Detailed Rationale

CRISIL Ratings has downgraded its rating on the long term bank facilities and non convertible debentures of Home Credit India Finance Private Limited (Home Credit India) to ‘CRISIL BBB/Negative’ from ‘CRISIL BBB+/Negative’.

 

The rating action is driven by the weakening of the consolidated credit profile of the parent Home Credit Group B.V. (Home Credit Group/Group) due to the potential impact on the performance of the Russian operations of the group. Home Credit BV has operations in Russia via its banking subsidiary Home Credit and Finance Bank (HCFB). HCFB constituted about 23% of the gross loan book of Home Credit Group with the second largest share as on June 30, 2021. S&P Global had on March 5, 2022, revised its sovereign rating on Russia to CCC- following the recent developments pertaining to the Russian economy and the sanctions placed thereof. Subsequently on March 7, 2022, S&P Global also undertook similar rating actions on Russian Banks. The performance of the Russian operations would be impacted due to the developments in Russia  which is expected to impact the overall group credit profile. CRISIL Ratings has applied the parent notch-up rating criteria by factoring in the credit profile of Home Credit Group while arriving at the rating of Home Credit India. Consequently, any impact on the group credit profile has a corresponding impact on Home Credit India’s credit rating.

 

CRISIL Ratings understands from Home Credit Group management, that HCFB’s operations are run independently with limited cross country credit exposure within the Group. Being a Bank, it is predominantly deposit funded. While HCFB has borrowings of USD 200 million in markets outside Russia, CRISIL Ratings understands that there are no events of default or other termination events linked to the group borrowings in other geographies. However, with the recent developments with regards to sanctions that have been imposed on Russia and possible capital control measures to be imposed to preserve any flow-out of foreign reserves, HCFB’s standalone credit profile will be impacted.

 

The negative outlook continues to reflect on the overall weak performance of the group. Home Credit Group’s gross loan book has reduced to Euro 11.99 billion as on June 30, 2021 from Euro 14.53 billion as on December 31, 2020 and Euro 21.78 billion as on December 31, 2019. Further, the Group reported a loss of Euro 178 million for H1-CY2021 against a loss of Euro 584 million in CY2020. Home Credit Group’s operations in China, which is the largest contributor to the Group’s net interest income has a share of about 42% of gross loans as on June 30, 2021, which has rapidly reduced from a share of about 60% in 2019. The share of operating income from Group’s China operations has also reduced by 57% in H1-CY2021 against H1-CY2020, thereby reducing the share of China in Group’s operating income to 41% in H1-CY2021 from 60% in H1-CY2020. CRISIL Ratings believes that there is further uncertainty related to operations in China and the impact of the same on the overall revenue and loan book of the Group remains a key monitorable.

 

On a standalone basis, Home Credit India’s assets under management (AUM) stood at Rs  4,441 crore as on December 31, 2021, a de-growth of 44% as compared to Rs 7,997 crore as on March 31, 2020, at the onset of the pandemic. The de-growth in AUM was primarily due to write-offs of around Rs 2,860 crore in fiscal 2021 (equivalent to 35.8% of opening AUM for fiscal 2021) as the pandemic significantly impacted ground-level operations and collections. Amidst the second Covid-19 wave, the asset quality metrics continued to deteriorate , with reported 90+ dpd slipping to at 9.91% (Gross NPA of Rs 496 crore and Net NPA Rs 102 crore) as on June 30, 2021 from 1.62% as on March 31, 2021, though improved marginally to 7.97% (Gross NPA of Rs 388 crore Net NPA Rs 81 crore) as on September 30, 2021. The 90+ dpd as on December 31, 2021 stood at 9.32% (Gross NPA of Rs 414 crore and Net NPA Rs 82 crore).  The company had made adequate provisions against gross NPA with provisioning coverage ratio (PCR) of 80.3% as on December 31, 2021 and PCR has been in the range of 78-80% for each quarter end of fiscal 2022.  In addition to the gross NPA, about 6.9% of AUM was restructured as on December 31, 2021. Home Credit India’s monthly collection efficiency[1] had improved to 91% by March 2021 but it deteriorated again due to the second wave and clocked 89% for June 2021. With the easing of lockdown related restrictions in July, the collection efficiency has improved to 96% and remained in the range of 90-94% post  August 2021 till December 2021. CRISIL Ratings understands that the portfolio of loans where moratorium was not offered has collection efficiency in the range of 94-99% from June 2021, while for the portfolio which was under moratorium the collection efficiencies have been lower. However, any further drop in collection efficiency going ahead, may add to pressure on the earnings profile of the company.

