| Shriram Finance Limited | ||||||||
| Rated amount enhanced for Bank Debt | ||||||||
| Rating Action | ||||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||||
| 1 crore = 10 million | ||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ratings on the existing debt instruments and bank facilities of Shriram Finance Limited (SFL; erstwhile known as Shriram Transport Finance Company Limited) at ‘CRISIL AA+/CRISIL PPMLD AA+/Stable/ CRISIL A1+’.
Consequent to redemption, CRISIL Ratings has withdrawn its rating on debentures of Rs.2216.98 crore, subordinated debt of Rs.197 crore and market linked debentures of Rs.1400 crore (See Annexure 'Details of rating withdrawn' for details) in line with its rating withdrawal policy. CRISIL Ratings has received independent confirmation that these instruments are fully redeemed.
The ratings continue to reflect SFL's market leadership in the overall NBFC ecosystem, especially pre-owned commercial vehicle (CV) financing segment, comfortable capitalisation as well as adequate earnings profile. These strengths are partly offset by the company's average yet improving asset quality and resource profile. |
Analytical Approach CRISIL Ratings has considered the consolidated financial and business risk profiles of SFL, its subsidiary, Shriram Housing Finance Ltd and its associate Shriram Automall Limited.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation |
Key Rating Drivers & Detailed Description Strengths: Market leadership in overall NBFC ecosystem SFL is the second largest retail NBFC in India and third largest non-bank financier (including HFCs) with consolidated assets under management (AUM) of Rs 2,26,259 crore. On a standalone basis, it reported a strong 20.7% Y-o-Y growth in its AUM to Rs 2,14,233 crore as on December 31, 2023. The AUM continues to be predominantly vehicle finance, however, diversification in the book has increased with merger of Shriram City Union Finance Ltd into SFL enabling cross sell within the customer segments of the entities. While CV financing shall remain the key product segment, the company is also focusing on growing its other higher yielding product segments like passenger vehicle finance, two-wheeler, gold loans, MSME etc. As a result, the AUM as of December 2023, comprised of commercial vehicle (48%), passenger vehicle (19%), MSME (11%), construction equipment (8%), two-wheeler (6%) and others.
The company is expected to continue to retain its predominant market position in the pre-owned CV financing business and the SME loan segment. This is because of the strong and sustainable competitive advantage of the company through deep understanding of the borrower profile and their credit behaviour. They have done so by building a scalable operating model, extensive reach and strong valuation capabilities of pre-owned vehicles. The company faces limited competition from other organized financiers, including banks, in this segment, due to inherent riskiness of the target product and the customer profile. In the SME loan segment, the company is a leading financier among retail NBFCs. The company has grown significantly in the unique space created from its legacy chit fund ecosystem. The main characteristics of SME loan portfolio are that the borrowers have limited documentary income proof and the ticket size is small at average of Rs 10 lakh-Rs 15 lakhs.
Overall, CRISIL Ratings believes that SFL has strong structural advantages over its peers, which will support its growth plans and help it maintain a leadership position over the medium term. Further, the recent restructuring of the business (merger of Shriram City Union Finance Limited (SCUF) into SFL) has unlocked cross sell potential within the customer segments of the entities. Nevertheless, company’s ability to continue to scale up operations remains a key monitorable.
Comfortable capitalisation SFL’s capitalisation remains adequate with consolidated networth of Rs 47,690 crore and gearing of 3.9 times as on December 31, 2023. On a standalone basis, its networth was Rs 47,054 crore and gearing was 3.8 times as on the same date. The company had last raised capital in fiscal 2022 through issue of equity shares through qualified institutional placement of shares and preferential issue of shares to promoters, aggregating to Rs 2,479 crore (net of issue expenses). The networth to net NPA ratio improved to 8.4x as on December 31, 2023 (7.7x as on March 31, 2023). CRISIL Ratings believes that the capitalisation profile will remain comfortable over the medium term, given the demonstrated ability to access markets.
