Press Release Mahindra Rural Housing Finance Ltd

1 1 CARE Ratings Limited Press Release Mahindra Rural Housing Finance Ltd April 16, 2018 Ratings Instrument Amount (Rs. crore) Rating1 Rating Action Non-Convertible Debenture issue CARE AA+; Stable (Double A Plus; Outlook: Stable) Reaffirmed Subordinated Debt CARE AA+; Stable (Double A Plus; Outlook: Stable) Reaffirmed Total (Rs. Five Hundred crore only) Details of instruments/facilities in Annexure-1 Detailed Rationale & Key Rating Drivers The ratings assigned to debt instruments of Mahindra Rural Housing Finance Limited (MRHFL) continue to factor in its strong parentage of Mahindra & Mahindra Financial Services Ltd (MMFSL) (rated CARE AAA ). The ratings reflect the demonstrated financial, operational and managerial support from MMFSL. In addition, the shared Mahindra brand and branch network with MMFSL are also considered as key credit strengths.

2 The ratings also factor in MRHFL s adequate capitalization levels, comfortable liquidity profile, good resource raising ability and moderate financial performance. The ratings are constrained by MRHFL s weak asset quality, relatively unseasoned portfolio and geographical concentration. Continued support of MMFSL, capital adequacy, asset quality and profitability are the key rating sensitivities. Detailed description of the key rating drivers Key Rating Strengths Strong parentage of MMFSL and demonstrated operational, managerial and financial support from MMFSL: MRHFL is subsidiary of MMFSL which holds shareholding while the remaining shareholding is held by National Housing Bank (NHB) as on December 31, 2017. MMFSL is a subsidiary of Mahindra and Mahindra Limited (rated CARE AAA; Stable) which holds shareholding in MMFSL.

3 MMFSL is one of India s leading vehicle financiers. MRHFL has been receiving regular capital support from both MMFSL and NHB to support the strong business growth of MRHFL. During FY17 (refers to the period April 1 to March 31), MMFSL and NHB have infused equity capital of crore in MRHFL. MRHFL also benefits from the managerial support of MMFSL. MMFSL has deputed senior members as Directors of MRHFL. Mr. Ramesh Iyer (Vice-Chairman and Managing Director, MMFSL) is the chairman of MRHFL and Mr. V. Ravi ( and Executive Director, MMFSL) are the directors on the board of MRHFL MRHFL operates from geographic areas and target segments wherein MMFSL has rich experience. In addition to the capital and management support, MRHFL also benefits from the common Mahindra brand support from the parent which gives MRHFL an advantage to expand its business rapidly in the Rural and semi-urban areas which has been successfully demonstrated in past and also helps to borrow funds at very competitive rates.

4 Moderate gearing levels; albeit comfortable capitalization level due to small ticket size loans having lower risk weighted: As on March 31, 2017, gearing ratio was times ( times as on March 31, 2016). As on Dec 31, 2017, gearing level was times. MRHFL provides Housing loans to Rural borrowers having average ticket size of Rs. lakh, which falls under category of Housing Loan less than lakh and Loan To Value (LTV) ratio of less than 75% which have lower risk weights. As a result, MRHFL reported Capital Adequacy Ratio (CAR) of (Tier I CAR: ) as on March 31, 2017 and as on December 31, 2017, CAR of Comfortable liquidity and resource profile: As on September 30, 2017, MRHFL s liquidity profile was moderate mainly on account of shorter tenure of its borrowings as compared to its loan portfolio.

5 However, the mismatches are mitigated by adequate amount of unutilized lines of credit from various banks, and MRHFL can also avail ICDs from MMFSL, which provides comfort. 2 CARE Ratings Limited Press Release Moderate financial performance: MRHFL reported Profit After Tax (PAT) of crore on total income of crore during FY17 (refers to period from April 01 to March 31) as compared to PAT of Rs. 63 crore on total income of crore in FY16. MRHFL s Return on Total Assets (ROTA) for FY17 was marginally lower at as compared to for FY16 on account of higher provisioning as well as operating costs. For 9 MFY18, MRHFL reported PAT of crore on total income of crore as compared to PAT of crore on total income of Rs.

