HDB Financial Services Limited 'CRISIL AAA/Stable' assigned to Non Convertible Debentures
Rating Action
1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its 'CRISIL AAA/Stable' ratings to Rs 10,000 crore Non-convertible Debentures of HDB Financial Services Limited (HDB Finance) and reaffirmed its ratings on the bank loan facilities and other debt instruments at 'CRISIL AAA/CRISIL PPMLD AAAr/Stable/CRISIL A1+'.
CRISIL Ratings has also withdrawn its rating on the non-convertible debentures of Rs 1365 crore (See Annexure 'Details of Rating Withdrawn' for details) in-line with its withdrawal policy. CRISIL Ratings has received independent verification that these instruments are fully redeemed.
The ratings of Debt Instruments of HDB Finance continue to reflect strategic importance to and expectation of continued support from its parent and majority owner HDFC Bank Ltd (HDFC Bank; rated 'CRISIL AAA/CRISIL AA+*/Stable'). The shared logo also enhances the moral obligation of HDFC Bank towards this entity. The ratings are also underpinned by the company's established presence in the retail finance space, and its healthy capitalisation.
In line with RBI's measures for Covid-19 pandemic, HDB Finance had given moratorium to its borrowers. While the collection efficiency was impacted during the initial months of the moratorium, collections had gradually improved by March’21. However, the second wave of Covid-19 pandemic has resulted in intermittent lockdowns and localised restrictions. This has led to some delays in collections in Q1FY22 due to impact on the underlying borrower cash flows, although, with easing down of lockdown restrictions towards the latter half of June 2021, collections have shown an improvement. Nevertheless, any change in the behaviour of borrowers on payment discipline can further affect delinquency levels.
HDB Finance did witness an uptick in overall delinquencies across segments during Q1FY22 due to delay in collections given localized restrictions amidst second wave. The gross non-performing assets (GNPA) increased to 7.8% as on June’21 from 3.9% as on March 31, 2021 (as per IGAAP). However, as per management, the same is expected to come down as collections have shown an improvement from June’21 onwards.
Under the RBI’s August 2020 Resolution Framework for COVID-19-related Stress, HDB Finance has invoked restructuring on ~5.9% (Rs 3,650 crore) of its portfolio as on March 31, 2021. While RBI has extended the restructuring scheme till September 30, 2021, impact of the same remains to be seen.
*Tier I Bonds |
Analytical Approach For arriving at the ratings, CRISIL Ratings has analysed the business and financial risk profiles of HDB Finance. CRISIL Ratings has factored in the strong support that HDB Finance is expected to receive from its parent, HDFC Bank, on an ongoing basis and in times of distress. |
Key Rating Drivers & Detailed Description Strengths:
The ratings centrally factor in support that HDB Finance receives from HDFC Bank. The company complements the parent's product portfolio and distribution network, and supports collection activities for the retail portfolio. The shared logo also enhances the moral obligation of HDFC Bank towards this entity. The Company also receives funding support from its parent—Rs 3,480 crore has been infused cumulatively.
HDB Finance has emerged as one of the larger players in the retail financing space, over the past few years. The overall loan book stood at Rs 57,390 crore as on June 30, 2021 (Rs 58,947 crore as on March 31, 2021). The slowdown in growth was largely due to cautious approach adopted by the company in certain segments on account of Covid-19 pandemic.
HDB Finance’s loan book has also diversified over the years, with increased presence in commercial vehicle/construction equipment (CV/CE) financing and business loans. As a result, the share of loans against property (LAP) declined to 29% as on March 31, 2021, as compared to 41% as on March 31, 2018. Whereas, that of CV/CE loans and Business loans rose to 43% and 24%, respectively, from 35% and 20%, respectively.
HDB Finance has now expanded into consumer durable financing, digital products loans and other related segments. Apart from its traditional focus on the self-employed segment in non-metros, the company has now widened its reach to the metros as well.
