Detailed Rationale

CRISIL Ratings’ rating on the long term debt instruments of HDFC Credila Financial Services Limited (HDFC Credila) continues on ‘Rating Watch with Negative Implications’. The commercial paper has been reaffirmed at ‘CRISIL A1+’.

 

CRISIL Ratings has also withdrawn its rating on the non-convertible debentures of Rs 200 crore of NCDs (See Annexure 'Details of Rating Withdrawn' for details) in-line with its withdrawal policy. CRISIL Ratings has received independent verification that these instruments are fully redeemed.

 

HDFC Credila on June 19, 2023, had announced that HDFC has entered into a definitive agreement for sale of approximately 90% of HDFC Credila’s total issued and paid-up share capital to BPEA EQT Group owned Kopvoorn B.V. and Chrys Capital group owned entities Moss Investments Limited, Defati Investments Holding B.V., and Infinity Partners.

 

The transaction entails consideration of Rs 9060 crore and a primary capital infusion of Rs 2003.6 crore, of which Rs 700 crore has been infused by HDFC Limited in first quarter of 2024 and remaining will be infused by incoming investors on consummation of transaction. The company has received approval from Competition Commission of India on the transaction, whereas approval from RBI is awaited.

 

BPEA EQT is a global investment organisation, which combines the private equity teams from Baring Private Equity Asia (BPEA) and EQT Asia, with more than USD 25 billion of capital deployed since inception. Chrys Capital is an India focussed investment firm with ~USD 5 billion of asset under management across nine funds. Both BPEA EQT and Chrys Capital have multiple investments in financial services in India.

 

The existing analytical approach factors in the support expected from the parent HDFC Bank (100% shareholder as on July 31, 2023) and draws benefit from strong managerial and financial support. CRISIL Ratings understands that HDFC Bank is committed to support HDFC Credila in line with the erstwhile support stance of HDFC Limited, till the proposed transaction with BPEA EQT group and Chrys Capital group is consummated.

 

Once the transaction is consummated, the parent support factored in the existing analytical approach will be discontinued. The revised analytical approach will be based on the standalone credit risk profile of HDFC Credila and benefits, if any, emanating from the incoming consortium of investors.

 

CRISIL Ratings will track the progress on the transaction and have discussions with the management and the incoming investor consortium to understand their support stance, commitment, strategic importance and long-term business and financial strategy for the company. The watch will be resolved once all requisite regulatory approvals are in place, and once greater clarity emerges on the said aspects. 

 

The rating on the perpetual bonds reflects the comfortable buffer consistently maintained by HDFC Credila over the regulatory capital adequacy requirements, and high financial flexibility due to HDFC’s ownership. HDFC Credila is adequately capitalised and has maintained a cushion of >3% over the regulatory minimum capital ratio over the last five years. CRISIL Ratings believes that it will maintain a comfortable cushion going forward (see CRISIL publication 'CRISIL Criteria for Rating Hybrid Instruments Issued by NBFCs/HFCs' dated December 2016 for details on CRISIL's approach for rating such instruments). The approach on the ratings of this instrument will also be revisited once clarity emerges on the overall transaction.

 

The rating also continues to factor HDFC Credila’s experienced management with strong processes and systems, and an adequate resource profile. These strengths are partially offset by moderate scale of operations.

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 Bank.

Key Rating Drivers & Detailed Description

Strengths:

Strong managerial, financial and operational support from the parent

HDFC Group viewed 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 moderate scale of operations, the strong involvement of HDFC Group 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 two directors on the company’s board from HDFC Bank. 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 Bank and its established branch network and infrastructure in the sourcing of business.

 
HDFC has infused around Rs 700 crore in first quarter of fiscal 2024 and Rs 800 crore in fiscal 2023, prior to which it had infused 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.

 

However, considering the proposed transaction, extent of impact on support stance of incoming investors along with implication on business and financial synergies will be monitored.

 

Experienced management with strong processes and systems

With HDFC Limited taking over full ownership of HDFC Credila in December 2019, Mr Arijit Sanyal was appointed as the Managing Director and Chief Executive Officer and took 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 25% are secured loans as on June 30, 2023, 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 March 31, 2023, the company had total borrowing of Rs 15,737 crore raised at a competitive borrowing cost. It has been able to gradually diversify its resource profile and reduce the dependence on bank borrowing. As on June 30, 2023, bank borrowing constituted 70% (65% as on March 31, 2023) 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. Considering the proposed transaction, the company’s ability to raise resources will be monitored.

