Detailed Rationale

Crisil Ratings has reaffirmed its 'Crisil A1+' rating on the commercial paper of Cholamandalam Investment and Finance Company Ltd (Chola Finance).

 

The rating continues to factor in the established market position of the company - especially in the vehicle financing segment, sustained profitability aided by stable asset quality metrics, and strong association with the Murugappa group. These strengths are partially offset by moderate gearing and the ability to maintain adequate buffer in capitalisation metrics alongside growth, remaining a monitorable.

 

Chola Finance remains a leading player in the Indian non-banking financial company (NBFC) sector with a sizable market share in the vehicle financing segment. On December 31, 2024, the company’s AUM stood at Rs 1,77,846 crore marking a 3-year compounded annual growth rate of 28%.

 

Over the years, the company has diversified into, and garnered moderate market presence in, non-vehicle asset classes like loan against property (LAP), home loans, micro, small, and medium enterprises (MSME) lending, consumer finance and personal loans. As the newer portfolios (Small and Medium Enterprise loan [SME], Consumer and Small Enterprise Loan [CSEL], Secured Business and Personal Loan [SBEL] and Others) have seasoned over time and their share in the overall AUM has increased, steady state asset quality has also evolved. Though range bound, gross stage III (GS III) has risen marginally to 2.91% as on December 31, 2024 from 2.48% on March 31, 2024. Nonetheless, profitability remains steady with return on managed assets (RoMA) of 2.5% for fiscal 2024 and 2.3% for the first nine months of fiscal 2025, with credit cost being the primary variable at 1.0% and 1.5% (annualized) for the respective periods.

 

Networth stood at Rs 22,593 crore on December 31, 2024 whereas on the same date - Tier I and overall capital adequacy ratio (CAR) was 14.92% and 19.76% as compared to 15.10% and 18.57%, nine months ago. Gearing, however, has remained moderate and inched up to 7.5 times on December 31, 2024 from 6.9 times on March 31, 2024.

Analytical Approach

Crisil Ratings has assessed the standalone credit risk profile of Chola Finance.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position, especially in the vehicle financing segment: Chola Finance has retained its strong market position within the NBFC sector, catalysed by sustained growth in the vehicle financing portfolio and gradual diversification into newer business segments such as consumer and micro, small, and medium enterprises (MSME) loans [called Consumer and Small Enterprise Loan (CSEL)], secured business and personal loan (SBPL) and SME finance.

 

Overall disbursements grew by 33% in fiscal 2024 and 16% (year-on-year) during the nine months ended December 31, 2024, aided by favourable macroeconomic conditions and a lower base of the new portfolio. This traction was witnessed across all product segments. Consequently, total AUM grew by 33% (year-on-year) to Rs 1,77,846 crore as on December 31, 2024 from Rs 148,167 crore as on March 31, 2024 (Rs 106,498 crore as on March 31, 2023). As one of the largest vehicle financiers in the country, the company has a dominant market share in the new and used vehicle financing segment, which accounts for two-thirds of its overall AUM. As on December 31, 2024, the vehicle finance stood at Rs 96,673 crore comprising commercial vehicles (CVs; 28%), used vehicle (28%), cars (13%), multiutility vehicles (11%); two-/three-wheelers (8%), construction equipment (6%) and tractors (6%). Furthermore 72% of the vehicle-financing AUM comprised new vehicles. Over the years, the company has developed expertise in catering to credit needs of small and medium-fleet transport operators and first-time users, which enables them to customize credit offerings while appropriately factoring in the inherent risks.

 

The company has also gained a sizeable presence in the loan against property (LAP) business, reflected in an AUM base of Rs 37,564 crore (22% of overall AUM) as on December 31, 2024 which marks a year-on-year growth of 40%. Within the housing loan segment as well, the company has registered a year-on-year growth of 42% to achieve an AUM of Rs 17,121 crore (10% of overall AUM) as on December 31, 2024. This diversification, supported by healthy demand prospects and branch expansion, imparts diversity to the overall portfolio of the company which insulates the business from cyclical downturns in the vehicle industry.  The company has also been growing its portfolio in the newer segments – like Consumer & Small Enterprise Loan (CSEL), Secured Business and Personal Loan (SBPL) and Small and Medium Enterprise Loan (SME) finance which were launched in fiscal 2022 – and cumulatively account for 13 % of the overall AUM as on December 31, 2024, and have clocked a year-on-year growth of 53 %.

 

Over the medium to long term, traditional segments like vehicle finance will continue to account for the majority share in overall AUM with CV financing remaining the flagship product. However, gradual expansion into newer business segments like LAP, home loans and CSEL shall result in higher portfolio diversity over time.
 

• Adequate earnings profile aided by sequential restoration in asset quality metrics: Asset quality has remained range bound since after the blip witnessed in the aftermath of the Covid-19 pandemic. Gross stage III (GS III) assets of Chola Finance, after peaking at 6.8% as on June 30, 2021 (4.0% as on March 31, 2021) vis-à-vis 3.3% as on June 30, 2020, have corrected significantly over the past 2 fiscals. On December 31, 2024, GS III inched up marginally to 2.91% (gross non-performing assets [GNPAs][1] of 4.0%) from 2.48% (GNPAs of 3.54%) on March 31, 2024, driven by an inch up in slippages across all segments, particularly the newer portfolios.
   

In terms of segmental asset quality, GS III in the vehicle finance portfolio stood at 3.7% as on December 31, 2024, as compared to 3.0% on March 31, 2024 and 3.20%, a year prior. In the LAP portfolio, GS III was 2.3% on December 31, 2024 as compared to 2.4% as on March 31, 2024, and has further scope of improvement. In the CSEL portfolio, which is a relatively newer business segment, delinquencies have remained slightly elevated as a sizable pool herein has been originated through fintech partnerships. These loans are covered by first loss default guarantee (FLDG), which shall cover for the credit losses.
 

