ICRA downgrades Indiabulls Housing long-term ratings to AA+ from AAA

Credit rating agency ICRA has downgraded mortgage lender Indiabulls Housing Finance’s (IBHL) long-term debt instruments to AA+ from AAA, on account of rising woes for non-banking financial companies (NBFCs) and housing finance companies (HFCs). 

The NBFC and HFC sectors have been plagued by increase in cost of funds and prolonged squeeze in liquidity. The rating of IBHL remains under watch with “developing implications” in light of its merger proposal Laxmi Vilas Bank. 

“While the scheme has received approval from the Competition Commission of India, key approvals from regulators including the Reserve Bank of India (RBI), are still pending,” said ICRA.

The revision in ratings of the debt instruments has factored in challenges in maintaining the asset quality, which stem from the continued slowdown in the real estate sector. The realty sector has been hit by subdued sales and rising challenges on the funding front, said ICRA.

ICRA has downgraded non-convertible debentures (NCDs) of the company worth Rs 45,200 crore to AA+ from AAA. Similarly, its sub-ordinated debt programme worth Rs 5,000 crore and retail bond programme worth Rs 15,000 crore to AA+ from AAA. Its long term bank facilities worth Rs 47,000 crore were also downgraded. 

However, ICRA reaffirmed its rating for the company’s commercial papers worth Rs 25,000 crore. 

The rating agency noted that maintaining asset quality was a challenge, given the slowdown in the real estate sector. Indiabulls has, nevertheless, managed to maintain healthy asset quality despite some deterioration in the June quarter. 

Gross non-performing assets (NPAs) stood at 1.47 per cent of the assets under management (AUM), compared to 0.88 per cent in March 2019. 

“IBHL’s ability to achieve timely exits/refinancing of the real estate exposure will remain important for maintaining the asset quality. IBHL’s healthy liquidity position provides comfort,” the rating agency said. 

Although IBHL has been increasing its retail portfolio and is sitting on cash equivalents to the tune of Rs 28,511 crore that adequately provides for debt obligations due to mature in the next 12 months, its growth prospects and ability to maintain profitability are expected to remain constrained over the near-to-medium term.

The contraction in the company’s loan book over the past two quarters, coupled with the higher cost of funds and provision expenses, resulted in moderation of its profitability in the June quarter, ICRA said.

“Given the extant challenges, Indiabulls housing finance’s profitability is expected to remain rangebound over the near term, though it remains healthy compared to peers”, ICRA further added.