Summary of rated instruments
|Instrument||Previous Rated Amount
|Current Rated Amount
|Fund-based Bank Limits||10,000.00||10,000.00||Downgraded to [ICRA]BBB+ (Negative)
from [ICRA]A- (Negative)
(including Subordinated Debt)
|4,488.45**||4,028.08*||Downgraded to [ICRA]BBB+ (Negative)
from [ICRA]A- (Negative)
|Bonds/Non-convertible debenture (NCD) Programme
|2,000.00||2,000.00||Downgraded to [ICRA]BBB+ (Negative)
from [ICRA]A- (Negative)
|Commercial Paper Programme||500.00||500.00||Downgraded to [ICRA]A2+
* Outstanding as on March 31, 2018
** Outstanding amount as on December 31, 2016
ICRA has downgraded the long-term rating on the Rs. 10,000.00-crore long-term bank borrowings, the Rs. 8,000.00-crore (outstanding Rs. 4,028.48 crore) long-term bond programme and the Rs. 2,000.00-crore NCD programme of IFCI Limited (IFCI) from [ICRA]A- (pronounced ICRA A minus) to [ICRA]BBB+ (pronounced ICRA triple B plus). ICRA has also downgraded the short-term rating on the Rs. 500.00-crore commercial paper programme of IFCI to [ICRA]A2+ (pronounced ICRA A two plus) from [ICRA]A1 (pronounced ICRA A one). The outlook on the long-term ratings has been retained at ‘negative’.
The rating downgrade considers the continued deterioration in IFCI’s profitability and capitalisation ratios despite the sizeable divestment of non-core investments, resources and cost control measures undertaken by the company during FY2018. Net interest income (NII) remained negative because of elevated non-performing assets (NPAs) during FY2018. This, along with continued fresh slippages, surge in credit provisions and limited increase in recoveries, resulted in sizeable losses for IFCI during the year. Even as IFCI stepped up the divestment of non-core assets during the year, the increase in income from the sale of these assets was not commensurate with the losses from lending operations. The capital infusion during the year was also much lower than the losses during the year, leading to erosion in the capital base and capitalisation levels being below regulatory requirements. Given the capital constraints, IFCI has been consistently focussing on the reduction of risk-weighted assets (RWAs) by scaling down its business and adopting other measures. Accordingly, its standard earning advances also continue to decline.
Going forward, ICRA expects incremental slippages to continue during FY2019 but to be much lower than slippages during FY2018 and FY2017. However, profitability from lending operations will remain under pressure mainly due to a) capital constraints leading to a decline in earning advances and, hence, NII; b) credit provisions on an elevated level of net NPAs. The company’s ability to restore the capital ratios above the regulatory levels by further stepping up divestments or raising equity capital to offset losses is critical for sustainable operations. In the absence of requisite divestments or capital infusion, IFCI’s ability to absorb expected credit provisions will remain weak, leading to further erosion in the capital position. This will also impact its ability to grow the business. With the Government of India’s (GoI) shareholding at 56.42%, IFCI is highly dependent on capital infusion from the GoI, in the absence of which, the breach in capital ratios may be expected to continue.
In ICRA’s view, given the elevated level of NPAs and continued provisioning requirements, IFCI will require sizeable capital/divestment of non-core assets to offset losses. Inability to raise capital will continue to pressurise IFCI’s ability to grow the business and improve profitability, leading to further weakening in the core earnings profile. In case IFCI continues to report a further decline in earnings and weakening of the capital position, the ratings may be downgraded further. Conversely, the rating may be upgraded and outlook will be changed to Stable if IFCI is able to raise capital/divest non-core assets to offset the impact of losses and restore the capital position to above regulatory levels.
