Rating Rationale

Strengths:
* Established market position in the retail mortgage finance segment
IBHFL is the one of the three largest housing finance companies (HFC) in India and has a strong market position catering to niche markets and customer segments. The company is one of the largest players in the retail mortgage finance segments, with total assets under management (AUM) of Rs 124,271 crore, including a loan against property (LAP) portfolio of around Rs 23,500 crore as on December 31, 2018.

IBHFL continues to increase the housing loan proportion of its overall AUM - it has risen to 60% as at December 31, 2018, from 49.5% as of March 31, 2015, and is expected to continue to increase going forward. Focus on salaried customers in the suburbs of Tier I and Tier II cities with ticket size of Rs 15-30 lakh in the housing segment, is expected to continue.

Growth in the housing loan segment is expected to remain strong, with healthy asset quality. Growth will be driven by increased penetration of mortgage financing, especially in non-metros. Ability to address the needs of customers through quick turnaround times help IBHFL in effectively catering to the retail mortgage finance market, while sharp focus on cash flow in the appraisal process supports healthy asset quality metrics. Despite increasing competition from banks in the key operating segments, IBHFL is well-placed to capitalise on growth opportunities over the medium term, backed by its market standing and wide reach.

* Strong profitability and healthy asset quality
IBHFL is expected to maintain strong profitability despite increase in relatively lower yielding housing loans proportion in the overall lending portfolio. The company continues to generate high return on assets (RoA) at above 3.0%, supported by competitive cost of borrowing and improving operating efficiencies. The company's earnings profile continues to benefit from higher yielding non-housing portfolio. Asset quality in the non-housing segment also remains healthy and hence, credit costs are low. Risk-mitigating measures are prudent, in the form of conservative loan-to-value ratios (averaging around 50%) in the LAP segment, and emphasis on collateral with sufficient cover in the commercial credit segment. Gross non-performing assets (NPAs) have, therefore, remained healthy at 0.79% as on December 31, 2018 (around 0.77% as of March 31, 2018). Over the medium term, profitability is likely to remain strong, driven by improving operating efficiency and low credit costs.

* Robust capitalisation, with healthy cover for asset-side risks
IBHFL has robust capitalisation with a sizeable networth at Rs 17,792 crore as on December 31 2018, supported by strong internal accrual. Networth coverage for net non-performing assets (NPAs) remained strong at ~32 times as on date. Consolidated Tier 1 capital adequacy ratio (CAR) was healthy at 15.7%, and total CAR at 21.5%, as on December 31, 2018. Consolidated gearing was comfortable at 6 times as on December 31, 2018 (8.2 times as on March 31, 2018). Given the strong liquidity that IBHFL maintains on a steady-state basis, net gearing was 4.9 times as on December 31, 2019 and further has reduced to 4.0 times as of March 31, 2019 (7 times as on March 31, 2018). The company has demonstrated strong ability to raise capital as and when required. CRISIL believes IBHFL will maintain healthy capitalisation over the medium term, which will continue to support its overall financial risk profile.

Weakness:
* Susceptibility to asset quality risks arising from the commercial credit portfolio
Asset-quality risks arising from a sizeable large-ticket commercial credit portfolio persist, and could impact the company's portfolio performance in a continuing economic downturn scenario. The commercial segment of developer loans mainly comprises lease rental discounting and construction finance of over Rs 23,300 crore as on December 31, 2018. Given the chunkiness of loans in this segment (average ticket size of Rs 150 crore), stress in even a few large accounts could impact asset quality. While there is no immediate impact on IBHFL's portfolio because of curtailment of disbursements to the commercial credit segment, any near-term impact on the segment and its effect on IBHFL remains to be seen. Nevertheless, the company follows prudent lending practises and also ensures sufficient collateral cover against these loans. While the delinquencies in the commercial lending portfolio remains low, it will remain a key monitorable over the medium term.

Given the current evolving liquidity situation since September 2018 for non-banks, asset quality on exposures such as developer loans and LAP would also be monitorables. That is because of the sensitivity of such borrowers to prolonged liquidity tightness. While current delinquencies in these loans are not high on account of strong credit appraisals and risk-mitigating mechanisms, it is possible that over a period of time, if the liquidity situation does not stabilise, there could be asset quality challenges. Banks have been open to lending to non-banks through both securitisation and traditional routes. If this continues, it would provide much-needed liquidity support to non-banks including IBHFL. Nevertheless, growth in the non-retail businesses would be curtailed for non-banks in the medium term given their propensity to conserve liquidity and slow down disbursements in this space.

IBHFL has also reduced disbursements in the wholesale segment and has adopted a cautious approach for the retail segment. Any deterioration in asset quality, specifically in the wholesale lending book and its impact on profitability remains a monitorable.