CRISIL Ratings has taken note of the recent measures by Reserve Bank of India (RBI) covering the Banking and NBFC sector. Firstly, on the asset side for NBFCs, there was an increase in risk weights for unsecured consumer loans (including credit card receivables), by 25 percentage points to 125% from 100% earlier. This regulation applies to all retail loans except housing loans, vehicle loans, educational loans, loans against gold and microfinance/SHG loans. The increase in risk-weighted assets leads to a decrease in the capital adequacy ratios of NBFCs but is unlikely to materially impact the ratios of SFL. The overall capital adequacy ratio and tier 1 capital ratio of SFL remained comfortable at 21.0% and 20.0% respectively as on December 31, 2023.
Secondly, there was an increase in risk weights for Bank’s exposure to NBFCs by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs is below 100%. Herein, loans to HFCs, and loans to NBFCs which are eligible for classification as priority sector are excluded. This development may potentially lead to an increase in the cost of bank borrowings for NBFC sector. This could lead to diversification in the borrowings mix with higher share of capital market instruments and securitisation, amongst others. Ability of NBFCs to pass on the potentially higher borrowing costs will be monitored.
Further, the Reserve Bank of India (RBI)’s recent circular pertaining to the investments made by regulated entities including non-banking financial companies (NBFCs) in Alternative Investment Funds (AIFs) is not expected to have any material impact on the company.
Adequate earnings profile The earnings profile of SFL has strengthened benefited by the merger synergies, as reflected by improvement in the Return on Managed Assets (RoMA) to 3.1% for first nine months of fiscal 2024 (9M FY24) and 3.0% for fiscal 2023 as compared to 2.0% for fiscal 2022 (pre-merger), on a consolidated basis. It reported net profit after tax of Rs 5,378 crore for 9M FY24 (Rs 6,020 crore for fiscal 2023).
Total income (net of interest expense) improved to 8.9% for 9M FY24 as compared to 8.7% for fiscal 2023 aided by yield improvement owing to change in product mix and reduction in negative cash & carry with normalization of liquidity maintenance. While yield benefit is accretive, SME business is operational intensive, and therefore, the operating expense ratio increased post business restructuring to 2.7% for 9MFY24 (fiscal 2023: 2.6%) as compared to 1.6% for fiscal 2022 (pre-merger). The credit costs however, improved to 1.9% for 9MFY24 (fiscal 2023: 2.1%) as compared to 2.8% in fiscal 2022 (pre-merger), with gradual improvement in the asset quality metrics.
Weaknesses: Exposure to inherent asset quality-related challenges arising from lending to borrowers with modest credit profile The asset quality metrics for SFL have been elevated over the past several years given the fact that the company largely caters to borrowers with modest credit profile and relatively under-banked customers. It has been improving each quarter with SFL reporting Gross Stage 3 (GS3) ratio of 5.66% (standalone basis) as on December 31, 2023 (6.21% as on March 31, 2023). The GS3 ratio has improved across product segments from March 2023 levels and was reported at 6.1% for CV segment, 5.4% for passenger vehicles, 6.6% for construction equipment, 9.75 for farm equipment, 5.2% for MSME financing, 3.3% for two-wheeler, 1.9% for gold loans and 5.0% for personal loans.
With increase in Stage-3 provision coverage ratio to 53% as on December 31, 2023 (50% as on March 31, 2023), the Net Stage 3 improved to 2.72% as on December 31, 2023 (3.19% as on March 31, 2023).
CRISIL Ratings notes SFL and erstwhile SCUF have displayed ability in the past to ultimately recover from these accounts, even post loan maturity date. Consequently, the overall credit costs have been range bound over the past 3 fiscals. Further, the restructured portfolio for the company was also negligible at sub 1% as on December 31, 2023. However, ability to scale up the portfolio whilst improving asset quality metrics remains a key monitorable. Nevertheless, company’s long track record in its business segments, understanding of the target customer segment and relationship-based lending model should support the asset quality metrics.
