Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Positive’ rating on the Rs 1250 crore of non-convertible debentures while reaffirming its ‘CRISIL A1+’ rating on the commercial paper (CP) of Fedbank Financial Services Limited (Fedfina).

 

The rating factors in the strong support that Fedfina receives from its majority shareholder, The Federal Bank Ltd (Federal Bank; ‘CRISIL A1+). Majority ownership, strategic importance and shared brand imply a strong moral obligation on Federal Bank to support Fedfina both on an ongoing basis as well as in the event of distress. The rating also factors in Fedfina’s comfortable capitalisation. These strengths are partially offset by moderate, albeit growing, scale of operations and limited seasoning of the portfolio.

 

The outlook is a reflection of CRISIL Ratings' view on the long-term fixed deposit rating of the parent, The Federal Bank Ltd (Federal Bank; ‘CRISIL AA+/Positive/CRISIL A1+).

Analytical Approach

For arriving at the ratings, CRISIL Ratings has assessed the standalone credit risk profile of Fedfina and factored in strong managerial and financial support from the parent, Federal Bank. The parent will continue to provide strong support to Fedfina, considering the strategic importance of the entity and the high moral obligation on account of majority shareholding and shared name.

Key Rating Drivers & Detailed Description

Strengths:

• Strategic importance to, and strong expectation of support from, the parent

Fedfina is a subsidiary of Federal Bank and an integral part of its business strategy and will therefore remain strategically important to the bank.  Overall, Federal Bank’s cumulative equity contribution till date is  is Rs 471 crore, and holds 61.7% stake as on December 1, 2023. The company being a subsidiary of Federal Bank enjoys the benefits of shared brand name along with financial and operational support from its parent. CRISIL also derives comfort from the high degree of management integration with senior management representation of Federal Bank on the board of Fedfina.

 

The parent’s funding, operational and management support is expected to continue.

 

• Comfortable capitalisation

Overall capital adequacy ratio (CAR) stood at 19.7%, as on September 30, 2023. Tier 1 ratio and CAR stood at  15.1% and 17.9%, respectively, as on March 31, 2023. Networth stood at Rs 1,356 crore as on March 31, 2023 (Rs 1,496 crore as on September 30, 2023) and has increased from Rs 1,154 crore as on March 31, 2022, supported by both internal accrual as well as rights issue of Rs 200 crore in June 2021. The company had earlier raised capital through rights issue of Rs 79.20 crore in fiscal 2021, and Rs 200 crores in fiscal 2022. Both the shareholders participated in all these right issues.

 

Gearing was 5.4 times as on September 30, 2023, against 5.3 times as on March 31, 2023. While it is expected to inch up as operations gain scale, gearing will remain below 6.5 times over the medium term.

 

Weaknesses:

• Moderate, albeit growing, scale of operations

The company primarily operates in the retail loan segments such as gold loan (33% of asset under management [AUM] as on September 30, 2023), medium ticket LAP (25%), unsecured business loans (16%), affordable mortgage (25%; comprising housing loans [6%] and small ticket LAP [18%]), and others (1%). AUM increased by 47% from Rs 6,187 crore as on March 31, 2022to Rs 9,069 crore as on March 31, 2023 and further to Rs 10,030 crore as on September 30, 2023). Growth in fiscal 2023 was driven by affordable mortgage, small ticket LAP and unsecured business loans. While the AUM growth is expected to be broad based, Fedfina is likely to remain a small player in the non-banking financing space in the near term. Over the near to medium term, the company intends to increase the share of co lending business specifically in the LAP and Gold Loan portfolio. Also, the share of gold loan portfolio in the overall AUM is expected to decline.

 

Top three states, Karnataka, Tamilnadu, and Maharashtra, accounted for around 53% of the AUM, with Maharashtra leading at 20% as on 30 September 2023. The management plans to expand its branch network in the next few fiscals. However, ability to scale up while maintaining delinquency levels will be closely monitored.

 

• Limited portfolio seasoning

While gold loans are of shorter tenure (average of 9 months), other products such as unsecured business loans (around 3 years), medium and small ticket LAP (13-14 years), and housing loans (around 18 years) are of long tenure. Also, many of these segments cater primarily to self-employed borrowers. Fedfina began offering a few of these products only recently, and hence, these loans are not seasoned and have not witnessed a complete credit cycle. Overall gross non-performing assets (GNPAs) moderated to 2.03% as on March 31, 2023, from 2.23% as on March 31, 2022. GNPAs increased in fiscal 2022 largely due to slippages in LAP, unsecured business loans, and one construction finance account. The increase in GNPA also included around 50 basis-point impact from the implementation of revised NPA recognition norms released by the Reserve Bank of India on November 12, 2021. GNPA was at 2.34 % as on September 30, 2023.