 

The profitability of Home Credit India has been historically impacted by higher operating cost and moderate credit cost because of the business model which involved manned point of sales (POS) in all the outlets. However, since fiscal 2019, the company has taken several steps to reduce the operating expenses and driving digitisation initiatives across organisation, leading to change in origination structure like digitisation of POS’s by removing dependence on  manned POS, rationalization of work force and reduction in number of office locations to 4 from about 50 previously. CRISIL Ratings expects these measures to improve the profitability measures in the medium term by reducing the operating expenses to average assets ratio which was at 15.9% (annualised) as on December 31, 2021. Home Credit India has also restricted incremental exposure to higher risk categories of borrowers and has been conservative with lower approval rates. With the reduction in operating expenses, despite the credit costs remaining high, the company has reported profits during the December quarter of fiscal 2022. While rationalisation of operating expenses would bode well for the earnings profile, the ability of the company to remain profitable on sustainable basis whilst managing its NIMs and credit costs remains a key monitorable.

 

The ratings continue to reflect Home Credit India’s strategic importance to, and expectation of continued strong support from, the parent, Home Credit Group. The ratings also factor in the company’s adequate capitalisation and moderate resource profile backed by significant funding from group. The resource profile is primarily supported by borrowings from the parent group (78% as on December 31, 2021 in the form of ECBs). The group is committed to refinancing or facilitating rollover of these ECBs as they become due during second half of calendar year 2022.

 

[1] Collection efficiency = total collections (including overdues but excluding prepayments) /scheduled billing for the month.

Analytical Approach

CRISIL Ratings has evaluated the standalone business and financial risk profile of Home Credit India. Additionally, the overall ratings of Home Credit India continue to be centrally driven by its strategic importance to, and expectation of strong support from its parent, Home Credit Group. CRISIL Ratings has applied the parent notch-up rating criteria by factoring in the credit profile of Home Credit Group.

Key Rating Drivers & Detailed Description

Strengths:

Strategic importance to, and expectation of strong support from, the parent, Home Credit Group BV: 

Given its large population and limited credit penetration by organised players in the retail consumer finance business, India is a strategically important country for the Home Credit Group. Home Credit India, therefore, is likely to receive strong financial, managerial, and operational support from the parent, Home Credit Group. Home Credit Group has infused equity capital of close to Rs 3,163 crore in Home Credit India between fiscal 2017 and 2021. During fiscal 2021, Home Credit group has infused equity of around Rs 624 crore, thereby providing support to capitalisation profile. The Group also provides debt funding support to the company. This indicates the parent’s strong commitment to provide funding and capital support to the subsidiary. CRISIL believes Home Credit India will continue to receive capital support from the parent on an ongoing basis and in the event of distress.

 

Managerial support is reflected in the deployment of senior management personnel from the Home Credit group, and involvement of senior management personnel from Home Credit Group, in the operations of Home Credit India. Operational support is reflected in technical and functional inputs from Home Credit Group. The risk management tools used by Home Credit India are developed centrally by the Home Credit Group and are customised for India. The functional team of Home Credit India receives regular guidance from the corresponding teams across Asia and Europe. Home Credit India will continue to receive financial, managerial, and operational support from Home Credit Group. Any change in the credit risk profile of Home Credit Group and in the extent of its support to the Indian subsidiary remain key rating sensitivity factors.

