Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/CRISIL PPMLD AAA/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of Mahindra Rural Housing Finance Limited (MRHFL).

 

CRISIL Ratings has also withdrawn its rating on the Rs 25 crore non convertible debentures, (See the 'Annexure - Details of Rating Withdrawn' for details) on receipt of independent confirmation that these instruments are fully redeemed and at the request of the company, in line with its withdrawal policy.

 

The prefix 'PP-MLD' indicates that the principal amount of the debentures is protected, while returns remain market-linked. Also, payments to investors are not fixed and are linked to external variables such as government bond yields, commodity prices, equity indices, foreign exchange rates, or equity valuation of the company.

 

On January 6, 2023, CRISIL Ratings had upgraded its ratings on long-term bank facilities and debt instruments of MRHFL to ‘CRISIL AAA /Stable’ from ‘CRISIL AA+/Stable’. The rating action followed the upgrade in ratings on the long-term bank facilities and debt instruments of majority owner, Mahindra and Mahindra Financial Services Ltd (Mahindra Finance) to ‘CRISIL AAA/Stable’ from ‘CRISIL AA+/Stable’.

 

The upgrade of Mahindra Finance was driven by the stronger support stance of the parent Mahindra and Mahindra Ltd (M&M; 'CRISIL AAA/Stable/CRISIL A1+'), towards Mahindra Finance as well as improvement in the business performance of the latter.

 

CRISIL Ratings expects Mahindra & Mahindra Financial Services Ltd to maintain majority shareholding in MRHFL, and to exercise management oversight for the company to conduct its business in line with governance and compliance standards that all Mahindra group entities follow, including, MRHFL honouring its debt obligations in timely manner.

 

The ratings on MRHFL continue to be driven by expectation of strong support from the majority owner Mahindra Finance (‘CRISIL AAA/Stable/CRISIL A1+’), and the company’s adequate capitalisation and resource profile. These strengths are partially offset by modest scale of operations with geographical concentration, and weak asset quality.

Analytical Approach

CRISIL Ratings has analysed the standalone business and financial risk profiles of MRHFL and has factored in the strong support the company is likely to receive from its parent, Mahindra Finance, on an ongoing basis and in times of distress.

Key Rating Drivers & Detailed Description

Strengths:

Expectation of strong support from majority owner, Mahindra Finance

The strategic importance of MRHFL to Mahindra Finance is reflected in the latter's strategy to focus on rural and semi-urban customers, strategic oversight of MRHFL, and the steady increase in MRHFL's share in total assets and advances of its parent to more than 10%. This is in addition to regular capital infusion, ongoing management integration and assistance from Mahindra Finance. Also, the parent is expected to maintain its majority shareholding and to exercise management oversight for the company to conduct its business in line with governance and compliance standards that all Mahindra group entities follow, including, MRHFL honouring its debt obligations in timely manner.

 

MRHFL's operations will remain significant to Mahindra Finance, given the healthy growth prospects of the rural and affordable housing finance segment and MRHFL's ability to enhance the parent’s presence in rural and semi-urban areas. MRHFL benefits significantly from managerial and operational integration with, and access to the branch network of, Mahindra Finance.

 

Adequate resource profile

MRHFL’s resource profile benefits from the expertise of Mahindra Finance in raising funds from the market. Mahindra Finance and other Mahindra group companies also support MRHFL through inter corporate deposits (ICDs). Besides, MRHFL may access the refinance facility from National Housing Bank. This enables the company to raise funds at competitive rates, as reflected in the cost of borrowing of 7.6% for the first nine months of fiscal 2023 (7.5% for fiscal 2022 and 8.9% for fiscal 2021). The company has a fairly diversified resource mix with 42% of the borrowing from banks, 47% from NCDs, 7% from subordinate debt, 4% from ICDs as on December 31, 2022.

 

Adequate capitalisation

Tier I capital adequacy ratio of 33.2% as on December 31, 2022 (30.9% as on March 31, 2022), reflects adequate capitalisation. Since inception, the parent has infused equity of Rs 513 crore, including Rs 150 crore in December 2018. Absolute networth was Rs 1,506 crore and gearing at 4.5 times as on December 31, 2022 (Rs 1,455 crore and 4.6 times, respectively, as on March 31, 2022).

