Rating Rationale
July 31, 2020 | Mumbai
Fullerton India Home Finance Company Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.2000 Crore
Long Term Rating CRISIL AAA/Stable (Reaffirmed)
 
Rs.1500 Crore Non Convertible Debentures CRISIL AAA/Stable (Reaffirmed)
Rs.500 Crore Subordinated Debt CRISIL AAA/Stable (Reaffirmed)
Rs.500 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its rating of 'CRISIL AAA/Stable/CRISIL A1+' on the bank facilities and other debt instruments of Fullerton India Home Finance Company Limited (FIHFC).
 
CRISIL's ratings on the bank facilities and debt instruments of FIHFC continue to factor in strong support from the ultimate parent, Fullerton Financial Holdings (FFH), Singapore, a step down subsidiary of Temasek (rated: AAA/Stable by S&P Global). The rating also reflects the experienced management and healthy capitalisation in FIHFC. These rating strengths are partially offset by moderate asset quality and profitability.
 
FFH is a step down subsidiary of Temasek, which holds 100% stake in FIHFC via its subsidiary Fullerton India Credit Company Ltd (FICCL; rated CRISIL AAA/CRISIL PP-MLD AAAr /Stable/CRISIL A1+). FIHFC is into housing loans, loans against property and construction finance in the affordable housing segment primarily in rural/small and medium enterprise (SME) segments which is in line with the target segment of FICCL and consequently, blending into the global strategy for FFH. The strategic importance of FIHFC is visible in the regular capital infusions that it has received since inception (Rs 710 crores, of which Rs 200 crores was infused in fiscal 2020), board oversight with FFH and FICCL having strong presence on the Board and regular interactions of FIHFC with FICCL and FFH. FIHFC adopts similar policies in terms of liquidity and risk management as FICCL and has regular interactions with FFH on the same. Further, in CRISIL's view, the shared brand name also enhances the expectation of support from FFH, if needed.
 
Having commenced operations in December 2015, FIHFC leverages upon the infrastructure of FICCL in terms of branch outreach with operations, treasury, finance, legal and analytics being shared between them. FIHFC currently operates out of around 78 branches of which only 26 branches are owned whereas all others are shared with FICCL.  Consequently, it has been able to scale up its loan book to Rs 4,302 crores as on March 31, 2020.
 
On the asset quality front, in the initial years, the company witnessed elevated slippages mainly attributed to few geographies where it faced challenges. However, the company took corrective actions and has since then focused on strengthening the internal processes and systems. While the 90+ dpd increased to 3.3% as on March 31, 2020, compared to 1.8% as on March 31, 2019, the inching up was primarily on account of slippages from the old book i.e. book originated pre-April 2018. Of the total portfolio the old book is currently at around Rs 1,300 crores. The new book has been performing well with limited delinquencies. For the new book the performance has remained comfortable with 30+ dpd being at around 2.2%. While the company has put in place robust systems and processes for monitoring asset quality metrics, ability to scale up the portfolio whilst maintaining asset quality metrics remains a key monitorable.
 
In CRISIL's view, the nationwide lockdown (originally till April 14, 2020) declared by the Government of India to contain the spread of the Novel Coronavirus (Covid-19) will have near-term impact on disbursements, collections and asset quality. The lockdown is now further extended in containment zones with re-opening of the prohibited activities in a phased manner in areas outside containment zones. However, certain states have extended the lockdown. Herein, CRISIL believes that eventual lifting of restrictions will continue to be in a phased manner. Any delay in return to normalcy will put further pressure on collections and asset quality metrics of the company. Additionally, any change in the behavior of borrowers on payment discipline can affect delinquency levels
 
In terms of moratorium 1.0 the company had around 66% of book under moratorium which has come down to 46% in June 2020. The same is expected to have further declined in July 2020. On the collections side too, similar trend is witnessed with collections estimated at around 50-55% in June which is expected to improve up to 65-70% in July. Nevertheless, any delay in return to normalcy could put pressure on collections and asset quality metrics and will be a key monitorable.
 
Given the nascent stage of operations, the earnings profile currently is marked by high operating expenses and elevated credit costs which has impacted the earnings profile. CRISIL expects earnings to improve over the medium term on account of company's ability to charge high yields as it is catering to underserved segment and reduction in operating expenses on account of increased operational efficiencies. Nevertheless, in the near term earnings profile will be impacted. While the operating expenses are expected to normalise going forward as the branches achieve scale, ability to manage credit costs will be a key monitorable for improvement in earnings profile.

Analytical Approach

For the purpose of the rating, CRISIL has factored in expectation of support that FIHFC is expected to receive from its ultimate parent FFH, both on an ongoing basis, and in the event of distress given its high strategic importance.  This is also driven by its growth plans in the affordable housing segment, complete ownership and management control, and the shared brand name. FFH holds 100% stake in FIHFC via its subsidiary, Fullerton India Credit Company Ltd (FICCL, rated CRISIL AAA/CRISIL PP-MLD AAAr /Stable/CRISIL A1+).

