Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA+/Stable’ rating to the Rs 1,000 crore non-convertible debentures (NCD) of GIC Housing Finance Ltd (GIC HF) and has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the existing debt instruments and bank facilities.

 

The ratings continue to reflect the strong support expected from GIC HF’s promoter and largest shareholder, General Insurance Corporation of India Re (GIC Re); and the company’s adequate capitalisation. These strengths are partially offset by modest asset quality and a moderate, albeit improving, scale of operations.

 

From an industry perspective, the nationwide lockdown imposed by the government to contain the spread of Covid-19 had impacted disbursements and collections of financial institutions. The lockdown has been eased in a phased manner. However, certain states have implemented local lockdowns. The 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 financial institutions. Additionally, any change in the behaviour of borrowers on payment discipline can affect delinquency levels. Also, while the one-time restructuring scheme announced by the Reserve Bank of India (RBI) will provide the necessary support to affected borrowers in the current environment, the impact of the same remains to be seen.

On the assets side, GIC HF had offered moratorium to its borrowers (around 42% of the portfolio as of August 2020). One-time restructuring has been relatively low at 0.4% of the loan book.

 

Collection efficiency for three months ending March 2021 improved to 95% from 63% for five months ended August 2020; however, this remains lower than the pre-Covid level of around 97%. Nevertheless, Collections will continue to remain a monitorable, as income streams of the borrowers have been impacted in the current challenging macro environment.

 

On the liabilities side, RBI had announced regulatory measures under 'Covid-19 - Regulatory Package', whereby lenders were permitted to grant moratorium on bank loans. CRISIL understands that GIC HF did not avail of a moratorium on its bank loans or any other borrowings.

Analytical Approach

CRISIL Ratings assesses the standalone credit risk profile of GIC HF and continues to factor in the strong support from the parent, considering the strategic importance of the entity, largest shareholding, shared management, and high moral obligation of the parent on account of shared name and brand.

Key Rating Drivers & Detailed Description

Strengths:

Expectation of strong support from the promoter and largest shareholder, GIC Re

GIC Re and its erstwhile subsidiaries - National Insurance Co Ltd, The New India Assurance Co Ltd, The Oriental Insurance Co Ltd, and United India Insurance Co Ltd - together hold 42.41% equity stake in GIC HF as on December 31, 2020. While GIC Re is the largest shareholder with 15.26% stake, all the promoter companies act in concert with GIC Re for decision-making. GIC HF also derives management, operational, and financial support from GIC Re. Furthermore, the name sharing strengthens GIC Re's moral obligation to support the housing finance entity. Additionally, GIC Re has provided a written commitment ensuring that GIC HF will honour all its financial obligations in a timely manner.

 

Adequate capitalisation

The company had a sizeable networth of Rs 1,278 crore and tier-I capital adequacy ratio of 16.45% as on December 31, 2020 (Rs 1,263 crore and 16.99% as on March 31, 2020). While capital cushion to manage the asset-side risk reduced, it remains adequate with networth to net non-performing asset (NPA) ratio of 3.6 times as on December 31, 2020 (3.2 times as on March 31, 2020). Although, the gearing was within the regulatory limits, it remained high relative to its peers at 9.0 times as on December 31, 2020 (9.3 times as on March 31, 2020). Capitalisation is expected to remain stable over the medium term.

 

Weakness:

Modest asset quality

Asset quality metrics have witnessed a significant uptick- gross NPAs without factoring in the standstill ruling by Supreme Court increased to 9.1% (proforma NPAs) as on December 31, 2020 from 5.5% as on March 31, 2020. Reported gross NPAs were lower at similar levels as March 2020. This increase follows a sharp uptick witnessed in fiscal 2020 as well with gross NPAs more than doubling due to slippages in housing loans to units in two large residential projects that faced completion challenges. At the same time, loans against property (LAP) book also continued to witness relatively higher delinquencies.

 

Around two years ago, the company revamped its systems and process to improve its asset quality. CRISIL understands that the current NPAs have been primarily from the portfolio originated prior to fiscal 2019 and recent originations have negligible delinquencies. Further, over the last year, the company has shifted its focus towards home loans, particularly towards salaried customers. Hence, the proportion of non-salaried customers is likely to decline over the medium term.