 

Home Credit Group BV’s credit risk profile is driven by that of three of its largest subsidiaries, Home Credit China, Home Credit Russia and Home Credit Czech/Slovakia. Home Credit’s China operations contributed to 40.8% of the total group’s operating revenue in H1 of CY2021 as compared to 58.0% in H1 CY2020 (54.5% for CY2020 down from 59.47% in CY2019). Further the share of China in group’s total gross loans has decreased to 41.5% in H1-CY2021 against 55.1% in 2020 and 59.6% in 2019. The gross loans of Home Credit China’s operations as on June 30, 2021 were Euro 4.98 billion and the net loans were Euro 4.22 billion indicating overall ECL provisioning of Euro 766 million, equivalent to 16.3% of the gross loans. The gross and net loans as on December 31, 2020 were Euro 8.00 billion and Euro 6.69 billion indicating overall ECL provisioning of Euro 1.31 billion, equivalent to 16.3% of the gross loans. Additionally, CRISIL Ratings believes that there would be significant write-off in the loans in Home Credit China, information for which is not available in the public domain. CRISIL Ratings also observed that the cost of risk ratio was at 15.9% of average gross loans for Home Credit China in 2020. Since cost of risk refers to impairment loss based on gross loans, CRISIL Ratings estimates it to be at Euro 1.67 billion. The consolidated total impairment loss was Euro 2.35 billion as per the financials of Home Credit Group B.V. for 2020. Hence, bulk of impairment is stemming from Home Credit China operations. CRISIL ratings understands that in addition to the Covid-19 related disruption, the implementation of lending related curbs on the unlicensed lending market in China had impacted the business of Home Credit China, though it is one of the first non-banking entity to receive license in China.  CRISIL Ratings observed that Home Credit China had in the past withstood such headwinds and realigned itself to become profitable within a 1-2 quarters. However, the incremental impact of the above on the business and financial risk profile of China operations remains a key monitorable.

 

Home Credit Russia continues to maintain its steady performance and has been playing a key role in supporting Home Credit group’s profitability. Home Credit and Finance Bank (including Kazakhstan operations) reported a net profit of Ruble 7.3 billion in the first six months of CY2021 against Ruble 8.8 billion for CY2020 and Ruble 15.8 billion during 2019. The gross loans for Home Credit Russia’s operations have increased by 6% in local currency to Ruble 237.9 billion in H1-CY2021 from Ruble 225.1 billion in 2020 (Ruble 273.3 billion in 2019) and the ECL provisioning as on June 30, 2021 stood at Ruble 8.9 billion against Ruble 11.2 billion in 2020 (a decline of 20.5%). As per the management of the Group, HCFB has seen marginal outflow of deposits which has been mostly reversed through increase of the interest rates on deposits. CRISIL Ratings also understands that the repayment trends of borrowers have remained stable and thus providing liquidity. However, the credit offtake going ahead, any unexpected pressure on asset quality coming from primarily unsecured portfolio and the ability of HCFB to pay the coupon on the borrowings raised in outside market, with regards to sanctions that have been imposed on Russia and possible capital control measures, remain key monitorable. With the recent developments with regards to sanctions that have been imposed on Russia and possible capital control measures to be imposed to preserve any flow-out of foreign reserves, HCFB’s standalone credit profile will be impacted

 

On a consolidated basis, Home Credit Group had reported a loss of Euro 178 million primarily from impairment losses of Euro 730 million similar in line with that of 2020 wherein impairment losses of Euro 2.35 billion resulted in a loss of Euro 584 million. As on June 30, 2021, of the overall retail loan portfolio of Home Credit Group (99.9% of total portfolio) about 6.2% was recognised as portfolio under moratorium based on moratoria set in individual countries and 0.1% of the portfolio was identified as Covid-impacted portfolio wherein the performing contracts over a prescribed time moved to 30+dpd post Covid. The remaining 93.7% was classified as non-Covid portfolio and would continue to be monitored.

 

The cost of risk and NPL ratio for H1-CY2021 was 10.9% and 9.8% respectively against 12.9% and 6.4% respectively for 2020. The incremental impact on the profitability of the group because of the stage-2 assets (16% of portfolio as on June 30, 2021) and additional impact if any from the global scenario of Covid-19 remains a key monitorable and rating sensitivity factor.