 

Fedfina had Rs 140 crore (1.4% of AUM) as on 30th September 2023, under COVID-19-related restructuring. Nevertheless, ability to manage collections and delinquencies will remain a key monitorable.

Liquidity: Strong

The asset-liability management profile was comfortable, with positive cumulative mismatches in the maturity bucket of up to one year as at September 2023. Fedfina had Rs 8,153 crore in borrowings as on 30th September 2023  , comprising bank borrowings (89%; 9% is from the parent) and capital market (11%; non-callable debentures 10% and CPs 1%), with non-bank financing companies (NBFCs) accounting for the remaining.

 

The company had Rs 1001.90 crore debt maturing in September-December , 2023, for which it has unutilised bank line (Rs181 crore), mutual fund investments (Rs 50 crore), other liquid investments (Rs 1107  crore) and cash and bank balance (Rs 122 crore). Short-term nature of gold loans (less than one year), which was 33% of the AUM as on September 30, 2023, offers healthy collections. Liquidity is cushioned by funding support extended by the parent, Federal Bank.

Outlook: Positive

CRISIL Ratings believes Fedfina will remain strategically important to Federal Bank and will continue to benefit from its strong support and high moral obligations from the parent .

Rating Sensitivity factors

Upward factors

• Rating upgrade of the parent Federal Bank by 1 or more notches
• Significant improvement in market position led by increase in scale of operations while maintaining comfortable adjusted gearing
• Sustenance of improvement in earnings profile with ROMA remaining at around 3.0% on steady state basis.

 

Downward factors

• Decline in support from Federal Bank, either by way of decline in ownership in Fedfina below 51% or in the strategic importance of the company to the parent
• Significant and continuous increase in delinquency, impacting profitability

About the Company

Fedfina, is a non-deposit accepting, systemically important non-banking finance company (NBFC-ND-SI). The company was incorporated in the state of Kerala in April 1995 and commenced operations in August 2010 after receiving the NBFC license from RBI. It is primarily engaged in the lending business with a diversified portfolio consisting of gold loans, loan against property, home loans and business loans. Fedfina is a retail-focused NBFC promoted by Federal Bank Limited (Federal Bank). Federal Bank, a commercial bank with significant presence in the private sector holds 61.7 % stake in Fedfina along with True North Fund, a renowned PE firm based in Mumbai, that holds the other 8.82% stake through its fund (True North Fund VI LLP) as on 1st December 2023. The proportion of the wholesale book has reduced to 1% as on June 30, 2023 from 26% as of March 31, 2017

 

The company has 607 branches in 17 states and AUM of Rs 10030 Crs as at 30th September 2023, The company’s AUM has grown from Rs 9,069  crore as on March 31, 2023 The companyearned a profit after tax (PAT) increased to Rs 180 crore in  fiscal 2023 from Rs 103 crore in fiscal 2022. The company has achieved  PAT of Rs 111.64 Crs for six months ended September 30, 2023 from same period of FY 23 which saw PAT of Rs 89.92 Crs,. Return on managed assets (RoMA) improved to 2.1% in fiscal 2023 from 1.6% in fiscal 2022, driven by better lower credit cost of 0.6% vs 1.3%.  Annualised RoMA for the six months ended September 30, 2023, was 2.2%, on the back of lower credit cost of 0.5%, it was 0.6% in fiscal 2023.

Key Financial Indicators

As on / for the fiscal year ended March 31,	Unit	Sep-23 (UA)	2023 (A)	2022 (A)
Total assets	Rs crore	10,105	9,071	6,556
Total income (net of interest expense )	Rs crore	435	743	536
PAT	Rs crore	112	180	103
Gross Stage 3 assets	%	2.34	2.03	2.23
Return on managed assets	%	2.2*	2.1	1.6

*annualised

UA: unaudited, A: audited

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity Level	Rating assigned with outlook
NA	Non convertible debentures*	NA	NA	NA	1250	Simple	CRISIL AA/Positive
NA	Commercial paper	NA	NA	7-365 days	1000	Simple	CRISIL A1+

*yet to be issued