursements have picked up in Q1 of fiscal 2021 at Rs 531 crore – increasing the loan book to Rs 6385 crore as on June 30, 2021.

 

Gross stage 3 assets had a slight uptick to 0.6% (Rs 37 crore) as on March 31, 2021 (0.66% {Rs 42 crore} as on June 30, 2021), from 0.12% (Rs 8 crore) as on March 31, 2020. Further, the company has invoked restructuring for accounts worth 0.7% of the loan book (Rs 47 crore), out of which accounts worth Rs 25 crore are classified as gross stage 3. Further, given high growth in recent years, a significant part of the loans disbursed are in the moratorium period and hence, the seasoning of the loan portfolio is limited at this stage. However, the overall gross stage 3 assets remain low and comfortable.

 

Nevertheless, the ability to successfully recover the loans across business cycles is yet to be tested.

Liquidity: Superior

The company has adequate liquid assets (Rs 78 crore) and unutilized bank lines (Rs 1038 crore) as on July 31, 2021 which is sufficient to cover upcoming debt repayments for the next five months (Rs 817 crore of repayments by December 31, 2021). Liquidity position is further supported by the parentage of HDFC.

Outlook: Stable

HDFC Credila should continue to benefit from the strong financial, managerial, and operational support from HDFC and the experienced management.

Rating Sensitivity Factors

Downward factors

• Downward change in the credit risk profile of HDFC by 1 notch could lead to a similar rating change on HDFC Credila
• Any material change in the shareholding or support philosophy of HDFC impacting the quantum and timing of support.

About the Company

HDFC Credila was incorporated on February 1, 2006, promoted by Mr Anil Bohora and Mr Ajay Bohora. The company is registered as a non-deposit-taking NBFC with the Reserve Bank of India. It is in the business of originating, funding, and servicing educational loans. With HDFC buying out the promoters’ stake in fiscal 2020, the company became a wholly owned subsidiary of HDFC since December 12, 2019.

 

HDFC Credila has eight own offices, and at other places does business through the branches of HDFC. The company uses various channels for sourcing and marketing, which include the internet, branch network of HDFC and a few private sector banks, partnering with colleges, education consultants, and test preparation centres, advertising, and direct marketing.

 

The loan book was at Rs 6385 crore as on June 30, 2021. The networth was Rs 1,188 crore as on this date (Rs 1144 crore as on March 31, 2021). Tier-1 and overall capital adequacy ratios were 18.3% and 24.4%, respectively, as on June 30, 2021 (17.7% and 24.0%, respectively, as on March 31, 2021). 

 

For fiscal 2021, profit after tax (PAT) was Rs 155 crore on total income of Rs 713 crore, against a PAT of Rs 123 crore on total income of Rs 727 crore for the previous fiscal.

 

For the quarter ended June 30, 2021, PAT was Rs 44 crore on a total income of Rs 176 crore, as against Rs 37 crore and Rs 180 crore, respectively, for the corresponding period of the previous fiscal.

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 level	Rating outstanding  with Outlook
NA	Non-convertible debentures*	NA	NA	NA	500	Simple	CRISIL AAA/Stable
INE539K07189	Non-convertible debentures	02-Aug-21	7.23%	01-Aug-31	250	Simple	CRISIL AAA/Stable
INE539K07171	Non-convertible debentures	13-Nov-20	7.00%	12-Nov-27	200	Simple	CRISIL AAA/Stable
INE539K07163	Non-convertible debentures	24-Sep-20	5.99%	02-Aug-23	200	Simple	CRISIL AAA/Stable
INE539K07148	Non-convertible debentures	31-Jan-20	8.00%	31-Jan-25	200	Simple	CRISIL AAA/Stable
INE539K07155	Non-convertible debentures	25-Feb-20	7.10%	25-Feb-22	200	Simple	CRISIL AAA/Stable
INE539K07114	Non-convertible debentures	17-June-19	8.62%	17-June-24	100	Simple	CRISIL AAA/Stable
INE539K07122	Non-convertible debentures	08-July-19	8.85%	06-July-29	200	Simple	CRISIL AAA/Stable
INE539K07130	Non-convertible debentures	01-Aug-19	8.70%	01-Aug-29	200	Simple	CRISIL AAA/Stable
INE539K08195	Subordinated debt	6-June-19	9.12%	6-June-29	150	Complex	CRISIL AAA/Stable
INE539K07056	Non-convertible debentures	27-Oct-16	8.25%	25-Nov-21	300	Simple	CRISIL AAA/Stable
INE539K07064	Non-convertible debentures	27-Feb-17	8.00%	27-Feb-22	200	Simple	CRISIL AAA/Stable
INE539K08146	Subordinated debt	9-Oct-15	9.30%	9-Oct-25	100	Complex	CRISIL AAA/Stable
INE539K08153	Subordinated debt	24-Jul-17	8.20%	23-Jul-27	50	Complex	CRISIL AAA/Stable
INE539K08161	Subordinated debt	16-Nov-17	8.10%	16-Nov-27	50	Complex	CRISIL AAA/Stable
NA	Commercial paper programme	NA	NA	7 to 365 days	1000	Simple	CRISIL A1+

*Yet to be issued