 

However, CRISIL Ratings understands Home Credit Group is strategically important to PPF Group, one of the largest investment groups in Central and Eastern Europe accounting for around 47% of the latter’s total assets and would support Home Credit Group in case of any stress. Shareholders of PPF Group publicly acknowledge the strategic importance of Home Credit Group and share the key performance highlights of this company and its subsidiaries with bankers during their annual bankers’ meet. Home Credit Group receives funding support from PPF Group in the form of equity capital and unsecured loans and will continue to do so. The ability of PPF Group is expected to be adequate in case of any stress in the group given the high amount of liquid assets of 6,509 million Euro (~ Rs 52,000 crore) as on June 30, 2021.

 

Adequate capitalisation:

Home Credit India is adequately capitalised. The networth of the company stood at Rs 1,832 crores as on December 31, 2021 as against Rs 1,897 crores as on March 31, 2021. Consequently, the networth coverage for net non-performing assets (NPAs) remained comfortable, as the company maintains a high provisioning level. Further, the parent through various entities has been providing debt funding on regular basis and Group debt funding stood at Rs 2,615 crore as on December 31, 2021. Adjusted for this group debt, the gearing based on external indebtedness (after excluding borrowings guaranteed by Home Credit Group) stood at just 0.05 times (not adjusted to deferred tax assets) as on December  31, 2021. However, the incremental impact on the capital profile from the provisioning expense and therefore on the gearing levels remains a key monitorable.

 

Moderate resource profile:

Home Credit India benefits from funding support from Home Credit group. Most of its bank facilities are backed by corporate guarantee from Home Credit Group BV. The company has availed most of its debt from foreign banks. To diversify its resource profile, Home Credit India has raised funds through non-convertible debentures, ECBs and securitisation on a regular basis. The company has availed debt from domestic banks, non-banking financial companies (NBFCs), Mutual Funds and Financial Institutions (FI’s). CRISIL Ratings believes Home Credit group will continue to support the resource profile of the Indian subsidiary if needed to help raise debt to fund growth. The resource profile is primarily supported by borrowings from the parent group of 78% as on December 31, 2021 (in the form of ECBs), working capital loans from banks at 18%, term loans from bank and financial institutions at 2.5%, NCDs from domestic institutions at 1.5% and remaining is from securitisation. Further, of the overall borrowings, the debt guaranteed by Home Credit Group was about 97% as on December 31, 2021.

 

Weakness:

Weak asset quality:

In fiscal 2021, the gross NPA position after reaching a peak of 9.4% in June 2020 decreased to 1.6% as on March 31, 2021, primarily on account of write-off of about Rs 2,860 crore done in fiscal 2021 (equivalent to 35.8% of opening AUM for fiscal 2021). With the onset of second wave, the GNPA increased to 9.32% as on December 31, 2021 with write offs of about Rs 421 crore in the first 9 months of fiscal 2022 (7.85% of  AUM as on December 31, 2021). Additionally, Home Credit India had restructured assets of 6.9% of portfolio as on December 31, 2021. -

 

Collection efficiency of Home Credit India dropped to 80% in May 2021 with onset of second wave and improved to 96% in July 2021, post which, had ranged between 92-94%. However, CRISIL Ratings notes that for the portfolio without moratorium the collection efficiency has been in the range of 94-99% in Q2 and Q3 of fiscal 2022. The ability of the company to sustain collections and consequently improve asset quality metrics remains a key monitorable.

 

Earnings profile remains impacted but showing improvement:

Till fiscal 2019, Home Credit India’s earning profile was constrained by high provisioning and operating expenses given the substantial investments in building its infrastructure. From fiscal 2020, with the continued improvement in scale resulting in operating efficiencies as well as control on various expense lines, the company was able to improve its pre-provisioning operating profitability significantly. In terms of credit costs, in fiscal 2020, the company changed its write-off policy to 270+ days in March 2020 from 360+ days previously and consequently, the credit costs have been higher since fiscal 2020 also contributed by the macro-economic scenario. Further, in fiscal 2021, the credit costs were elevated at Rs 2,523 crore primarily from the write-offs resulting in a loss of Rs 1,221 crore. ‘