 

Weakness:

Modest scale of operations with geographical concentration

Scale of operations although modest, has been improving over the past few years. Gross advances saw compound annual growth of around 32% from fiscals 2015 to 2020. However, the Covid-19 pandemic-led disruptions and cautious approach adopted by the management led to subdued growth in the last two fiscals. Loan book stood at Rs 7,374 crore as on December 31, 2022 (Rs 7,602 crore as on March 31, 2022 and Rs 7,647 crore as on March 31, 2021). Growth is expected to gradually pick up in the near-medium term.

 

Loan book remains geographically concentrated with Maharashtra and Tamil Nadu forming  54% of the overall portfolio (57% as on March 31, 2022). Nevertheless, the management is taking active steps to reduce the loan book exposure in Maharashtra over the medium term. The company plans to enter relatively new markets of Punjab, Odisha and Uttar Pradesh while focusing on established geographies such as Tamil Nadu, Andhra Pradesh and Telangana.

 

Weak asset quality

Asset quality remains susceptible to seasonality in the cash flow of borrowers, who are primarily engaged in agriculture and related activities, and have relatively weaker credit risk profiles. Furthermore, the company is present in markets where risks related to documentation of property are significantly high. Hence, asset quality remains weaker than peers, with gross stage 3 assets (GS3) at 11.3% as on March 31, 2022 (13.2% as on March 31, 2021). Nevertheless, absolute GS3 declined to Rs 861 crore as on March 31, 2022, from Rs 1,006 crore as on March 31, 2021, supported by write-off worth Rs 264 crore. GS3 inched up in the first nine months of fiscal 2023 and stood at Rs 16.42% as on December 31, 2022.

 

As per the revised norms of the Reserve Bank of India (RBI) on the asset classification as part of the circular released on November 12, 2021, gross NPA stood at 21.2% as on December 31, 2022.

 

The proportion of outstanding restructured book (under the RBI August 2020 and May 2021 Resolution Framework for Covid-19-related stress) remains high in relation to the total loan book. Performance of the restructured book and overall asset quality will remain a key monitorable.

 

As a strategic move, the company has over past few years increased its focus on affordable housing segment, thereby reducing exposure to agriculture segment; non-agriculture customers increased to 75% % of total loan portfolio as on December 31, 2022 compared to 48% as on March 31, 2018. Further, given the challenging macro environment, MRHFL has taken various measures towards improving collections and has tightened underwriting norms

 

However, given the customer profile, MRHFL’s ability to manage collections and asset quality will remain a key monitorable.

Liquidity: Superior

Liquidity position remains strong with positive cumulative mismatch in each bucket upto one year as on December 31, 2022. As on December 31, 2022, MRHFL had unutilised bank lines of Rs. 865 Crore and contingent line of Rs. 975 Crore from its parent. Liquidity is further supported with cash, cash equivalents and other liquid assets of around Rs 1,507 crore as on December 31, 2022. The total liquidity is sufficient to repay debt obligations for next five months assuming no collections. Moreover, being a part of the M&M Group, additional liquidity support will be available to the entity as and when required.

Outlook: Stable

CRISIL Ratings believes MRHFL will remain strategically important to Mahindra Finance and the parent will maintain its majority equity stake and provide operational, managerial and financial support.

Rating Sensitivity Factors

Downward factors:

• Downward change in the credit risk profile of Mahindra Finance by 1 notch could have a similar rating change on MRHFL
• Reduced support from the parent because of a significant decline in ownership or in the strategic importance of MRHFL
• Significant deterioration in asset quality, impacting earnings on a sustained basis

About the Company

MRHFL was established as a wholly owned subsidiary of Mahindra Finance in April 2007. Being one of the pioneers in the rural housing finance business in India, the company intends to leverage its understanding and experience in rural markets by providing housing loans to untapped semi-urban and rural segments. The loan portfolio stood at Rs 7,374 crore as on December 31, 2022 (Rs 7,602 crore as on March 31, 2022).

 

For fiscal 2022, MRHFL reported profit after tax (PAT) of Rs 48 crore and total income of Rs 1,377 crore, against Rs 151 crore and Rs 1,455 crore, respectively, in the previous fiscal.

 

For nine months ended December 31, 2022, MRHFL reported PAT of Rs 48 crore and total income of Rs 995 crore, against profit of Rs 48 crore and total income of Rs 1,047 crore in the corresponding period of the previous fiscal.

Any other information: Not applicable