Key rating drivers
Majority sovereign ownership -The GoI had a 56.42% equity stake in IFCI as on March 31, 2018. Though the GoI infused Rs. 100-crore equity capital in IFCI during FY2018, it was much lower than the loss before tax of Rs. 1,756.86 crore during the year. Accordingly, despite a decline in RWAs to Rs. 23,017 crore, as on March 31, 2018, from Rs. 30,300 crore, as on March 31, 2017, IFCI’s reported capital ratios were below regulatory levels. During FY2019, assuming a 5% de-growth in RWAs, ICRA expects IFCI to require a significant amount from divestments and capital infusion to restore the Tier-I capital ratio to above the regulatory level of 10%. In case IFCI is not able to divest its non-core assets, its dependence on the GoI for meeting capital requirements will increase. Given the scale of capital requirements, ICRA expects IFCI to remain highly dependent on capital infusion from the GoI to meet regulatory capital ratios.
Capital-raising ability through divestment of strategic equity investments – IFCI has sizeable investments in Group entities and subsidiaries and other entities. During FY2018, IFCI reported ~Rs. 588-crore profit through the sale of several strategic investments such as in National Stock Exchange of India Ltd. (NSE) and Tourism Finance Corporation of India. Additionally, IFCI continues to hold ~2.44% stake in NSE, which is valued at ~Rs. 1100 crore and can potentially provide a profit of ~Rs. 1000 crore, ~53% stake in Stock Holding Corporation of India (rated [ICRA]A1+) with book value of Rs. 637 crore and ~4% stake in Clearing Corporation of India (CCIL; rated IrAAA (Stable)), which can potentially provide profits of over Rs. 100 crore. Stockholding Corporation also holds 5% stake in NSE with potential profit of Rs. 2,200 crore. These apart, IFCI has equity stakes in many other companies where it has provided financing assistance. The company’s ability to liquidate investments in a timely and profitable manner can partially offset the expected losses and reduce the capital requirements during FY2019.
Diversified borrowing profile – The overall level of borrowings is on a declining trend driven by a de-growth in advances. The total borrowings reduced to Rs. 21,359 crore, as on March 31, 2018, with a weighted average cost of 9.09% as against Rs. 24,064 crore, as on March 31, 2017, with a weighted average cost of 9.26%. Of the borrowings, as on March 31, 2018, ~44% was from bank loans, ~22% from the private placement of bonds, ~10% from public NCDs, and the rest from other sources.
Satisfactory liquidity position – IFCI’s liquidity profile remains satisfactory with a positive cumulative mismatch in near-term buckets, mainly supported by de-growth in advances coupled with the long-term nature of liabilities. As on May 25, 2018, the total liquidity available with IFCI is ~ Rs. 1,360 crore, which includes liquid mutual funds, commercial papers, bonds, etc. While the company’s overall liquidity profile remains comfortable for the near term, IFCI will have to tie-up additional bank facilities in the medium term given the committed loan sanctions.
Asset quality to remain weak – IFCI’s asset quality continued to deteriorate with fresh slippages of Rs. 857 crore during Q4 FY2018 and Rs. 2,045 crore in FY2018 as against Rs. 4,629 crore during FY2017. Although cash recoveries from NPAs improved to ~Rs. 925 crore during FY2018 as against Rs. 620 crore during FY2017, they remained below fresh slippages. As a result, gross NPAs increased to Rs. 8,672 crore (40.96%) as on March 31, 2018 as against Rs. 7,552 crore (31.86%) as on March 31, 2018. Slippages were driven by multiple factors including the change in the NPA recognition norm to 90+dpd (days past due) as on March 31, 2018 compared to 120+ dpd as on March 31, 2017 as well as the revised RBI circular on the resolution of stressed assets resulting in slippages of accounts under regulatory forbearance schemes. IFCI has exposure to 10 accounts referred by RBI for resolution under the Insolvency and Bankruptcy Code, 2016 (IBC) with amount outstanding of Rs. 2,390 crore and provision coverage of 57% as on March 31, 2018. Excluding one case, where on resolution, IFCI has received the sale proceed in May 2018, in other cases IFCI holds provision coverage of 62%. In addition, IFCI has exposure to 8 other accounts referred by other lenders for resolution under IBC with amount outstanding of Rs. 870 crore and provision coverage of 71%. Overall, the exposure to these 18 accounts is Rs. 3,260 crore with provision cover of 60% as on March 31, 2018. Excluding one exposure, where resolution has been achieved, the IBC exposure was Rs 2,863 crore in 17 accounts with 65% provision coverage.
