Fullerton India Credit Company (FICC), the non-banking finance subsidiary of Singapore-based Temaesk, may need additional assistance from its government-owned parent to withstand weak business conditions and risks of high credit losses, a rating agency said here on Monday.
In its statement, Fitch Ratings said FICC extends mostly unsecured loans, which comprises over 80 per cent of its lending, to its clients. Borrowers predominantly belong to the lower-middle or the middle income segments, a large part of which is self-employed.
The finance company’s current profitability is fairly high with a net interest margin of 16 per cent. But, its adequacy for absorbing high credit losses is yet to be tested.
Fitch therefore believes that “FICC could require support from its parent over the medium-term”.
Temasek Holdings, owned by the government of Singapore controls FICC through Fullerton Financial Holdings. The rating agency believes promoter support will continue to be available to FICC. This is important as its current financial performance, though improving, remains weak.
FICC relied on short-term borrowings from 2006 till the first half of 2008. This caused refinancing problems in the third quarter of FY09 when money markets turned away from non-banking financial companies such as FICC.
In the aftermath of the Lehman Brothers’ collapse in September 2008, the liquidity in the global financial market dried up as banks were reluctant to lend to each other.
Temaesk promptly helped Fullterton India to meet immediate funding requirements. The company is now focusing on longer tenor funding. In addition, the company now carries significant cash (about 15 per cent of debt) as liquidity backup.
Referring to business operations and practices, Fitch said the company refers to target segment as the “mass market” and serves it through its own employees. This is unlike many other Indian retail financiers who have traditionally relied on third-party selling and servicing agents for origination and collection.
While FICC’s model provides obvious underwriting and collection advantages due to better client knowledge, it is relatively high cost, more so in the current situation where optimal utilisation of human resources is a challenge due to weak credit demand.
Moreover, the credit implications of such a model remain unproven under Indian conditions, it added. Weak business conditions currently prevailing have resulted in asset quality deterioration for many consumer financiers and FICC’s own credit losses have been higher than what was initially budgeted, it added.