Average, albeit improving resource profile SFL has an average, though improving, resource profile. SFL has an established track record in raising funds from the markets also being able to tap retail borrowings which helps diversify its resource profile. The share of public deposits increased to 24% as on December 31, 2023 (23% as on March 31, 2023 and 19% as on March 31, 2022). Furthermore, the company has also been tapping External Commercial Borrowing (ECB) route which adds diversity to its resource profile, with the latest issuance of USD 750 million social bonds in January 2024.
However, the cost of borrowings is relatively higher than peers. Ability to trim down borrowing costs from the current levels and diversify further into domestic capital market will be key to support the earnings profile amidst the current environment. CRISIL Ratings notes that the yields for bonds of STFCL in the secondary market which were higher than benchmarks in the previous years have now been on an improving trend over the last six months. Consequently, the ability of SFL to now consistently raise resources from traditional routes of term loans and capital market instruments at optimal costs remains a key monitorable. |
Liquidity: Strong The structural asset liability maturity (ALM) statement of SFL as on December 31, 2023, shows that ALM position is adequate with cumulative positive gaps upto the 1-year bucket indicating that business inflows also support repayments. As of December 31, 2023, SFL had liquidity of Rs 10,653 crore (comprising of cash and equivalents and unutilized CC/WCDL lines) which comfortably covers 2 months of debt obligations of Rs. 8,841 crore.
ESG Profile CRISIL Ratings believes that SFL’s ESG profile supports its already strong credit risk profile.
The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment.
SFL has a continuous focus on strengthening various aspects of its ESG profile.
Key ESG highlights:
There is growing importance of ESG among investors and lenders. SFL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given the sizable share of market borrowings in its overall debt and access to both domestic and foreign capital markets. |
Outlook: Stable CRISIL Ratings believes that SFL will continue to maintain healthy capitalisation and strong earnings profile which will help mitigate inherent asset quality-related challenges. CRISIL Ratings also believes that the company will maintain its competitive position in the key business segments. |
Rating Sensitivity factors Upward Factors:
Downward Factors:
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About the Company Following the consummation of the merger of SCUF and demerged undertaking of Shriram Capital Limited with SFL (erstwhile STFCL), the company has been renamed to Shriram Finance Ltd (SFL). Shriram Housing Finance Ltd (SHFL) continues to operate as a subsidiary of SFL which holds around 84.2% stake in the former. Pursuant to the consummation of the transaction, Shriram Capital and SCUF cease to exist.