With an increase in GNPAs, the credit provisioning surged to Rs. 2,327 crore during FY2018 as against Rs. 1,192 crore during FY2017. With higher credit provisions during FY2018, the net NPA declined to Rs. 5,127 crore (29.54%), as on March 31, 2018, from Rs. 5,882 crore (27.03%) as on March 31, 2017. Even though net NPAs declined in absolute terms, de-growth in net advances resulted in a higher percentage of net NPAs. The provision cover against NPAs stood at ~55.5% (41% excluding technical write offs) as on March 31, 2018 as against 42% (22% excluding TWO) as on March 31, 2017. With low provision cover against existing NPAs, and a weak capital position, IFCI’s solvency ratio (net NPA/net worth) remained weak at 106.94% as on March 31, 2018. Given that a sizeable portion of IFCI’s net worth is deployed in Group companies, net NPA as a percentage of Tier I capital is even weaker at ~220% as on March 31, 2018. Going forward, ICRA expects incremental slippages to continue during FY2019 but to be much lower than slippages during FY2018 and FY2017.
Profitability to remain weak due to declining earning assets and high credit cost – Total loans and advances (including debentures) declined to Rs. 17,345 crore as on March 31, 2018 as against Rs. 21,764 crore as on March 31, 2017 because of prepayments by borrowers and the decision to reduce RWAs. With a decline in overall advances and a lower decline in net NPAs, standard advances declined during FY2018 leading to a higher decline in interest income compared to interest expense. As a result, IFCI’s NII was negative during FY2018 at ~ Rs. -47 crore as against positive NII of Rs. 193 crore in FY2017. IFCI was, however, able to offset the impact of lower NII by stepping up the divestment of non-core assets, which resulted in gains of Rs. 589 crore during FY2018 as against Rs. 156 crore during FY2017. As a result, IFCI’s operating profit before credit provisions improved to Rs. 570 crore during FY 2018 as against Rs. 412 crore during FY2017. Despite the improvement in operating profits including divestments, a surge in credit provisions resulted in a loss before tax of Rs. 1,756.86 crore during FY2018 as against Rs. 779.02 crore during FY2017. With expectations of continued de-growth in advances and consequent pressure on NII, profitability is expected to remain under pressure during FY2019 because of credit provisions on the high stock of stressed assets. IFCI will be able to absorb credit provisions only through substantial profit on disinvestments or capital infusion from the GoI in FY2019.
Capital ratios to be driven by capital infusion by GoI and divestment of non-core assets –IFCI reported a Tier 1 and CRAR ratio of 7.52% and 14.02%, respectively, as on March 31, 2018, compared to 11.21% and 16.71%, respectively, as on March 31, 2017. Capital ratios were below the minimum regulatory requirement of 10.0% and 15.0%, respectively, due to losses surpassing the capital infusion during FY2018 despite a reduction in RWAs. As mentioned earlier, during FY2019, assuming a 5% de-growth in RWA and depending upon the losses, ICRA expects IFCI to require large amount from divestments and capital infusion to restore the Tier-I capital ratio to above the regulatory level of 10%. In case IFCI is not able to divest its non-core assets, its dependence on the GoI for meeting capital requirements will increase.
Credit concentration risk remains high due to large ticket corporate loans – The top 20 exposures constituted around 27.6% of gross advances (or 467% of Tier 1 capital) as on March 31, 2018 as against 30.8% (or ~282% of Tier 1 capital) as on March 31, 2017. Further, the exposure to the top-most borrower group stands at ~35% of IFCI’s net own funds as on March 31, 2018 as against ~32% as on March 31, 2017. Given the concentrated exposure, the deterioration in performance of one or two of the large borrowers could impact IFCI’s asset quality and capital profile significantly.
Analytical approach: For arriving at the ratings, apart from assessing IFCI’s standalone credit profile as per the rating methodology indicated below, ICRA has taken into account its sovereign ownership.