Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/CRISIL PPMLD AAA/Stable/CRISIL A1+’ to the existing ratings for bank facilities and debt instruments of SMFG India Credit Company Limited (SMICC) (Formerly Fullerton India Credit Company Limited).

 

CRISIL Ratings has also withdrawn its rating on the Rs 540 crore non-convertible debentures, (see the annexure, 'Details of rating withdrawn', for details) at the request of the company and on receipt of independent confirmation that these instruments are fully redeemed. The rating action is in line with CRISIL Ratings’ policy on withdrawal of ratings.

 

Post the acquisition by SMFG, the company had received board approval for a change in the name of the company. The company received board approval for the same on April 13, 2023 post which the process for regulatory approvals was initiated. On May 11, 2023, the company received the approval from Ministry of Corporate Affairs and received its Certificate of Registration from Reserve Bank of India (RBI) on May 30th. The logo of the company has also been rebranded in line with that of the ultimate parent i.e. Sumitomo Mitsui Financial Group Inc (SMFG)

 

The current outstanding ratings factor in strong support from SMFG (rated ‘A-/Stable’ by S&P Global) on an ongoing basis and in the form of need-based equity/debt capital support and operational/managerial synergies. SMFG also fully consolidates SMICC, being a subsidiary, in its financial statements. In CRISIL Ratings’ view, SMFG is also committed to providing equity capital or liquidity to support SMICC group’s growth plans or in the event of any exigency. The ratings also reflect the comfortable capitalisation profile and the scale up in the portfolio. However, asset quality remains vulnerable to slippages given the borrower profile and earnings profile, which albeit improving, remains modest.

 

CRISIL Ratings notes that the name of the entity has changed from Fullerton India Credit Company Limited to SMFG India Credit Company Limited.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has analysed the consolidated business and financial risk profile of SMICC and its wholly owned subsidiary, SMFG India Home Finance Company Limited (SMHFC), together referred to as SMFG India group. The companies have strong operational and financial linkages, common senior management, and shared brand. The ratings also continue to factor in strong support from, SMFG, the parent, given the strategic importance of SMICC to SMFG, majority ownership, complete management control and shared brand name.

 

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

Key Rating Drivers & Detailed Description

Strengths:

• Strategic Importance to, and expectation of continued support from, SMFG

The rating factors in expectations of continued support in the form of both equity and debt from SMFG (rated ‘A-/Stable’ by S&P Global) on an ongoing basis and in the event of any exigency. SMFG has senior level representation on the Board and various committees of SMICC and is involved in key decisions taken by the company. Further, SMFG also fully consolidates SMICC, being a subsidiary, in its financial statements.

 

India continues to be one of the focus markets for SMFG Group, with the group tapping into the Indian market through its presence via Sumitomo Mitsui Banking Corporation (SMBC) which is more entrenched towards large corporate lending, and SMICC, wherein the latter allows SMFG to build a comprehensive financial service offering and also cater to the retail segment, thus increasing its clientele base on a global demographic.

 

CRISIL Ratings notes that the name of the entity has changed from Fullerton India Credit Company Limited to SMFG India Credit Company Limited.

 

In CRISIL Ratings’ view, SMFG is also committed to providing equity capital or liquidity to support SMICC group’s growth plans or in the event of any exigency. CRISIL Ratings also expects that SMFG India Group's borrowings profile and costs will benefit both directly and indirectly leveraging SMFG’s global presence. Any material disruption in SMFG India Group’s business could, in CRISIL Rating’s view, have a significant impact on the reputation and franchise of the parent.

 

• Healthy Capitalisation

On a standalone basis, the net-worth of SMICC continues to witness an uptrend improving to Rs 5,272 crore as on March 31, 2023, as compared to Rs 4,558 crores as on March 31, 2022, primarily driven by rise in internal accruals during the period as the company reported PAT of Rs 670 crore during fiscal 2023. The gearing metrics also remain comfortable with adjusted gearing at 5.8 times as on March 31, 2023, as against 4.0 times as on March 31, 2022. In terms of capital adequacy ratio (CAR), as on March 31, 2023, SMICC’s overall CAR stood at 18.8% with tier 1 CAR at 14.0%, well above the regulatory requirement.

 

Capitalisation metrics have been supported by regular and timely equity infusions in the past with the last equity infusion of Rs 250 crore coming in October 2021, prior to which the group had raised Rs 750 crores in April 2020.

 

At a group level also, the networth stood at Rs 5,215 crore as on March 31, 2023, with adjusted gearing at 6.9 times as on March 31, 2023 (5.1 times as on March 31, 2022).

 

The SMFG India group follows a conservative capitalisation policy by maintaining a buffer over the regulatory capital requirement based on a stress test. CRISIL Ratings does not expect any change in the capital philosophy of the group, and capitalisation metrics to continue to remain at healthy levels going forward.

 

• Strong Liquidity Management Practices:

The group maintains liquidity in excess of 3 months of outflows. Including fee-paying committed and undrawn CC/WCDL lines, this increases further to 3-5 months of outflows. This liquidity cushion was higher during periods of stress as was seen during the pandemic period when the group was having liquidity cover for over 6 months of debt repayment outflows. This was also visible during demonetisation period. In addition, the diversified lender base, low reliance on short term funding (commercial paper) and well-matched asset-liability profile to minimise tenor and refinancing risks provide adequate support. Additionally, even during the past one year, the company continued to raise funds at optimal costs.  The group is thus likely to be well-placed to withstand any liquidity pressure in the market, if any. CRISIL Ratings also expects that SMFG India Group's borrowings profile and costs will benefit both directly and indirectly leveraging SMFG’s global presence.

 

Weaknesses:

• Modest, albeit improving, asset quality metrics

Amidst the improvement in the macro-economic environment, the AUM for SMFG India Group increased by ~44%  to Rs 36,613 crore as on March 31, 2023 as against Rs 25,397 crore as on March 31, 2022. The growth was broad based across segments with personal loans (including digital lending) constituting 44% of the AUM followed by loans against property (LAP, 30%), housing (11%) and the rest towards a mix of secured and unsecured product categories. Consequently, at the consolidated level the share of unsecured loans stood at 53% as on December 31, 2022. Even on a standalone basis, the AUM grew by 44% (annualized) to Rs 27,976 crore as on December 31, 2022, with unsecured loans constituting around 65%. The share of unsecured loans in the portfolio was around 60% pre-Covid as well.

 

Given the borrower profile, the asset quality metrics were impacted during Covid. However, in line with resurgence in economic activity and increase in credit flow in the overall industry post August 2021, asset quality metrics for the group have witnessed sequential improvement with reported GNPA improving to 3.2% (consolidated) as on March 31, 2023, as compared to 6.7% as on March 31, 2022 (9.2% as on March 31, 2021).

 

On a standalone basis, headline asset quality metrics of SMICC improved sequentially with GNPA improving to 3.3% as on March 31, 2023, as compared to 6.6% as on March 31, 2022 (9.6% as on March 31, 2021).

 

The improvement in the collection efficiencies have supported this with an improvement to around 99% post Jun-22, which has remained at a similar level since then. Further, the restructured book, as on December 31, 2022, accounted for 1.5% of the AUM, out of which provisions have been created for ~62% of the restructured book.

 

In accordance with improving delinquency trend, write-offs as a % of assets under management have also improved considerably to 2% for the nine months ended December 31, 2022, as opposed to 12% for fiscal 2022.

 

Over the years, risk management processes and data analytics capability have been strengthened. Underwriting norms and monitoring mechanisms have been reinforced. The unsecured lending business has also been supported through investments in risk analytics and technology. Underwriting and collection norms have been tightened based on portfolio performance trends and early warning indicators.

 

Nevertheless, the ability to manage collections and improve asset quality metrics while the portfolio scales up remains a key monitorable.