SFL, incorporated in 1979, was registered with RBI as a deposit-taking, asset-financing non-banking financial company and predominantly provides financing for vehicles such as CVs (both pre-owned and new), tractors, and passenger vehicles. Erstwhile SCUF (now merged into SFL) was incorporated in 1986 and operated in the retail financing segment with a focus on small enterprise loans, two-wheeler financing, gold loans, housing loans and others (auto and personal loans). |
Key Financial Indicators: SFL Consolidated
*Gross Stage-3 estimated on combined basis for SFL and SHFL ^Pre-merger |
Any other information: Not Applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
#yet to be issued ^transferred from Shriram City Union Finance Limited upon its merger into Shriram Finance Limited *Interchangeable with short term facility
Annexure - Details of Rating Withdrawn
^transferred from Shriram City Union Finance Limited upon its merger into Shriram Finance Limited |
Annexure – List of Entities Consolidated
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Annexure - Rating History for last 3 Years
| Current | 2024 (History) | 2023 | 2022 | 2021 | Start of 2021 | |||||||
| Instrument | Type | Outstanding Amount | Rating | Date | Rating | Date | Rating | Date | Rating | Date | Rating | Rating |
| Fund Based Facilities | LT/ST | 62765 | CRISIL AA+/Stable / CRISIL A1+ | -- | 23-10-23 | CRISIL AA+/Stable / CRISIL A1+ | 31-12-22 | CRISIL AA+/Stable / CRISIL A1+ | 17-12-21 | CRISIL AA+/Stable / CRISIL A1+ | CRISIL AA+/Negative / CRISIL A1+ | |
| -- | -- | 08-05-23 | CRISIL AA+/Stable / CRISIL A1+ | 27-09-22 | CRISIL AA+/Stable / CRISIL A1+ | 28-09-21 | CRISIL AA+/Stable / CRISIL A1+ | -- | ||||
| -- | -- | 07-02-23 | CRISIL AA+/Stable / CRISIL A1+ | 27-06-22 | CRISIL AA+/Stable / CRISIL A1+ | 27-05-21 | CRISIL AA+/Stable / CRISIL A1+ | -- | ||||
| -- | -- | 30-01-23 | CRISIL AA+/Stable / CRISIL A1+ | 23-06-22 | CRISIL AA+/Stable / CRISIL A1+ | 23-03-21 | CRISIL AA+/Stable / CRISIL A1+ | -- | ||||
| -- | -- | -- | 30-03-22 | CRISIL AA+/Stable / CRISIL A1+ | 15-03-21 | CRISIL AA+/Stable / CRISIL A1+ | -- | |||||
| -- | -- | -- | 07-02-22 | CRISIL AA+/Stable / CRISIL A1+ | -- | -- | ||||||
| Non-Fund Based Facilities | ST | 478 | CRISIL A1+ | -- | 23-10-23 | CRISIL A1+ | 31-12-22 | CRISIL A1+ | 17-12-21 | CRISIL AA+/Stable / CRISIL A1+ | CRISIL AA+/Negative / CRISIL A1+ | |
| -- | -- | 08-05-23 | CRISIL A1+ | 27-09-22 | CRISIL A1+ | 28-09-21 | CRISIL AA+/Stable / CRISIL A1+ | -- | ||||
| -- | -- | 07-02-23 | CRISIL A1+ | 27-06-22 | CRISIL A1+ | 27-05-21 | CRISIL AA+/Stable / CRISIL A1+ | -- | ||||
| -- | -- | 30-01-23 | CRISIL A1+ | 23-06-22 | CRISIL A1+ | 23-03-21 | CRISIL AA+/Stable / CRISIL A1+ | -- | ||||
| -- | -- | -- | 30-03-22 | CRISIL A1+ | 15-03-21 | CRISIL AA+/Stable / CRISIL A1+ | -- | |||||
| -- | -- | -- | 07-02-22 | CRISIL AA+/Stable / CRISIL A1+ | -- | -- | ||||||
| Commercial Paper | ST | 10500 | CRISIL A1+ | -- | 23-10-23 | CRISIL A1+ | 31-12-22 | CRISIL A1+ | 17-12-21 | CRISIL A1+ | CRISIL A1+ | |
| -- | -- | 08-05-23 | CRISIL A1+ | 27-09-22 | CRISIL A1+ | 28-09-21 | CRISIL A1+ | -- | ||||
