Detailed Rationale

CRISIL Ratings has removed its rating on the long-term bank facilities and debt instruments of Fullerton India Credit Company Limited (FICCL) from 'Rating Watch with Developing Implications' and reaffirmed the existing ratings at ‘CRISIL AAA/CRISIL PP-MLD AAAr/CRISIL A1+’ while assigning a 'Stable' outlook to the long-term rating. CRISIL Ratings has also withdrawn its ratings on debt instruments of Rs 565.1 crores (See annexure 'Details of Rating Withdrawn') as CRISIL Ratings has received independent confirmation that these instruments have been redeemed. The withdrawal is in line with CRISIL Ratings withdrawal policy.

 

The ratings factor in expectation of strong support from Sumitomo Mitsui Financial Group Inc (SMFG; rated ‘A-/Stable’ by S&P Global) on an ongoing basis and in the event of distress. The rating watch has been resolved following clarity on the expected brand association with SMFG, high operational and managerial oversight by SMFG and overall strategy for India market. CRISIL Ratings understands that SMFG is working on a defined timeline plan to change the name of FICCL so as to reflect association with SMFG post receipt of required regulatory approvals. SMFG also fully consolidates FICCL, being a subsidiary, in its financial statements. SMFG is also committed to providing equity capital or liquidity to support FICCL group’s growth plans or in the event of any exigency.

 

On July 9, 2021, CRISIL Ratings had placed the long-term ratings of FICCL on 'Rating Watch with Developing Implications' following announcements made by FICCL on July 6, 2021, that Sumitomo Mitsui Financial Group Inc (SMFG; rated ‘A-/Stable’ by S&P Global) and Fullerton Financial Holdings Pte Ltd (FFH) have reached an agreement for SMFG to acquire a 74.9% stake in FICCL from FFH, subject to regulatory approvals. SMFG will eventually acquire 100% of FICCL. FICCL’s subsidiary, Fullerton India Home Finance Company Ltd (FIHFCL) will continue to be a wholly owned subsidiary of FICCL. The transaction was completed on November 30, 2021 post receipt of all regulatory approvals and execution of share-transfer agreement.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has analysed the consolidated business and financial risk profile of FICCL and its wholly owned subsidiary FIHFCL, together referred to as Fullerton group. The companies have strong operational and financial linkages, common senior management, and shared brand. Post the consummation of the transaction, the ratings factor in strong support expected from, the parent, SMFG given that strategic importance of FICCL to SMFG, the majority ownership, complete management control and expected shared brand.

 

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 strong expectation of support from, SMFG:

The rating factors in expectations of strong support from SMFG (rated ‘A-/Stable’ by S&P Global) on an ongoing basis and in the event of distress. Post the consummation of the transaction, SMFG has senior level representation on the Board and various committees of FICCL and is involved in key decisions taken by the company. Further, Fullerton’s group will also be consolidated at a global level with SMFG.

 

India is one of the focus markets for SMFG Group and they have presence in the country today via Sumitomo Mitsui Banking Corporation (SMBC) which is more entrenched towards large corporate lending. The acquisition of FICCL will allow SMFG to build a comprehensive financial service offering and also cater to the retail segment.

 

CRISIL Ratings understands that SMFG is working on a defined timeline plan to change the name of FICCL so as to reflect association with SMFG post receipt of required regulatory approvals. SMFG also fully consolidates FICCL, being a subsidiary, in its financial statements.

 

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

 

Any material deviation from the proposed brand sharing between Fullerton Group and SMFG will remain a key monitorable.

 

Healthy Capitalisation:

On a standalone basis, the Networth of FICCL improved to Rs 4,341 crores as on December 31, 2021 as compared to Rs 4,244 crores as on March 31, 2021 primarily driven by fresh equity infusion of Rs 250 crores in October, 2021 by FFH. The company however posted losses of Rs 178 crores for 9 months of Fiscal 2022 as against losses of Rs 1,157 crores for full fiscal 2021. For the third quarter ended December 31, 2021, the company posted profits of around Rs 277 crores.

 

Capitalisation metrics have been supporting regular and timely equity infusions by FICCL. Prior to the Rs 250 crores infusion in October 2021, the group had raised Rs 750 crores in April 2020 to create adequate capital cushions against asset side risks.

 

The gearing metrics also remain comfortable with adjusted gearing at 3.8 times as on December 31, 2021, as against 4.5 times as on March 31, 2021. Gearing has been supported by the lower borrowing requirements for the company as the AUM declined by 10.7% (annualized) in the nine months ended December 31, 2021, leading to lower borrowing requirements. At a group level also, the gearing improved to 4.7 times as on December 31, 2021, as against 5.4 times as on March 31, 2021 owing to lower borrowings by the group as the AUM declined by 6.4% in the nine months ended December 31, 2021.

