CRISIL has revised its outlook on the long term debt instruments of Shriram City Union Finance Limited (Shriram City) to ‘Negative’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL AA’. The rating on commercial paper has been reaffirmed at ‘CRISIL A1+’.
The outlook revision reflects expected pressure on Shriram City’s asset quality due to the nation-wide lockdown and challenging economic environment. The company largely caters to borrowers with modest credit profile and relatively under-banked customers. The non-regular income pattern and lack of financial flexibility of these borrowers may lead to higher delinquencies. CRISIL believes that the company’s MSME loan segment (~57% of assets under management) is most vulnerable due to high linkage to economic activity.
The nationwide lockdown (originally till April 14, 2020) declared by the Government of India to contain the spread of the Novel Coronavirus (Covid-19) will have near-term impact on disbursements and collections of Shriram City. The lockdown is now extended till May 3, 2020 and there is high likelihood that eventual lifting of restrictions will be in a phased manner. Any delay in return to normalcy will put further pressure on collections and asset quality metrics.
Historically, the reported GNPA / Gross Stage 3 metrics for Shriram City has remained elevated at 8.5 to 9.5%; as of December 31, 2019, it stood at 8.51%. However, Shriram City has displayed ability in the past to ultimately recover from these accounts, even post loan maturity date. With the borrower segment for Shriram City comprising primarily of MSMEs, the impact of the lockdown on the core business operations for these borrowers has been high. With a significant impact on the business operations, a large proportion of the customers have opted for moratorium. As and how the lockdown is lifted and the time taken for the borrowers operations to return to normalcy is a key monitorable. Additionally, any change in the fundamental behaviour of the borrower which could result in depletion of the ability of Shriram City to recover is a key monitorable.
