Moody's downgrades IndiaBulls on funding and governance issues

Global credit rating agency Moody's has downgraded IndiaBulls Housing Finance corporate family rating (CFR) and the foreign-currency senior secured rating to B2 from Ba2, driven by the mortgage lender's ongoing challenging access to funding as well as governance issues.

Moody's has also downgraded the company's foreign and local currency senior secured MTN program ratings to (P)B2 from (P)Ba2. The outlook on all ratings remains negative.

While company vice chairman and MD Gagan Banga, in an investor call on Friday, said there was very high liquidity on books to more than cover next 12 months repayments, Moody's said: "The continued decline in on-balance sheet loans is a reflection of its funding challenges."

Moody's said the access to funding remains challenging, although the company's pool of liquid assets, ability to run down the loan book and roll over of its bank funding act as a buffer against this risk in the short-term. "However, as the funding challenges prolong, the liquidity buffers may erode and expose the company to funding and liquidity risks. This is the key driver of the rating action," said Moody's.

Further, Moody's added that perceptions of weak governance have an impact on the credit profile by impeding access to funding. "This is particularly so in the current context as there has been an increase in lenders' risk aversion towards Indian finance companies following the default of IL&FS in September 2018," it said.

RBI too last Wednesday rejected the merger proposal between LVB and IndiaBulls. In a recent conversation with Business Today, Banga admitted that the company was facing perception issues and addressing it was the company's immediate priority.

"Multiple attacks have come our way in the last six months due to the merger, resulting in a perception disturbance. So, we have to work with lender and stakeholders to make sure that the perception goes back to appreciating that between 2008 and 2018, we created from scratch the second largest housing finance company in India. It will take 4-5 months to get back the perception and since our facts are strong, it will happen quickly," Banga had said.

IndiaBulls is now looking to exit developer loan segment completely over the next three to five years as it looks to improve its balance sheet. Currently, developer loans comprise 20 per cent or a fifth of IBH's Rs 1.13 lakh crore loan book (as at June 30, 2019) while the rest is retail loans for homebuyers and small and medium enterprises. "We want to make it a complete retail loan book in the long term," he added.

IndiaBulls Housing has also tied up with Bank of Baroda. It is close to signing up with State Bank of India for co-origination of loans, which will contribute nearly 40 per cent to incremental lending for the mortgage lender.

"For co-origination, we have tied up with Bank of Baroda. SBI tie-up is in final stages," Banga said during the investor call.

The Reserve Bank of India, on September 21, 2018, allowed banks and non-deposit taking non-banking financial companies (NBFCs) in the priority sector to offer joint loans. Loans would involve joint contribution of credit by both lenders and also involve sharing of risks and rewards between banks and NBFCs.

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