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Strengths:
* Strategic importance to, and strong expectation of support from, FFH
The rating is underpinned by the expectation of strong support from FFH, a step down subsidiary of Temasek, owing to the high strategic importance of FICCL to FFH, the 100% ownership, complete management control over FICCL, and the shared brand name.
FICCL is of high strategic importance to FFH as the former has significantly increased its presence in rural/small and medium enterprise (SME) segments in line with the global strategy of FFH. Furthermore, FICCL's operations are closely integrated with the parent and global operations. FFH has senior level representation on the Board and various committees of FICCL, and is actively involved in all key decisions taken by the company. FICCL's compliance, finance, treasury, business and risk management functions are aligned with the global standards of FFH.
FFH has demonstrated its commitment towards FICCL during stressed times. It has regularly infused growth capital in the company. From 2007 till date, FFH has infused over Rs 2,700 crore with over Rs 600 crore being infused in 2009-2010 during the then stressed environment and Rs 750 crores in April 2020 more as a confidence capital and to support growth when needed.
The shared brand also enhances the expectation of support from FFH, if needed. Any material disruption in FICCL business could, in CRISIL's view, have a significant impact on the reputation and franchise of the parent.
FICCL is expected to continue to benefit from the strong support from FFH. Any change in the management control by, or expectation of support from, FFH will remain a key rating sensitivity factor.
*Healthy capitalisation
The networth was sizeable at Rs 4648 crore, and the Tier I and overall capital adequacy ratios comfortable at 15.4% and 19.9%, respectively, as on March 31, 2020 at standalone level. The gearing too was comfortable at around 5.1 times as on March 31, 2020, against 5.3 times as on March 31, 2019. At consolidated level too, capital position was comfortable with networth and gearing at Rs 4592 crore and 6.0 times, respectively, as on March 31, 2020. Capitalisation is supported by strong internal accruals and capital infusions by the parent; FFH at regular intervals with the last equity infusion of Rs 750 crores in April 2020.
The group has a stringent capitalisation policy. It maintains a buffer over the regulatory requirement; the buffer is based on a stress test conducted in line with FFH policies. CRISIL expects the capital profile for the group to remain comfortable over the medium term, supported by regular capital infusion, and adequate internal cash accruals; thus providing cushion against asset-side risks.
* Strong liquidity management
Liquidity management policy is strong with FICCL needing to maintain cash and liquid investments to the extent of at least one month of outflows at all points in time. However, in practise the company maintains in excess of policy. Including fee-paying committed and undrawn CC/WCDL lines, this increases further to 2.5-3 months of outflows. This liquidity cushion is higher during periods of stress as can be seen now as the group is having liquidity cover for 6 months of cash outflow as on June 30, 2020. 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. In FY20, the company was able to sell almost all asset classes under direct assignment demonstrating liquidity of the asset book. FICCL has also raised foreign currency loans and foreign currency bonds in FY20, thereby diversifying its funding profile further. Additionally, even during lockdown the company continued to attract funding. The group is thus likely to be well-placed to withstand any liquidity pressure in the market.
* Comfortable earnings
Earnings are supported by a large proportion of high-yield businesses and competitive borrowing costs. Return on total assets (RoA) of FICCL stood at 2.8% in fiscal 2020, decreased from 3.7% in fiscal 2019 mainly owing to increase in credit cost at standalone level. For fiscal 2020, credit cost increased to 3.9% from 2.3% partly on account of increased Covid-19 related provisioning of Rs 182 crore. At consolidated level too, the group's reported profit after tax (PAT) and RoA reduced to Rs 760 crore and 2.5%, respectively, in fiscal 2020 as compared to Rs 774 crore and 3.4% of PAT and RoA, respectively, in previous fiscal due to increased credit cost. Having said that, the group's earnings is expected to remain higher than that of peers and the industry once the environment normalises on account of its ability to charge high-yield and borrow at competitive rates.
Nevertheless, earnings, remain susceptible to the inherent vulnerability of asset quality in the unsecured segment, which could result in a spike in credit costs. Therefore, ability to manage asset quality in the near term amidst the lockdown and hence volatility in credit cost remains a key monitorable.
Weaknesses:
* Inherent vulnerability of asset quality due to higher share of unsecured loans in the portfolio
On the asset quality front, on a consolidated basis, the reported gross non-performing assets (NPAs) was low at 2.3% as on March 31, 2020 (2.0% as on March 31, 2019). However, CRISIL notes that the group also has aggressive write-off policies. During fiscal 2020, the group's write-off as proportion of AUM was at 4.0% (2.3% during fiscal 2019). The group has high exposure to relatively risky asset segments such as personal loans including digital loans and rural group loans which are vulnerable to economic cycles. At consolidated level, as on March 31, 2020, assets under management (AUM) stood at Rs 29,106 crore, of which around 51% comprised unsecured loans (mainly personal loans incl. Digital [38%] and rural group loans [13%]), which are vulnerable to economic cycles. However, the group has managed these segments in the past as reflected during demonetisation too wherein the management was able to enforce corrective actions and report upgrades and recoveries. Furthermore, on account of group's efforts to increase the share of secured portfolio, the share of unsecured portfolio has come down from 64% as on March 31, 2014. Going forward as well, the group is planning to keep equal proportion of both secured and unsecured products which should support asset quality. Further, the rural loans portfolio is likely to benefit from the Government's policies towards this segment.
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. Diversification in the loan book will also help mitigate asset quality challenges; this was witnessed during demonetisation when the performance of the urban portfolio remained relatively steady. The increased focus on risk management should mitigate the inherent asset quality risks following the high growth in recent years and focus on relatively riskier asset segments.
Nevertheless, the group'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. On the asset side, the group has given moratorium to its borrowers on opt in/granted basis. Under Moratorium 1.0 (From Mar'20 to May'20), the group has considered the customer to be under moratorium for full 3 months even if the customer has paid its EMI for one or two months after opting for the moratorium. Therefore, the book under moratorium for the group stood at around 76% as on May 31, 2020. However, for Moratorium 2.0 (From Jun'20 to Aug'20), the same has reduced to 44% as on June 30, 2020. Similarly, collection efficiency have improved to around 55-60% for the month of June 2020 from around 25-30% during Moratorium 1.0. CRISIL understands that the collections are expected to go up further in coming months. Nevertheless, any delay in return to normalcy could put pressure on collections and asset quality metrics and will be a key monitorable.
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