CRISIL has removed its rating on the long-term bank facilities and debt instruments of Indiabulls Housing Finance Limited (IBHFL) from 'Rating Watch with Developing Implications' and assigned a 'Negative' outlook on the same. The ratings on these instruments have been reaffirmed at 'CRISIL AA+', while the rating on the short term bank facilities and the short-term debt programme has been reaffirmed at 'CRISIL A1+'.
 
Earlier, on September 10, 2019, CRISIL had revised its rating on the long-term debt instruments of IBHFL to 'CRISIL AA+' from 'CRISIL AAA' while short-term ratings were reaffirmed at 'CRISIL A1+'. The long-term ratings were put on 'Watch with Developing Implications'. The action on the long-term rating was on account of the continued challenging operating environment for non-banking financiers {non-banking financial companies (NBFCs) including housing finance companies (HFCs)} with issues in funding access, especially for those with a wholesale lending book, including IBHFL. Furthermore, the ratings continued on watch given the proposed merger of IBHFL along with its wholly owned subsidiary, Indiabulls Commercial Credit Limited (ICCL) into and with The Lakshmi Vilas Bank (LVB); the transaction was awaiting regulatory approvals.
 
The watch resolution follows the announcement by IBHFL on October 09, 2019 that the Reserve Bank of India (RBI) has not approved the voluntary amalgamation of IBHFL and ICCL with LVB.
 
The long-term ratings have been assigned 'Negative' outlook on account of possibilities of funding access challenges continuing due to the non-fructification of the proposed merger with LVB as well as the public interest litigation (PIL) recently filed against the company which can have an impact on investor confidence. Further, the outlook also reflects the potential impact on the financial flexibility of the company due to the recent sharp fall in its equity price.
 
Although IBHFL has been raising resources since September 2018 on an ongoing basis, the ease of raising resources and the cost of these resources have been impacted and improvements on this front have not materialized so far as expected. The company raised around Rs 7,500 crore in the second quarter of fiscal 2020 as compared to around Rs 10,000 crore raised in the first quarter of fiscal 2020 and around Rs 17,000 crore in last quarter of fiscal 2019.
 
However, there seem to be signs of improvement in first fortnight of October 2019 with IBHFL having received sanctions to raise Rs. 5200 crore via term loans, working capital lines, commercial papers and securitization lines, of which around Rs 3195 crore has been in the past one week. With the proposed merger no longer on the cards, the company has started tapping the banking channels once again and plans to increase the quantum of fund raising significantly going forward. CRISIL will continue to monitor the fund raising by IBHFL, in terms of the quantum, the cost, as well as the diversity of sources. CRISIL will also closely monitor the progress on proceedings pertaining to the public interest litigation (PIL) recently filed against the company. The company, on its part, has strongly refuted the allegations against it in the PIL. Any potential adverse impact on the company's ability to raise funding in the near to medium term on account of these developments will be monitored closely.
 
With rising borrowing costs and slowdown in disbursements by non-banks - mainly to wholesale borrowers, refinancing risks for real estate players has increased, resulting in greater vulnerability of this portfolio. While IBHFL has been managing it wholesale portfolio well till now and has also been reducing its proportion, there has been some increase in gross non-performing assets (NPAs) in IBHFL's loan portfolio to 1.47% as on June 30, 2019 from 0.88% as on March 31, 2019; this was primarily driven by slippages of a few accounts in its commercial real estate book. However, this can also be partly attributed to the management's decision to proactively recognize some accounts in the commercial real estate book as NPAs due to reduction in collateral values even though they are not overdue by more than 90 days. IBHFL has also been reducing its commercial real estate exposure, with limited disbursements compared to refinance and prepayments; proportion of commercial real estate portfolio to total assets under management (AUM) reduced to 15% as on June 30, 2019 from 21% as on March 31, 2018. The company is taking steps to reduce the commercial real estate  exposures further in the near term and is in advanced talks with investors/financial institutions to refinance a few of these. Further, recoveries from some stressed commercial real estate exposures also testify to IBHFL's strong capabilities on this front.
 
However, any sharp increase in NPAs, mainly in the commercial real estate portfolio and/or tightening in the resource profile, will remain key rating sensitivity factors for IBHFL.
 
IBHFL continues to maintain strong liquidity with cash and cash equivalents at around 20% of total assets as on October 10, 2019.  The company has aggregate liquidity of more than Rs 18,500 crore as on October 10, 2019, which provides around 100% cover over IBHFL's debt repayments till September 2020. The company is expected to maintain liquidity at these levels on a steady state basis.
 
The ratings continue to reflect CRISIL's expectation that IBHFL will maintain its sizeable presence in retail mortgage finance. The rating also factors in IBHFL's comfortable asset quality in the retail portfolio, strong capitalisation, healthy profitability, and sufficient liquidity.
 
CRISIL has withdrawn its rating on non-convertible debentures of Rs 4120 crore in line with its withdrawal policy. CRISIL has received independent confirmation that these instruments have been fully redeemed.

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of IBHFL and its subsidiaries. That is because of the substantial operational and management integration, common promoters and shared brand.

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

CRISIL believes IBHFL will maintain a strong financial risk profile over the medium term, supported by strong capitalisation and earnings metrics. The ratings also factor in IBHFL's established market position and comfortable asset quality in retail segments. The rating may be downgraded, if access to fresh funds remains challenging thereby impacting its liquidity levels and/or deterioration in IBHFL's asset quality thereby impacting its earning profile. The outlook may revised to stable if fund mobilization increases back to pre-September 2018 levels or there is significant improvement in IBHFL's asset quality on a sustained basis while improving its earning profile.

Rating Sensitivity Factors:
Upward Factors:
*Increase in fund mobilizations to pre-September 2018 levels on a steady state basis
*Significant improvement in IBHFL's asset quality with gross NPA <0.5% on a sustained basis while improving earnings profile
 
Downward Factors:
* Continued funding access challenges for non-banking sector with limited fund-raising by IBHFL and reduction in liquidity levels
* Deterioration in asset quality with gross NPA increasing to above 3%, over an extended period, thereby also impacting profitability
* Potential weakening of earnings profile with changes in the business model

IBHFL is one the larger housing financing companies in India. In its current legal form, its origins date back to April 1, 2012 when Indiabulls Financial Services Ltd was reverse-merged with it. The process was completed on March 8, 2013, following the Delhi High Court's approval on December 12, 2012. After the merger, IBHFL continues to operate as a housing finance company registered with the National Housing Bank. The company, along with its subsidiary Indiabulls Commercial Credit Ltd (ICCL) focuses on asset classes such as mortgages and commercial real estate. As on June 30, 2019, the promoter group held 21.5% stake in the company.
 
During first quarter of fiscal 2020, IBHFL had a profit after tax (PAT) of Rs 802 crore on a total income of Rs 3886 crore, compared with a PAT of Rs 1055 crore and total income of Rs 4073 crore during same period previous fiscal.

Any other information: Not applicable