| -- | -- | 07-02-23 | CRISIL A1+ | 27-06-22 | CRISIL A1+ | 27-05-21 | CRISIL A1+ | -- | ||||
| -- | -- | 30-01-23 | CRISIL A1+ | 23-06-22 | CRISIL A1+ | 23-03-21 | CRISIL A1+ | -- | ||||
| -- | -- | -- | 30-03-22 | CRISIL A1+ | 15-03-21 | CRISIL A1+ | -- | |||||
| -- | -- | -- | 07-02-22 | CRISIL A1+ | -- | -- | ||||||
| Fixed Deposits | LT | -- | -- | -- | 23-06-22 | Withdrawn | 17-12-21 | F AAA/Stable | F AAA/Negative | |||
| -- | -- | -- | 30-03-22 | F AAA/Stable | 28-09-21 | F AAA/Stable | -- | |||||
| -- | -- | -- | 07-02-22 | F AAA/Stable | 27-05-21 | F AAA/Stable | -- | |||||
| -- | -- | -- | -- | 23-03-21 | F AAA/Stable | -- | ||||||
| -- | -- | -- | -- | 15-03-21 | F AAA/Stable | -- | ||||||
| Non Convertible Debentures | LT | 33878.27 | CRISIL AA+/Stable | -- | 23-10-23 | CRISIL AA+/Stable | 31-12-22 | CRISIL AA+/Stable | 17-12-21 | CRISIL AA+/Stable | CRISIL AA+/Negative | |
| -- | -- | 08-05-23 | CRISIL AA+/Stable | 27-09-22 | CRISIL AA+/Stable | 28-09-21 | CRISIL AA+/Stable | -- | ||||
| -- | -- | 07-02-23 | CRISIL AA+/Stable | 27-06-22 | CRISIL AA+/Stable | 27-05-21 | CRISIL AA+/Stable | -- | ||||
| -- | -- | 30-01-23 | CRISIL AA+/Stable | 23-06-22 | CRISIL AA+/Stable | 23-03-21 | CRISIL AA+/Stable | -- | ||||
| -- | -- | -- | 30-03-22 | CRISIL AA+/Stable | 15-03-21 | CRISIL AA+/Stable | -- | |||||
| -- | -- | -- | 07-02-22 | CRISIL AA+/Stable | -- | -- | ||||||
| Subordinated Debt | LT | 5201.21 | CRISIL AA+/Stable | -- | 23-10-23 | CRISIL AA+/Stable | 31-12-22 | CRISIL AA+/Stable | 17-12-21 | CRISIL AA+/Stable | CRISIL AA+/Negative | |
| -- | -- | 08-05-23 | CRISIL AA+/Stable | 27-09-22 | CRISIL AA+/Stable | 28-09-21 | CRISIL AA+/Stable | -- | ||||
| -- | -- | 07-02-23 | CRISIL AA+/Stable | 27-06-22 | CRISIL AA+/Stable | 27-05-21 | CRISIL AA+/Stable | -- | ||||
| -- | -- | 30-01-23 | CRISIL AA+/Stable | 23-06-22 | CRISIL AA+/Stable | 23-03-21 | CRISIL AA+/Stable | -- | ||||
| -- | -- | -- | 30-03-22 | CRISIL AA+/Stable | 15-03-21 | CRISIL AA+/Stable | -- | |||||
| -- | -- | -- | 07-02-22 | CRISIL AA+/Stable | -- | -- | ||||||
| Long Term Principal Protected Market Linked Debentures | LT | 4806.4 | CRISIL PPMLD AA+/Stable | -- | 23-10-23 | CRISIL PPMLD AA+/Stable | 31-12-22 | CRISIL PPMLD AA+ r /Stable | 17-12-21 | CRISIL PPMLD AA+ r /Stable | CRISIL PPMLD AA+ r /Negative | |
| -- | -- | 08-05-23 | CRISIL PPMLD AA+/Stable | 27-09-22 | CRISIL PPMLD AA+ r /Stable | 28-09-21 | CRISIL PPMLD AA+ r /Stable | -- | ||||
| -- | -- | 07-02-23 | CRISIL PPMLD AA+/Stable | 27-06-22 | CRISIL PPMLD AA+ r /Stable | 27-05-21 | CRISIL PPMLD AA+ r /Stable | -- | ||||
| -- | -- | 30-01-23 | CRISIL PPMLD AA+ r /Stable | 23-06-22 | CRISIL PPMLD AA+ r /Stable | 23-03-21 | CRISIL PPMLD AA+ r /Stable | -- | ||||
| -- | -- | -- | 30-03-22 | CRISIL PPMLD AA+ r /Stable | 15-03-21 | CRISIL PPMLD AA+ r /Stable | -- | |||||
| -- | -- | -- | 07-02-22 | CRISIL PPMLD AA+ r /Stable | -- | -- | ||||||
All amounts are in Rs.Cr
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Criteria Details
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