 

In terms of capital adequacy ratio (CAR), as on December 31, 2021, FICCL’s overall CAR stood at 22.2% with tier 1 CAR at 15.9% well above the regulatory requirement.

 

FICCL 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 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 as on June 30, 2021. 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 to minimise tenor and refinancing risks provide 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. CRISIL Ratings also expects that Fullerton Group's borrowings profile and costs will benefit both directly and indirectly due to the association with SMFG.

 

Weaknesses:

Weak asset quality metrics:

At consolidated level, as on December 31, 2021, AUM stood at Rs 23,446 crore, of which around 46% comprised unsecured loans (mainly personal loans including rural group loans), which are vulnerable to economic cycles.

 

Post the economic implications linked to the Covid pandemic, the asset quality metrics for the group have deteriorated with reported GNPA increasing to 9.8% as on September 30, 2021, as compared to 9.6% as on March 31, 2021 (2.1% as on March 31, 2020). With the improvement in the economic environment, the asset quality metrics improved marginally to 8.6% as on December 31, 2021. The collection efficiency of the company after dropping during the first wave and second wave of COVID-19, has improved with the improvement in the macroeconomic environment reaching 99% for December 2021. As on December 31, 2021, restructured book of the company account for 4.1% of the AUM out of which provisions have been created for ~69% of the restructured book.

 

Consequent to the deterioration, the write offs as a % of assets under management inched up to 13% for the nine months ended December 31, 2021, as opposed to 7% for fiscal 2021.

 

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. While the pandemic related challenges were unprecedented, the company is putting in renewed efforts to recover from delinquent accounts. In the past too, the group has managed these segments as reflected during demonetisation too wherein the management was able to enforce corrective actions and report upgrades and recoveries.

 

Nevertherless, the ability to manage collections and improve asset quality metrics is a critical monitorable.

 

Moderate profitability metrics due to high ECL provisioning:

Historically, earnings profile for FICCL was supported by a large proportion of high-yield businesses and competitive borrowing costs. This helped FICCL 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 FICCL on standalone basis was healthy at 1.6% to 3.7% over the past 5 years ending 2020.

 

Nevertheless, amidst the impact on delinquencies, the credit costs for the company have remained elevated at 6.1% for the nine months ended December 31, 2021 as compared to 13.3% for fiscal 2021 (3.9% for fiscal 2020). The group also adopts aggressive provisioning and write off policies. Consequent to the deterioration, the write offs as a % of assets under management inched up to 13% for the nine months ended December 31, 2021, as opposed to 7% for fiscal 2021. Further, net interest margins too were impacted on account of the slippages leading to interest reversal with NIMs dropping to 10.1% for the nine months ended December 31, 2021, as opposed to 11.1% for fiscal 2021 (12.2% for fiscal 2020).

 

Consequently, FICCL reported losses at Rs 178 crores for the nine months ended December 31, 2021, as against losses of Rs 1,157 crores for full fiscal 2021.

 

The company however posted a profit in the third quarter of fiscal 2022 at around Rs 277 crores. The ability of the company to report profitability on a sustained basis whilst maintaining credit costs remains a key monitorable.

Liquidity: Superior

The liquidity profile of FICCL is comfortable with positive cumulative mismatches across all short term ALM buckets (upto 1 year) as on September 30, 2021, even with exclusion of committed lines at standalone level. At a consolidated level, the group continues to demonstrate ability to raise timely funds. Consequently, the liquidity position for the group too remains comfortable. As on January 31, 2022, the group had total principal debt repayments of Rs 3,907 crore till June 2022. Against this, they had liquidity (in the form of cash and cash equivalents, unutilised cash credit/working capital demand loan lines and unutilised committed bank loan line) of Rs 4,109 crore.

Outlook: Stable

CRISIL Ratings believes FICCL 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 FICCL's loan book with weak standalone earnings profile on a sustained basis.

About the Company

FICCL 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 FICCL are held by SMFG while FFH which in turn is a wholly owned subsidiary of Temasek continues to hold the balance stake. 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 629 branches.

Key Financial Indicators

As on/for the year ended		December 31, 2021	March 31, 2021*	March 31, 2020*
Total Assets (Reported)	Rs crore	22,210	23,782	29,168
Total income	Rs crore	2,631	4,731	5,250
Profit after tax	Rs crore	(178)	(1,157)	747
Gross NPA	%	8.6	9.6	2.1
Adjusted Gearing@	Times	3.8	4.5	5.2
Return on assets^	%	(0.8)	(4.2)	2.7

^based on total managed assets

*IND-AS

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

Any other information: Not applicable