6 484 crore for 9 MFY17. As the target customer segment of MRHFL has higher dependence on agricultural income, MRHFL sees improvement in collection in the second half of financial year, with payments received post the harvest season. Key Rating Weaknesses Deteriorating asset quality: Considering the nature of the customer segment being predominantly loans to informal sector (low ticket-size disbursements to agriculturalist and self-employed class) in Rural areas with high exposure to agriculture income, the asset quality ratios are on the higher side as compared to the traditional Housing Finance companies. Further, the Gross NPA and Net NPA ratios undergo substantial variations on account of the fact that Rural operations are characterized by seasonal nature of income flows.

7 As on March 31, 2017, MRHFL reported Gross NPA ratio of and Net NPA ratio of as compared to GNPA ratio of and Net NPA ratio of as on March 31, 2016. As on December 31, 2017 Gross NPA and Net NPA ratios were and respectively as compared to and respectively on December 31, 2016. Further, MRHFL classifies NPA on 90+ DPD in line with NHB guidelines for Housing Finance companies and does not avail the NPA recognition norms related to crop seasons for loans extended to an agriculturist or to a person whose income is dependent on the harvest of crops as permitted by the NHB Guidelines. Unseasoned portfolio in semi-urban area and geographic concentration: The loan book of MRHFL stood at ,824 crore as on March 31, 2017 (Rs 3,265 crore as on March 31, 2016).

8 Exposure in Maharashtra and Tamil Nadu accounted for 59% as on March 31, 2017 (58% as on March 31, 2016). Furthermore, the company has started disbursing loans in semi-urban areas, which is a new product category for the company. Interest rate risk: Interest rate risk is inherent in the business model of MRHFL principally as a result of lending to customers at fixed interest rates and in amounts and for periods, which may differ from its funding sources. Majority of the borrowings from banks are linked to MCLR / External Benchmark having resets mostly at annual intervals, as against majority of loan portfolio at fixed rates. In order to cover high costs of operations and to cover risk of delayed cash flows in Rural operations, MRHFL lends at relatively higher rates as compared to its urban peers resulting in MRHFL reporting high Net Interest Margin (NIM).

9 The NIM of MRHFL is susceptible to and hardening of interest rates. Analytical approach: CARE has taken a view based on the standalone financial profile of MRHFL, factoring in the parentage and operational linkages with MMFSL. Applicable Criteria Rating Methodology- Non-Banking Finance Companies Criteria for assigning Outlook to Credit Ratings Rating Methodology: Factoring Linkages in Ratings CARE s Policy on Default Recognition Financial ratios - Financial Sector About the Company Incorporated in April 2007, Mahindra Rural Housing Finance Ltd. (MRHFL) is a Housing Finance company with predominant presence in Rural areas. It is a subsidiary of Mahindra & Mahindra Financial Services Ltd (MMFSL-rated CARE AAA; Stable) which presently holds stake in MRHFL, with the remaining being held by NHB (National Housing Bank) as on December 31, 2017.

10 Mahindra and Mahindra Ltd. (rated CARE AAA; Stable), held equity stake in MMFSL as on December 31, 2017. MRHFL operates out of a network of 467 branches across 13 states as on September 30, 2017. Geographically, MRHFL s loan portfolio is concentrated in the state of Maharashtra (46%), Tamil Nadu (14%), Madhya Pradesh (9%), Gujarat (7%), Andhra Pradesh (8%) and Kerala (5%) as on March 31, 2017. 3 CARE Ratings Limited Press Release Brief Financials (Rs. crore) FY16 (A) FY17 (A) Total operating income 495 703 PAT 63 83 Interest coverage (times) Total Assets 3,295 4,900 Net NPA (%) ROTA (%) A: Audited Status of non-cooperation with previous CRA: Not Applicable Any other information: Not Applicable Rating History for last three years: Please refer Annexure-2 Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity.