By Jindal Haria

India Ratings and Research (Ind-Ra) has affirmed MAS Rural Housing & Mortgage Finance Limited’s (MASRHMFL) bank loan as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Bank loan

-

-

-

INR5

IND A/Stable

Affirmed

 

Analytical Approach: The ratings have factored in the company’s strategic importance to its parent, MAS Financials Limited (MASF; ‘IND A’/Stable), which holds 59.6% stake in MASRHMFL (the rest is held by promoter shareholders of MASF). The ratings factor in Ind-Ra’s expectation of continued importance of MASRHMFL’s housing finance business in the parent’s asset under management (AUM) along with operational synergies in terms of infrastructure sharing, commonality in board representation and common bankers in the overall funding mix.

KEY RATING DRIVERS

Parent Support: MASF and MASRHMFL share a common board of directors (promoters are part of both the boards) and the parent has high managerial, operational and financial integration with MASRHMFL. MASF drives the strategy for MASRHMFL and the former’s management maintains a close oversight over the company. It also shares branch infrastructure (22 branches shared with MASF), recovery and legal teams and employee bandwidth. The high level of operational integration between the two companies increases the likelihood of active support in the event of liquidity tightness or even through timely availability of growth capital, as and when required. However, on account of continuous disruptions in the real estate industry over last three years (demonetisation, goods and services tax, real estate regulatory authority related), MASRHMFL has not been growing its book significantly as a prudent measure. Nevertheless, this implies that the size and contribution of MASRHMFL to the overall MASF franchise is marginal (about 5% assets under management); the company expect this to pick up hereon.

MASF’s net worth stood at INR9.10 billion in FY19, which together with the promoter stake in MASF at 73.47%, strengthens the ability of MASF and its promoters to provide equity and liquidity support for MASRHMFL, if required. Ind-Ra expects MASF to operate at moderate leverage levels (maximum of around 5x, FY19 2.2x) in the long term, as it would strengthen its ability to extend support to MASRHMFL.

Adequate Capitalisation: At end-June 2019, tier 1 was 26.54% for MASF and 28.07% for MASRHMFL. As per Ind-Ra’s assessment and stress tests, MASRHMFL would require support from MASF or its promoters through dilution of their stake in the event of any extreme stress in the loan book. During FY19, MASF infused INR90 million in MASRHMFL, while the individual promoters infused additional INR60 million. Based on the capital buffers in MASF and regulatory limits, MASF can extend support to tune of 15% of net owned funds to subsidiaries. Also, a fall in capital buffers due to high loan growth or asset quality pressures would be a key monitorable in the medium term.

Moderate Funding and Liquidity Profile: The company’s funding profile is diversified, with funding lines from nine banks (most of them common with MASF). It also has access to National Housing Bank’s (‘IND AAA’/Stable) funding, which constituted 6.84% of its borrowings in 1QFY20. MASRHMFL’s leverage (debt to equity) stood at 5.5x in FY19 (FY18: 6.0x). The leverage reduced due to the capital infusion by parent and conversion of preference capital to equity during FY19. The company did not have any cumulative mismatches in the short term ALM maturity buckets (up to 1 year). Given the company’s exposure to the developer segment (24.3% of loans under management at end-March19) and to other housing finance companies (13%), which are larger ticket size loans, Ind-Ra expects the company to rely on MASF for liquidity support in event of any stress in the system.

Evolving Systems and Process: MASRHMFL caters to the requirements of informal borrowers from rural and semi-urban areas with almost negligible credit history. In this segment, poor credit habits lead to high overdue in softer buckets (6.3% of loans under management as of FY19).The agency believes the company has to step up investment in IT and risk management systems to manage the resultant risk. According to Ind-Ra, MASRHMFL also needs to enhance its focus on diversifying keyman risk (promoters) in the business by building a strong second line of management over the medium term.

Additionally, the informal nature of borrower requires superior credit evaluation in terms of scrutinising the title of property along with a regular follow-up of the collection team with the borrower to prevent migration of softer delinquency to higher buckets with the seasoning of the book over the medium term.

MASRHMFL has managed the movement of early delinquencies to harder buckets till date; however, with growth in scale, it would need to increase the monitoring of the existing portfolios, adopting a more process-driven approach.

Asset Quality Not Yet Seasoned: MASRHMFL’s gross NPL ratio was 0.37% in FY19 (FY18: 0.36%). The company’s assessment and risk management and monitoring systems will be tested over the medium term as the loan book seasons further and the company diversifies outside of Gujarat (FY19: 91% of total AUM) and Maharashtra (7% of total AUM). MASRHMFL’s total overdue increased to 6.3% in FY19 from 3.1% in FY15. Also, the company substantially increased the share of project loans in the overall AUM to 24.3% in FY19 from 17.5% in FY15. Even though these are small developers catering to the affordable segment, which could also help MASRHMFL garner low ticket housing loans, it could increase the concentration risk with respect to the overall loan book.

Furthermore, demonetisation, goods and sales tax and the Real Estate (Regulation and Development) Act have decreased the cash flow flexibility for both developers and potential buyers and reduced sales velocity across projects. Therefore, in the medium term, overdue in project loans needs to be monitored. However, Ind-Ra is of the view that ultimate credit losses will depend on the company’s ability to liquidate the collateral and recover through the process of SARFAESI Act.
 


RATING SENSITIVITIES

Positive: An upgrade of the parent’s Long-Term Issuer Rating would lead to a similar rating action for MASRHMFL.


Negative:
A significant dilution in MASF’s management control, a reduction in its stake to a minority shareholder, or a downgrade of MASF’s Long-Term Issuer Rating could lead to a similar rating action for MASRHMFL’s rating. In addition, inability to increase its share in the MASF franchise in the opinion of the agency, any material reduction in liquidity support by the parent or inability to access funding could lead to a negative rating action. 


COMPANY PROFILE

MASRHMFL is a public company incorporated under provisions of Companies Act, 1956. It is registered as a non-deposit taking housing finance company with National Housing Bank. The company provides housing loans, commercial loans and project loans for real estate projects to customers, especially in the  affordable housing segment in rural and urban areas. The activities of the company are spread over Gujarat, Maharashtra, Madhya Pradesh and Rajasthan. It has 69 branches with 47 exclusive branches for MASRHFL.

 

FINANCIAL SUMMARY

 

Particulars

FY19*

FY18*

FY17

Total assets (INR million)

3,092

2,151

1872

Total equity (INR million)

466

306

299.9

Net profit (INR million)

26.5

20.1

20.4

Return on average assets (%)

1.0

1.0

1.2

Equity/assets (%)

15.0

14.2

16.0

Tier 1 capital (%)

27.7

26.8

28.5

Source: MASRHMFL

*reported as per IND AS

 

 

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating/Outlook

19 March 2019

11 December 2017

Bank loan

Long-term

INR5

IND A/Stable

IND A/Stable

IND A/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

For details on complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.
 

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

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For more information, visit www.indiaratings.co.in.

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Analyst Names

  • Primary Analyst

    Jindal Haria

    Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001750

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121