 

• Moderate profitability metrics, albeit improving in FY23:

The earnings profile for SMFG India group is supported by a large proportion of high-yield businesses and competitive borrowing costs. This helped SMICC (standalone) report high net interest margin and pre-provisioning profits over the past 5 years till fiscal 2020. Hence, despite credit costs being in the range of 1.8% to 4.0% over the same period, the return on total managed assets (RoMA) of SMICC on standalone basis was healthy at 1.6% to 3.7% over the past 5 years ending 2020.

 

Impacted by rise in delinquencies post April 2020, the overall credit costs for the consolidated entity were elevated during FY21 and FY22, leading to an impact on the earnings profile. The credit costs for the SMFG India group had spiked up to 11.3% in FY21 which improved to 3.3% (netted off for provision writebacks) in FY22.

 

However, with the continued improvement in the asset quality credit costs for the company stood at 1.9% for fiscal 2023, which has supported the group in reporting a profit after tax of Rs 710 crore for the same period. As a result, return on managed assets (RoMA) for the group improved to 2.0% during the period, as against 0.3% in FY22.

 

Similarly, on a standalone basis, with credit costs remaining elevated at 3.6% during FY22 (12.4% in FY21), and interest income being impacted due to higher softer delinquencies, overall profitability of the entity remained constrained at Rs 58 crore. However, with improvement in asset quality, credit costs improved to 1.8% for the fiscal 2023, translating into standalone profits at Rs 670 crore for the same period. As a result, RoMA for SMICC (standalone) improved to 2.2% (annualized) during the period, as against 0.2% in FY22.

 

The ability of the company to report profitability on a sustained basis whilst maintaining credit costs remains a key monitorable.

Liquidity: Superior

Liquidity profile of the group remained adequate owing to presence of unencumbered liquidity surplus of Rs.5,512 crore in the form of cash and short-term investment balance as on April 30, 2023. This was further supported by unutilized bank lines amounting to Rs.1,500 crore and inflows from advances. Against the same, the group had total principal debt repayments amounting to Rs 6,093 crore till October 2023.

Outlook: Stable

CRISIL Ratings’ believes SMICC will remain strategically important to, and continue to receive support from, SMFG, and will sustain its growth momentum while maintaining its healthy financial risk profile.

Rating Sensitivity factors

Downward factors:

* If there is a significant diminution in the stake held by, or the support expected from, SMFG, or a change in SMFG’s ratings by S&P Global by 1 notch or higher

* Continued deterioration in asset quality of SMICC's loan book with weak standalone earnings profile on a sustained basis.

About the Company

SMICC was formed in December 2005 through the acquisition of Dove Finance (DF) by Asia Financial Holding Pte, Singapore (through its investment arm, Angelica Investment Pte Ltd). After the acquisition, the name was changed to First India Credit Company Ltd, which was then renamed to Fullerton India Credit Company Ltd deriving its name from the parent.

 

 Following the consummation of transaction between SMFG and FFH, 74.9% shares in SMICC are held by SMFG while FFH which in turn is a wholly owned subsidiary of Temasek continues to hold the balance stake. Post the change in ownership the name of the entity has now been changed to SMFG India Credit Company Limited.

 

Product offerings include secured products which comprise primarily of mortgages/loans against property, and commercial vehicle loans. The unsecured product offerings comprise of personal loans and rural group loans. The company operates through 730 distribution points.

Key Financial Indicators: (Standalone, SMICC)

As on / for the year ended		March 31, 2023	March 31, 2022*	March 31, 2021*
Total Assets (Reported)	Rs crore	35,541	23,490	23,782
Total income	Rs crore	5,028	3,591	4,757
Profit after tax	Rs crore	670	58	(1,157)
Gross NPA	%	3.3	6.6	9.6
Adjusted Gearing@	Times	5.8	4.0	4.5
Return on assets^	%	2.2	0.2	(4.2)

^based on total managed assets

*IND-AS, #: as per CRSIL adjusted calculation

@ Direct Assignment is included in Borrowings for calculation of Adjusted Gearing

Any other information: Not applicable