Rationale

 The ratings factor in the strong parentage of SBI Cards and Payment Services Limited (SBICPSL) with India's largest public sector bank (PSB), i.e., State Bank of India (SBI; rated [ICRA]AAA (Stable)/[ICRA]A1+), holding a majority stake in the company. As the credit card business is a key product offering to the bank's customers, SBICPSL is strategically important for SBI. This is reflected in the bank's track record of providing branding and funding support to the company. ICRA believes that SBI will continue to hold a majority stake in SBICPSL and support from the parent will continue, going forward as well. The ratings factor in SBICPSL's strong liquidity position and its track record of strong profitability with a seven-year average (FY2015 to FY2021) return on assets (RoA) and return on equity (RoE) of 4.4% and 28%, respectively. The ratings note the company's adequate capitalisation for the current scale of operations, with a capital to risk weighted assets ratio (CRAR) of 24.2% and a gearing of 2.8 times as on December 31, 2021. The asset quality pressure increased and the resultant credit cost grew significantly to 8.1% and 8.0% of the average total assets in FY2021 and 9M FY2022, respectively (compared to the sevenyear average of 4.4%), given the challenging operating environment. However, ICRA notes that SBICPSL enjoys adequate capital and profitability buffers to absorb the asset-side shocks emanating from the Covid-19 pandemic-induced disruptions. SBICPSL reported a modest improvement in its profitability in 9M FY2022 with the RoA and RoE increasing to 4.5% and 20.2%, respectively, from 3.6% and 16.9%, respectively in FY2021. The improvement in 9M FY2022 was on account of higher noninterest income driven by increasing spend. Given the pandemic-led disruptions and the resultant impact on the economy, SBICPSL's portfolio vulnerability had increased as reflected by the uptick in the percentage of gross non-performing loans to 4.99% as on March 31, 2021 from 2.01% as on March 31, 2020, despite sizeable write-offs (8.6% of gross advances in FY2021 as per the profit & loss account compared to five-year average of 5.4%). Further, the company had restructured 7.6% of the loan book (under the Reserve Bank of India's (RBI) resolution plan) as on March 31, 2021. However, the asset quality showed some improvement with the gross nonperforming advances (GNPAs) easing to 2.4% and the restructured portfolio declining to 2.0% (with restructured assets beyond 90 days overdue remaining nil) of advances as on December 31, 2021. In this regard, SBICPSL's past track record of rangebound asset quality metrics provides comfort. ICRA also notes SBICPSL's monoline nature of operations. The company's portfolio remains relatively risky, with less than 2% of the portfolio being secured in nature as on March 31, 2021