 

With the resumption of normal operations, the operating expenses have increased in fiscal 2022 at 15.9% of average total assets (annualised) for first 9 months of fiscal 2022 compared to 13.5% for fiscal 2021 on the account of lower average total assets. However, the credit costs remained moderate at 9.6% of average assets; annualised for first 9 months of fiscal 2022 and the company has maintained provisioning cover of 80% for 90+dpd assets as on December 31, 2021. Further, in Q3-FY2022, the company recorded a profit before tax of Rs 2.6 crore. However, the incremental impact from the slippages on the credit cost and inturn on the overall earnings profile remains a key monitorable.

Liquidity: Adequate

The asset liability maturity (ALM) profile for Home Credit India as on December 31, 2021, shows cumulative negative mismatches in the 6 months to 1 year bucket. This is primarily because of repayments of ECBs availed from parent group which are expected to be refinanced. Excluding the same, the ALM profile is adequate. Home Credit India’s liquidity profile is healthy with cash and equivalents of Rs 402 crore and unutilised working capital bank lines of Rs 817 crore as of January 31, 2022. This is expected to be comfortable to manage debt repayments over the next 6 months of Rs 688 crore.

Outlook: Negative

CRISIL Ratings believes Home Credit India will remain strategically important to, and will continue to receive financial, managerial, and operational support from, Home Credit Group BV. However, improvement in the global performance of the parent and control over asset quality and earnings profile of the company remains a key monitorable.

Rating Sensitivity Factors

Upward factors

• Improvement in profitability of the parent, Home Credit Group BV with no further deterioration in asset quality
• Improvement in earnings profile of Indian operations with return on managed assets (RoMA) moving above 3%
• Ability to diversify the resource profile of the company with higher share of local borrowings

 

Downward factors

• Inability of parent Home Credit Group BV to grow its book and improve profitability
• Change in support philosophy of the global parent Home Credit Group B.V towards Indian operations
• Continued challenges in asset quality with gross NPA not reducing from current levels of 10% and the company continuing to report loss

About the Company

Home Credit India launched operations in 2012 and has presence in 20 states in India. The company has presence in about 579 cities across the country and has partnership with about 53000 POS  as on December 2021. The company initially offers loans for purchase of consumer durables (primarily consisting of mobile phones), and subsequently offers cash loans to borrowers with good repayment track record..       

About Home Credit Group B.V.

The Home Credit Group was founded in 1997. The main shareholder of Home Credit Group BV is PPF Financial Holdings B.V.  (91.1% stake). The Home Credit Group has a presence in 9 countries through subsidiaries. It predominantly offers loans for purchase of consumer durables (primarily consisting of mobile phones) and unsecured personal loans (cash loans). It focuses on lending to borrowers with limited or no credit history. It operates as a bank in Russia and Kazakhstan, where it offers retail banking products such as credit cards, deposits, and current accounts. The Home Credit Group also has banking operations in Czech Republic in the name of Airbank. Over the years, the Home Credit Group has developed expertise in assessing customers with no credit score by collecting basic demographic and financial information of the prospective borrowers.

 

As on December 31, 2020, Home Credit Group (on a consolidated basis) had a gross loan portfolio of Euro 14.5 billion (Approximately Rs 1,16,000 crore), of which, around 18% comprised loans for buying consumer durables (primarily mobile phones), 72% was cash/personal loans, 7% revolving loans and residual 3% for mortgages, vehicle finance and corporate loans. It had assets of Euro 18.5 billion (Approximately Rs 1,48,000 crore) and a networth of Euro 1.9 billion (Approximately Rs 15,500 crore).

 

About PPF Group

PPF Group is one of the largest investment groups in Central and Eastern Europe. The main shareholder of PPF Group is Mr Petr Kellner Family (holds 98.93% stake in PPF Group). PPF Group has been investing in sectors such as banking, financial services, telecommunications, mechanical engineering, biotech and real estate. It is mainly active in Europe, Russia, Asia, and the US. As on December 31, 2020, it had assets of Euro 39.7 billion (about INR 317,000 crore).

Any other information: Not applicable