 

Adequate capitalisation

HDFC Credila had adequate capitalisation with a networth and a gearing of Rs 3,221 crore and 5 times as on June 30, 2023 (Rs 2,435 crore and 5.6 times as on March 31, 2023). Capitalisation is supported by a series of equity infusions by the erstwhile parent, HDFC Limited.

 

Historically, HDFC Credila operated at relatively high gearing levels of 7.6 times as on March 31, 2019, and 8.3 times as on March 31, 2018. Nevertheless, supported by capital infusion of Rs 250 crore by HDFC in fiscal 2020, the gearing improved to 5.9 times as on March 31, 2020. The gearing further improved to 4.6 times as on March 31, 2021. This was on account muted loan book growth largely due to lower disbursements and higher prepayments in fiscal 2020 and fiscal 2021 due to the on and off lockdowns and restrictions on international travel during the Covid 19 pandemic. However, with pick-up in disbursements in FY22, the gearing increased to 5.5 times as on March 31, 2022. Further during fiscal 2023, in order to support growth, gearing had reached to 7.3 times as on September 30, 2022. However, HDFC Limited infused equity capital of Rs 800 crore in fiscal 2023 and Rs 700 crore in first quarter of fiscal 2024, to bring back the gearing to adequate levels of 5.6 times as on March 31, 2023, and to 5 times in June 30, 2023.

 

As part of the definitive agreement signed, HDFC Limited infused Rs 700 crore in HDFC Credila on June 29,2023 towards growth capital and remaining primary capital of Rs 1303.6 crore is expected to be infused by incoming investors on consummation of the transaction. This will strengthen the capitalisation of the company. Further, adequate internal cash accruals (consistent with a return on equity of more than 14% over the past five fiscals) are expected to support capitalisation.

 

Weakness:

Moderate scale of operations with limited seasoning of the loan book

Scale of operations is moderate; however, the business has seen significant growth in fiscal 2023 and fiscal 2022. On account of lockdowns related to the pandemic, disbursements were impacted in fiscal 2021, however, disbursements had picked up in fiscal 2022 to Rs 4,309 crore and further to Rs 7,992 crore in fiscal 2023. As a result, the loan book grew to Rs 8,838 crore as on March 31, 2022, and further to Rs 15,298 crore as on March 31, 2023. Loan book grew further to Rs 17,062 crore as on June 30, 2023.

 

Gross stage 3 assets have improved to 0.14% (Rs 23.04 crore) and 0.17% (Rs 25.4 crore) as on March 31, 2023, from 0.57% (Rs 50.6 crore) as on March 31, 2022. Further, as on March 31, 2023, restructured accounts, have reduced to 0.08% (Rs 12.51 crore) from 0.62% (Rs 55.02 crore) as on March 31, 2022. Of restructured book, Rs 6.9 crore and Rs 31.4 crore were classified as gross stage 3 as on March 31, 2023, and March 31, 2022, respectively. 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 for the newer markets like Canada and UK.

Liquidity: Superior

The company has adequate cash and liquid investments of Rs 1296 crore and unutilised bank lines of Rs 1400 crore as on August 31, 2023. This is sufficient to meet upcoming debt repayments (including interest expense) till and beyond December 31, 2023. Liquidity position is further supported by the parentage of HDFC Bank.

Rating Sensitivity Factors

Downward factors

• Downward change in the credit risk profile of HDFC Bank by 1 notch could lead to a similar rating change on HDFC Credila
• Any material change in the shareholding or support philosophy of HDFC Bank 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.The company has been converted to a public limited company with effect from October 8, 2020.

 

HDFC Credila has eight major offices, and a network of 17 branches from where it conducts its business activities. 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 (gross) was at Rs 17,062 crore as on June 30, 2023 and Rs 15,298 crore as on March 31, 2023 (Rs 8,838 crore as on March 31, 2022).

 

For fiscal 2023, profit after tax (PAT) was Rs 276 crore on total income of Rs 1352 crore, against a PAT of Rs 206 crore on total income of Rs 824 crore for the previous fiscal. For first quarter of fiscal 2024, profit after tax (PAT) was Rs 97 crore on total income of Rs 495 crore.

Any other information: Not applicable