Rationale

 The rating reaffirmation factors in PNB Housing Finance Limited's (PNBHFL) established track record in the mortgage finance industry, its experienced management team, and diverse funding profile. ICRA also notes that PNBHFL continues to reduce its wholesale exposure, which declined by ~34% in last two years and its proportion in its assets under management (AUM) declined to ~16% as on March 31, 2021 from ~18% as on March 31, 2020. This was supported by sell-down and accelerated prepayments of around Rs. 1,880 crore in the corporate book in FY2021. Further, ICRA expects that the company will continue to benefit from the shared brand name with its promoter, i.e. Punjab National Bank (PNB; rated [ICRA]AA (Stable)), which helps PNBHFL leverage its franchise and raise funds, thereby supporting its financial flexibility. On the other hand, the rating factors in the significant increase in PNBHFL's gross non-performing assets (GNPAs) to 4.4% as on March 31, 2021 from 2.8% as on March 31, 2020, given the Covid-19 induced disruptions. The deterioration in the asset quality was witnessed in the retail as well as the corporate book. In addition, the company restructured certain accounts (2.28% of its AUM) under the one-time Covid-19 restructuring package announced by the Reserve Bank of India (RBI). ICRA notes that PNBHFL did manage to see some recoveries without any losses in its corporate book in FY2021. ICRA also notes that the company was not able to initiate legal proceedings due to asset classification standstill as per the honourable Supreme Court's order, which also caused low recoveries. With the lifting of the asset classification standstill, PNBHFL has started such proceedings and expects to witness an increase in recoveries. Nevertheless, the impact of the recent surge in Covid-19 infections and the resultant regional lockdowns/restrictions on operations and borrowers' cash flows remains to be seen. The risks are partly mitigated by the good collateral cover maintained by the company for such exposures and the healthy increase in its provision coverage ratio (PCR) in FY2021. Its overall provision to total assets increased to 4.1% as on March 31, 2021 from 2.6% as on March 31, 2020. Though this provides comfort and the cushion to absorb further losses, it has adversely impacted the profitability, which remains moderate despite improving from FY2020. ICRA notes that with the decline in its scale of operations, PNBHFL's gearing declined to 6.7 times as on March 31, 2021 from 8.6 times as on March 31, 2020 (9.8 times as on March 31, 20191 ), though it remains moderate. PNBHFL had been in the process of raising equity to reduce its leverage, however, there has been a significant delay in the same, given the challenging environment. In February 2021, PNBHFL stated that PNB would not be participating in the equity raise round. Nevertheless, PNBHFL is committed to raise further equity and expects the process to get completed in FY2022, which would further reduce its leverage and support its growth plans. The operating environment for non-banking financial companies (NBFCs) and housing finance companies (HFCs) with sizeable real estate exposure and self-employed borrowers in the housing loans (HL) and loan against property (LAP) segments continues to be challenging.