This trend in asset quality has led to a similar trajectory in credit costs whereby provisions on average total assets(%) for nine months ended December 31, 2024 have inched up to 1.4% (annualised) from 1.0% for full fiscal 2024 and 0.8%, for the previous year. Consequently, overall earnings profile has remained comfortable with a RoMA of 2.3% for 9M 2025 as against 2.5% for full fiscal 2024 and 2.7% for fiscal 2023. Against this, Net Interest Margin (NIMs) and Operating expenses (as % of average of total managed assets) have remained range bound.
 

Thus far, delinquencies within the new business segments have remained controlled owing to limited seasoning in portfolio. However, the ability of the company to profitably scale new businesses while maintaining sound asset quality in traditional segments like vehicle, will remain a key monitorable.
 

• Continued benefit of association with the Murugappa group: Chola Finance continues to benefit from the financial and management support from the Murugappa group, which holds majority equity stake of 49.93% in the company as on December 31, 2024 - through Cholamandalam Financial Holdings Ltd (44.35%) and other group entities. Over the years, the overall credit risk profile of the company has strengthened and in addition to it, the group has a track record of extending timely funding support to Chola Finance during weak liquidity conditions or other adverse macro developments. In fiscal 2020, the group infused Rs 300 crore in Chola Finance, thereby augmenting its capital position. Chola Finance remains a critical component of the Murugappa group ecosystem, witnessed by its high contribution to the group’s consolidated revenues and overall market capitalisation. The group is likely to maintain its majority stake in the company and shall provide need-based financial and managerial support.
   

Weakness:

• Moderate leverage level, ability to maintain adequate buffer in capitalisation metrics alongside growth remains critical: Overall capital-to-risk weighted assets ratio (CRAR) and Tier-1 CAR stood at 19.76% and 14.92%, as on December 31, 2024 as compared to 18.57% and 15.10%, respectively, as on March 31, 2024. Earlier in fiscal 2024, the company had raised Rs 2,000 crore through equity infusion and another Rs 2,000 crore through CCDs via qualified institutional placements.

 

Chola Finance had an elevated adjusted gearing level of >6.5 times over the years; as on March 31, 2024, adjusted gearing was at 6.9 times as on March 31,2024 which further rose to 7.5 times on December 31, 2024. While the company is an active issuer in the capital markets and has demonstrated track record for raising capital from there, its ability to maintain adequate buffer in reported capitalisation metrics remains critical.

[1]As per RBI’s revised methodology for recognition of NPAs as per circular dated November 12, 2021

Liquidity: Strong

The company had liquid cushion aggregating to Rs 16,426 crore in the form of cash and equivalent (Rs 1,083 crore), Liquid investments (Rs 14,075 crore) and unutilized bank lines (Rs 1,267 crore) as on December 31, 2024. The expected contractual inflows for the succeeding 3 months (January to March 2025) were Rs 13,665 crore. Against this, for the same 3-month period, the company had a debt obligation of Rs 16,463 crore.

 

Environment, social and governance (ESG) profile

Crisil Ratings believes the environment, social and governance (ESG) profile of Chola Finance supports its already strong credit risk profile.

 

The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, lending decisions may have a bearing on environment.

 

Chola Finance has maintained strong focus on strengthening various aspects of its ESG profile.

 

Key ESG highlights:

• The company, through its lending practices, is largely retail focused and enables financing to new-to-credit customers in semi-urban areas and strives to provide sustainable livelihood related financing products.
• ESG disclosures are evolving, and the company is in the process of strengthening disclosures over the medium term.
• It has taken adequate measures for conservation of energy and use of alternative sources of energy.
• Its governance structure is characterised with ~60% of the board members being independent directors; investor grievances are handled by a dedicated stakeholder relationship committee.

 

There is growing importance of ESG among investors and lenders. The commitment of Chola Finance to ESG principles will play a key role in enhancing stakeholder confidence, given the sizeable share of its market borrowings in overall debt and access to both domestic and foreign capital markets.

Rating sensitivity factors

Downward factors:

• Significant and sustained deterioration in asset quality with GNPA increasing to, and remaining beyond 5%, leading to weakening in profitability
• Inability to maintain capitalisation metrics at healthy levels alongside scale up in business.

About the Company

Part of the Chennai-based Murugappa group, Chola Finance was incorporated in 1978. The company provides vehicle financing and LAP as well as home loans, MSME and agricultural loans. It has ventured into new businesses in the consumer and MSME ecosystems, namely CSEL, SBPL and SME finance in the second half of fiscal 2022. It had 1,577 branches across 29 states in India, with 85% presence across tier III to tier VI cities, as on December 31,2024.
 

Between April 2005 and March 2010, the company operated as a joint venture between DBS Bank and the Murugappa group. In March 2010, DBS Bank sold its 37.5% equity stake to the Murugappa group. Chola Finance exited the unsecured personal loan segment in October 2008 and subsequently from the asset management business. The Murugappa group holds 51.6% equity stake in Chola Finance, of which 45.5% is held by Cholamandalam Financial Holdings Ltd, a group company.
 

Chola Finance has two subsidiaries: Cholamandalam Securities Ltd and Cholamandalam Home Finance Ltd, a joint venture with Payswiff Technologies Pvt Ltd and three associates: White Data Systems India Pvt Ltd, Vishvakarma Payments Pvt Ltd and Paytail Commerce Pvt Ltd.

 

For 9M 2025, profit after tax (PAT) was Rs. 2,991 crore on total net income (net of interest expense) of Rs. 9,811 crore as against a PAT of Rs. 2,364 crore and a total net income of Rs. 7,073 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not Applicable