 

The company has made provisions for the proforma NPAs in line with reported NPAs; hence, the lifting of Supreme Court standstill is not expected to impact profitability in the current quarter. However, the company’s ability to arrest slippages and manage further credit costs, particularly given the challenging environment, remains a key monitorable, as does its ability to recover from NPAs.

 

Moderate, albeit improving, scale of operations

GIC HF remains a relatively small player in the Indian housing finance industry with around 1% market share. Nevertheless, loan book has grown steadily at a 5-year compound annual growth rate of 14% till March 31, 2020, and stood at Rs 13,108 crore as on December 31, 2020 (Rs 13,227 crore as on March 31, 2020, including write-offs of Rs 65 crore). Although the loan book is concentrated in Maharashtra, the company is consciously growing its book outside the state (particularly Hyderabad, Bengaluru, and Gurgaon) to achieve better geographical diversification. Consequently, proportion of book in Maharashtra reduced to 39% as on March 31, 2020, from 50% in fiscal 2018.

Liquidity: Strong

Given the longer tenure on asset side, the asset and liability management (ALM) profile as on September 30, 2020, had negative cumulative mismatches in upto one year bucket, excluding sanctioned but unutilised bank lines. Nevertheless, including bank lines, the inflows are fairly matched with the outflows on cumulative basis. Also, the company had overall liquidity cushion of Rs 2,680 crore as on March 4, 2021, which adequately covers the scheduled debt obligation of Rs 2,168 crore till end of June 2021. The company also benefits from GIC Re’s support.

Outlook Stable

CRISIL Ratings believes GIC Re will continue to support GIC HF, and the latter will maintain adequate capitalisation over the medium term.

Rating Sensitivity factors

Upward factors:

• Substantial and sustained improvement in market position and asset quality
• Better earnings profile with return on assets (RoA) above 2.5% on a steady state basis

 

Downward factors:

• Dilution of GIC Re's ownership or material change in expectation of support from the shareholder
• Deterioration in asset quality leading to weakening of earnings profile, with RoA under 1.0% on a sustained basis

About the Company

GIC HF was founded in 1989 by GIC Re and its erstwhile subsidiaries, National Insurance Co Ltd, The New India Assurance Co Ltd, The Oriental Insurance Co Ltd, and United India Insurance Co Ltd, together with Unit Trust of India (UTI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Finance Corporation of India (IFCI), Housing Development Finance Corporation (HDFC) and State Bank of India (SBI), all of which contributed to the initial share capital. Later on HDFC, SBI, ICICI, UTI, and IFCI sold their holding in GIC HF and ceased to be promoters. As on December 31, 2020, the promoter group held a 42.41% stake in the company, with GIC Re being the largest shareholder.

 

GIC HF provides individual housing loans to the middle to low income group in Tier-II and Tier-III cities. The portfolio mix consisted of 89% housing loans and 11% LAP, while the borrower profile comprised of 74% salaried customers and 26% non-salaried customers, as on March 31, 2020. The company had a network of 75 branches as on March 31, 2020, most of which were concentrated in Maharashtra.

 

Profit after tax (PAT) was Rs 46 crore on total income of Rs 1,255 crore in fiscal 2020, against Rs 172 crore and Rs 1,228 crore, respectively, in fiscal 2019. In the nine months ended December 31, 2020, net profit was Rs 26 crore on total income (net of interest expense) of Rs 301 crore mainly due to higher provisions. In the nine months ended December 31, 2019, net profit was Rs 19 crore on total income (net of interest expense) of Rs 222 crore.

Key Financial Indicators

As on/for the nine months ended December 31	Unit	2020	2019
Total assets	Rs crore	12,862	13,017
Total income (net of interest expense)	Rs crore	301	222
Profit after tax	Rs crore	26	19
Gross NPA	%	5.49	5.55
Gearing	Times	8.99	9.46
Return on assets (annualised)	%	0.26	0.19

 

Any other information:

Annexure - Details of Instrument(s)

*Yet to be issued