Key Rating Drivers & Detailed Description
Strengths:
* Expectation of strong support from FFH
FFH is a step down subsidiary of Temasek which holds 100% stake in FIHFC via its subsidiary Fullerton India Credit Company Ltd (FICCL). FIHFC is into housing loans, loans against property and construction finance in the affordable housing segment in line with the target segment of FICCL and consequently, blending into the global strategy for FFH. The strategic importance of FIHFC is visible in the regular capital infusions that it has received since inception (Rs 710 crores, of which Rs 200 crores was infused in fiscal 2020), Board oversight with FFH and FICCL both having strong presence on the Board, regular interactions between HFC with FICCL and FFH, FIHFC adopts similar policies in terms of liquidity and risk management as FICCL and has regular interactions with FFH on the same.
 
Having commenced operations in December 2015, FIHFC leverages upon the infrastructure of FICCL in terms of branch outreach with operations, treasury, finance and analytics being shared between them. FIHFC currently operates out of around 78 branches of which only 26 branches are owned whereas all others are shared with FICCL. Consequently, it has been able to scale up its loan book to Rs 4,302 crores as on March 31, 2020.
 
* Experienced management team
FIHFCL has an experienced management team drawn from leading private and foreign banks and financial services companies with over two decades of relevant experience. During FY18 (refers to period from April 01 to March 31), there were changes in management with Mr. Anindo Mukherjee joining as the Chairman and Non-Executive Director and Mr. Rakesh Makkar joining as the Whole Time Director and Chief Executive Officer (WTD & CEO). Mr. Makkar has over 20 years' experience of experience in establishing new businesses, managing large and multi-pronged distribution networks. Prior to joining FIHFC he was heading the business vertical for FICCL.
 
* Healthy capitalisation
The company has received high quantum of initial capital and subsequently more equity infusion from parent to support its growth plans. The parent has infused Rs 710 crore since inception of which Rs 200 crore was infused in July 2019.
 
As a result, the overall capital adequacy ratio is comfortable at 22.09% as on March 31, 2020 compared to 20.49% as on March 31, 2019. Adjusted gearing metrics (including off-book portfolio) too remain adequate at 5.1x as on March 31, 2020 as compared to 5.5x as on March 31, 2019. The company plans to maintain a target gearing of under 8 times on a steady state basis.
 
Weaknesses:
* Moderate asset quality
On the asset quality front, in the initial years, the company witnessed elevated slippages mainly attributed to few geographies where it faced challenges. However, the company took corrective actions and has since then focused on strengthening the internal processes and systems. While the 90+ dpd increased to 3.3% as on March 31, 2020, compared to 1.8% as on March 31, 2019, the inching up was primarily on account of slippages from the old book i.e. book originated pre-April 2018. Of the total portfolio the old book is currently at around Rs 1,300 crores. The new book has been performing well with limited delinquencies. For the new book the performance has remained comfortable with 30+ dpd being at around 2.2%. While the company has put in place robust systems and processes for monitoring asset quality metrics, ability to scale up the portfolio whilst maintaining asset quality metrics remains a key monitorable.
 
Post the lockdown and RBI announcement, FIHFC has a fair share of book under moratorium. Nevertheless that too has been improving month on month. In Moratorium 1.0 the company had around 66% of book under moratorium which has come down to 46% in June. The same is expected to have further declined in July 2020. On the collections side too, similar trend is witnessed with collections estimated at around 50-60% in June which is expected to inch up to 65-70% in July. Nevertheless, any delay in return to normalcy could put pressure on collections and asset quality metrics and will be a key monitorable.
 
* Moderate scale of operations and profitability
FIHFC commenced lending operations in December, 2015 and is in its nascent stage of operations with FY17 being the first full year of operations. The company has managed to scale up its operations to Rs 4,302 crore on March 31, 2020 from Rs 3065 crores as on March 31, 2019. Of this, housing loans constituted the bulk at 59% followed by LAP at 40% and construction finance which was under 1%. Going forward, the company plans to maintain housing loans at around 55-60% of the portfolio with developer loans to be capped at 10% of the portfolio on a higher side. The remaining would be constituted by loans against property. Nevertheless, the company is expected to remain a small player in the overall housing finance market in the near term.
 
Being in the nascent stage of operations, earnings profile has been constrained by elevated operating expenses and credit costs. The company reported net profit of Rs 13.9 crore for fiscal 2020 compared to a profit of Rs 0.48 crore in fiscal 2019. The NIMs of the company increased to 4.9% for fiscal 2020 compared to 4.5% for fiscal 2019 mainly owing to improvement in interest yields. As the company is growing and achieving scale, its operating efficiencies are improving due to which operating expenses are on a decreasing trend and stood at 3.2% for fiscal 2020 as against 3.6% in fiscal 2019. Nevertheless, in the near term earnings profile will be impacted. While the operating expenses are expected to normalise going forward as the branches achieve scale, ability to manage credit costs will be a key monitorable for improvement in earnings profile.
Liquidity Superior

Given the longer tenure on asset side, FIHFC had negative cumulative mismatches in the upto 1 year bucket (as on March 31, 2020), measured on a contractual basis (excluding the lines of credit committed by other institutions). However, after including lines of credit, the ALM profile has positive cumulative mismatches in upto 1 year bucket.
 