Capitalisation remains healthy, as reflected in Tier-1 capital adequacy ratio (CAR) of 14.9%, and overall CAR of 19.8% as on June 30, 2021. Net worth stood at around Rs 8,446 crore as on March 31, 2021 against Rs 8,018 crore as on March 31, 2020, while gearing stood stable at ~6.0 times. Cushion for asset side risks was adequate, as reflected in net worth coverage for net non-performing assets (NPAs) at around 4.5 times as on March 31, 2021.
While capital generation remains comfortable, the capital profile is also aided by periodic infusion by HDFC Bank.
Weakness:
During Q1FY22, the pandemic-induced challenges, localized lockdowns and associated impact on cash flows of borrowers resulted in deterioration in asset quality. HDB reported an inch up in reported GNPA to 7.8% as on June 30, 2021 from 3.9% as on March 31, 2021 (as per IGAAP). Further, the company has restructured around 5.9% of the loan book as on March 31, 2021.
The deterioration in NPA levels was seen in secured as well as unsecured portfolio as on June 30, 2021. The company's ability to manage collections and asset quality during the current weak macroeconomic environment is a key monitorable.
Further, Return on assets (RoA) declined to 0.6% in fiscal 2021 from 1.7% in fiscal 2020 due to increase in provisioning expenses to Rs 3,069 crore (5.0%) in fiscal 2021 from Rs 1,442 crore (2.5%) in fiscal 2020. This was due to high write-offs and aggressive expected credit loss provisioning across stages on account of pandemic. While the provisioning cover is high, benefit due to recoveries from delinquent accounts due to roll-backs during fiscal 2022 will remain a monitorable. |
Liquidity: Strong HDB Finance’s asset–liability management profile had positive cumulative mismatch in all buckets upto 1 year as on May 31, 2021 after including committed lines. The company has upcoming repayments of Rs 4048 crore from July 31, 2021 till September 30, 2021. Against this, the company has adequate liquidity in the form of unutilised bank lines amounting to Rs 6225 crore and liquid investments of Rs 3229 crore as on May 31, 2020. The company’s liquidity is further cushioned by healthy inflows from assets, option to securitise loans and funding support from HDFC Bank, if required. |
Outlook: Stable CRISIL Ratings factors strong financial support for HDB Finance, from HDFC Bank. On a standalone basis, HDB Finance should maintain its strong position in the retail finance space.
The rating on perpetual bonds remains sensitive to the capital buffer maintained by HDB Finance, over regulatory capital requirements, and rating transition on these instruments could potentially be sharper than those on other debt instruments and bank facilities. |
Rating Sensitivity factors Downward Factor:
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About the Company HDB Finance was set up as a non-banking finance company by HDFC Bank in June 2007. The company began operations in fiscal 2008. As on March 31, 2021, HDFC Bank owned 95.1% of HDB Finance's equity shares. On the same date, the company had 1319 branches across 959 cities in India. Apart from the lending business, HDB Finance is also engaged in the distribution of general and life insurance products for HDFC Ergo General Insurance Company and HDFC Standard Life Insurance Company, respectively. The company also runs BPO services that undertake collection services, back office and sales support functions under a contract with HDFC Bank.
HDB Finance reported a profit after tax of Rs 89 crore on a total income of Rs 2,814 crore for the quarter ended June 30, 2021 as against Rs 111 crore and Rs 2,679 crore, respectively, in the corresponding quarter earlier fiscal. The overall loan book stood at Rs 57,390 crore as on June 30, 2021 (Rs 58,947 crore as on March 31, 2021). Further, HDB reported an inch up in reported GNPA to 7.8% as on June 30, 2021 from 3.9% as on March 31, 2021 (as per IGAAP). |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
* Amount of Rs 1500 crore sanctioned but not yet disbursed from SIDBI #Yet to be issued @amount outstanding as on June 30, 2021
Annexure – Details of Ratings Withdrawn
Note: The above table is updated as of July’21 |
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| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||
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* Amount of Rs 1500 crore sanctioned but not yet disbursed from SIDBI
@amount outstanding as on June 30, 2021
Criteria Details
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