SHRIRAM FINANCE LIMITED
Fitch Ratings has affirmed
The Outlook is Stable. SFL was previously known as
Key Rating Drivers
Standalone Profile Drives Ratings: SFL's ratings reflect the company's longstanding franchise in used commercial-vehicle (CV) financing, experienced management, satisfactory execution record backed by established underwriting processes and risk controls, and adequate balance-sheet buffers.
Improved Sector Risk Operating Environment (SROE): Fitch has revised the SROE score for Indian finance and leasing companies (FLCs) to 'bb+', from 'bb', reflecting improved governance, risk and liquidity management frameworks due partly to regulatory strengthening in the past few years, and the easing of Covid-19 and commodity shocks on medium-term growth prospects despite lingering global growth and inflation risks. We expect resilient GDP expansion (FY24: 6.3%, FY25: 6.5%) to provide adequate headroom for FLCs to expand profitably in the medium term.
Diversifying Loan Mix: SFL merged with sister company
Merger Execution: We expect the combined management team will maintain a steady product rollout strategy with consistent underwriting standards and credit monitoring to avoid asset-quality setbacks. We expect cross-sell opportunities, which were a key merger objective, to materialise gradually over the medium term. SFL has rolled out SCUF's loan products across its branches and is using SFL branding on SCUF's branches. Aggressive growth as SFL executes its post-merger strategy could indicate a rise in risk appetite.
Stable Asset Quality: We expect asset quality to remain stable in the medium term supported by a steady economy. SFL's high non-performing loan (NPL) ratio reflects its exposure to sub-prime borrowers who fall outside banks' typical customer base. Even so, the NPL ratio declined to 5.8% by
Healthy Profitability: Fitch expects improved credit demand and controlled operating and credit costs to support earnings in the medium term. SFL's rural and semi-urban customer base underpins its high net interest margin (FY22: 6.9%), which has further improved (1QFY24: 8.4%) with addition of higher yielding SCUF products. This, along with its carefully-managed operating expense base, resulted in healthy pretax profitability to assets of 4.3% in 1QFY24.
Controlled Leverage: SFL's debt/tangible equity improved to 4.2x by
Stable Funding and Liquidity: SFL has a diversified funding mix with adequate access to debt capital markets, securitisation market, offshore markets, banking relationships, and public deposits. SFL's asset portfolio is generally matched against its funding portfolio. High liquidity buffers, built against pandemic-induced contingencies, are been pared down as the company becomes more confident of the macroeconomic outlook. However, it is likely to keep its liquidity buffer commensurate with its rating to cover near-term debt maturities.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
SFL's rating could be downgraded in the event of significantly weaker asset quality and profitability, diminished funding access or a weakened liquidity profile. Leverage consistently greater than 5.5x or a material increase in risk appetite marked by loosened underwriting standards or aggressive growth relative to the industry would also place downward pressure on the rating.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
A sustained improvement in asset quality and profitability as SFL executes on its post-merger cross-sell objectives would be positive for the credit profile and may lead to positive rating action. This is provided that leverage remains below 4.0x on a sustained basis. A stronger risk profile assessment may increase SFL's leverage tolerance over time.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The ratings on SFL's US dollar medium-term note (MTN) programme and foreign-currency senior secured debt are at the same level as its Long-Term Foreign-Currency IDR, in line with Fitch's rating criteria.
Indian non-bank financial institution (NBFI) borrowings are typically secured and Fitch believes that non-payment of their senior secured debt would best reflect uncured failure of the entity. NBFIs can issue unsecured debt in overseas markets, but such debt is likely to constitute a small portion of their funding and thus cannot be viewed as their primary financial obligations.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The ratings on SFL's US dollar MTN programme and foreign-currency senior secured debt are sensitive to its Long-Term Foreign-Currency IDR. Any action on the Long-Term Foreign-Currency IDR will drive similar action on the MTN programme and foreign-currency senior secured debt ratings.
ADJUSTMENTS
The 'bb+' sector risk operating environment score is above the 'b' implied score for the following reasons: size and structure of economy (positive) and economic performance (positive).
The 'bb' asset quality score is above the 'b' implied score for the following reason: loan charge-offs, depreciation or impairment policy (positive).
The 'bb' funding, liquidity and coverage score is above the 'ccc' implied score for the following reason: funding flexibility (positive).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
SFL has an ESG Relevance Score of '3' for Customer Welfare, compared with the standard score of '2' for the finance and leasing sector. This reflects its retail-focused operations, which exposes it to risks around fair-lending, pricing-transparency and repossession, foreclosure and collection practices. Aggressive practices in these areas may subject the company to legal, regulatory and reputational risk that may negatively affect its credit profile. The relevance score of '3' for this factor reflects Fitch's view that these risks are adequately managed and have a low impact on SFL's credit profile at present.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores
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