As on June 30, 2020 FIHFC has outstanding principal debt payments of Rs 391 crores till December 2020. Against the same, FIHFC had cash equivalents and investment of Rs 721 crore, unutilised CC/WCDL lines of Rs 75 crore, and unutilised term loan bank lines of Rs 225 crore. Further, the Company is in discussions for widening funding sources through issue of market linked debentures, external commercial borrowings and refinance from NHB as part of conservative liability management. Additionally, FIHFC can avail need-based support, in case of any exigency, from parent FICCL.

Outlook: Stable

CRISIL believes FIHFC will remain strategically important to, and continue to receive support from, FFH over the medium term.

Rating Sensitivity factors
Downward factors:
* Downgrade in the credit rating of Fullerton India Credit Company Ltd (FICCL) by 1 notch or higher
* Any change in the articulation of support philosophy by the parent
* Significant deterioration in asset quality of FIHFC's loan book
About the Company

The company started its operation in December 2015; offering home loan and loan against property in the affordable segment to the salaried and self-employed professionals.  FFH currently holds 100% in the HFC via its subsidiary FICCL. The company leverages on the existing infrastructure of FICCL with branch sharing. It currently operates out of 78 branches out of which 26 branches are self and the rest are shared with FICCL.
 
In fiscal 2020, the company reported a profit after tax of Rs 13.9 crores on a total income of Rs 527 crores compared to Rs 0.48 crores on a total income of Rs 319 crores in fiscal 2019.

Key Financial Indicators
As on/for the period/ for the year ended as per INDAS   March 31,2020* March 31, 2019*
Total Assets Rs crore 4487 3468
Total income Rs crore 527 319
Profit after tax Rs crore 13.9 0.48
90+dpd % 3.3 1.8
Adjusted Gearing Times 5.1 5.5
Return on assets % 0.35 0.02
*IND-AS

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity
date		 Issue size
(Rs. cr)		 Complexity Levels Rating outstanding 
with outlook
NA Commercial Paper NA NA 7-365 days 500 Simple CRISIL A1+
NA Non-Convertible Debentures* NA NA NA 1104 Simple CRISIL AAA/Stable
INE213W07129 Non-Convertible Debentures 12-Feb-20 8.65% Feb-25 121 Simple CRISIL AAA/Stable
INE213W07137 Non-Convertible Debentures 18-May-20 7.95% May-23 175 Simple CRISIL AAA/Stable
INE213W07145 Non-Convertible Debentures 29-Jun-20 7.20% Jun-23 100 Simple CRISIL AAA/Stable
NA Subordinated debt* NA NA NA 470 Complex CRISIL AAA/Stable
INE213W08010 Subordinated debt 08-Jun-2020 8.50% Jun-30 30 Complex CRISIL AAA/Stable
NA Cash Credit & Working Capital demand loan NA NA NA 25 NA CRISIL AAA/Stable
NA Term Loan 1 NA NA Sept-24 50 NA CRISIL AAA/Stable
NA Term Loan 2 NA NA Sept-24 200 NA CRISIL AAA/Stable
NA Term Loan 3 NA NA Sept-24 100 NA CRISIL AAA/Stable
NA Term Loan 4 NA NA Aug-23 200 NA CRISIL AAA/Stable
NA Proposed Long Term Bank Loan Facility NA NA NA 1425 NA CRISIL AAA/Stable
*Yet to be issued
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  500.00  CRISIL A1+      18-12-19  CRISIL A1+    --    --  -- 
            13-08-19  CRISIL A1+           
Non Convertible Debentures  LT  1500.00
31-07-20  		CRISIL AAA/Stable      18-12-19  CRISIL AAA/Stable    --    --  -- 
            13-08-19  CRISIL AAA/Stable           
Subordinated Debt  LT  500.00
31-07-20  		CRISIL AAA/Stable      18-12-19  CRISIL AAA/Stable    --    --  -- 
            13-08-19  CRISIL AAA/Stable           
Fund-based Bank Facilities  LT/ST  2000.00  CRISIL AAA/Stable      18-12-19  CRISIL AAA/Stable    --    --  -- 
            13-08-19  CRISIL AAA/Stable           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit & Working Capital demand loan 25 CRISIL AAA/Stable Cash Credit & Working Capital demand loan 25 CRISIL AAA/Stable
Proposed Long Term Bank Loan Facility 1425 CRISIL AAA/Stable Proposed Long Term Bank Loan Facility 1425 CRISIL AAA/Stable
Term Loan 550 CRISIL AAA/Stable Term Loan 550 CRISIL AAA/Stable
Total 2000 -- Total 2000 --
Links to related criteria
Rating Criteria for Finance Companies
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Group Support
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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