Rating Rationale

Strengths:
* Expectation of strong support from BFL
BHFL is the housing finance arm of BFL, which holds 99.9% stake in the company. In September 2015, BHFL received a certificate for the housing finance business from the National Housing Bank. The parent, BFL is a subsidiary of Bajaj Finserv Ltd, the financial services arm of the Bajaj group. Registered with the Reserve Bank of India as a systemically important, deposit-taking, non-banking finance company (NBFC-D-SI), BFL has emerged as one of the largest retail asset financing NBFCs in the country. It has a diversified product suite, comprising key businesses such as vehicle loans (two- and three-wheelers manufactured by Bajaj Auto Ltd), consumer durable loans, personal loans, mortgage loans, small business loans, loans against securities, commercial finance, and rural finance.

CRISIL believes BHFL is strategically important to BFL, as it is now the vehicle for growing the mortgage business, which is a focus area for the parent. Also, conducting the mortgage business through a housing finance company (HFC) will allow more efficient use of capital. With BFL having infused Rs 300 crore in fiscal 2017 and Rs 1,200 crore in Feb 2018 and Rs 2000 crores in fiscal 2019, Rs 1,500 crore in fiscal 2020, BHFL has a sizeable networth of around Rs 5585 crore as on March 31, 2020. The parent plans to hold majority stake and is willing to infuse additional capital to support growth requirements in the medium term. BHFL plans to follow a conservative gearing policy and maintain capital adequacy well above the regulatory norms. The common treasury team allows BHFL to leverage upon banking relations of BFL. The shared name also enhances BFL's moral obligation to support BHFL.

* Established track record of BFL in home loans
BFL has been present in the highly competitive mortgage business since fiscal 2011, and has an experienced management team. Including BHFL, it has scaled up its mortgage book to around Rs 45,960 crores as on March 31, 2020 while maintaining strong asset quality metrics. The management has laid down prudent underwriting practices, and focuses on existing customers having exposure to other banks. It also has adequate risk management systems to manage asset quality, because of which the gross non-performing assets (GNPA) of the existing mortgage book (including LRD) of BFL & BHFL together stood at 0.53% as on March 31, 2020 (0.08% for BHFL and 1.5% for BFL).

Currently, home loans to self-employed (Rs 3545 crore) and salaried individuals (Rs 2029 crore) are under BFL, and together constitute around 5% of the total assets under management of BFL as on March 31, 2020. At a consolidated level, home loans constitute around 19% of the consolidated AUM for the company. All incremental mortgage disbursements will be done via BHFL, while BFL's existing mortgage portfolio will be gradually run-down. According to the management, BHFL will, in the medium term, primarily focus on the home loan category, which is expected to constitute around 65% of total loans in the medium term. Loan against property including LRD will constitute another 25%, while the rest 10% will be directed towards developer financing, rural mortgages and other loans.

Weakness:
* Early stage of operations
BHFL is the vehicle for BFL for growing the mortgages business and has attained significant size and scale in the past two years as a share of the overall AUM for the Bajaj group. Bajaj Housing Finance started operations in July 2017 and grew at a rapid pace to an assets under management (AUM) of Rs 32705 crore as on March 31, 2020 with gross NPA of 0.08%. As on March 31, 2020, AUM grew 86% (year-on-year) to Rs 32705 crores on a standalone basis. The AUM consisted primarily of home loans - salaried (59%), loans against property (22%), home loans to self-employed (7%), developer finance (5%), rural finance (3%) and other portfolio (3%). A significant proportion of BHFL's portfolio has witnessed strong growth over the past few years and remains under-seasoned. Herein, the company's ability to manage collections and asset quality during this period of lockdown, with slow lifting of restrictions and weak macroeconomic environment is a key monitorable amidst the impact on the underlying borrower cash flows. The company has given moratorium to its borrowers, however, the moratorium as a percentage of AUM was only 14% on May 31, 2020 and the collection efficiency has been in a range of about 85% over the past three months between April-June. Nevertheless, any delay in return to normalcy could put pressure on collections and asset quality metrics and will be a key monitorable.