Rationale

The Negative outlook factors in the expected increase in challenges for Indiabulls Housing Finance Limited (IBHFL) in resource mobilisation and maintaining its asset quality. The ongoing legal proceedings (public interest litigation, PIL, filed against the company, which has been admitted in the Delhi High Court) are expected to further heighten the risk-averse sentiments of lenders/investors, thereby impacting the company's financial flexibility, notwithstanding the high liquidity cushion currently maintained by it. IBHFL maintained on-balance sheet liquidity of ~Rs. 18,000 crore (~20% of total assets) as on October 09, 2019, which covers its debt repayments for the next 12 months. The court has allowed the company's request for an early hearing of the PIL and the hearing has now been scheduled for October 24, 2019. ICRA will monitor the developments around the same. The long-term rating of IBHFL had earlier been placed under Watch with Developing Implications following the announcement of the merger proposal (the scheme) between IBHFL (along with its wholly owned subsidiary, Indiabulls Commercial Credit Limited) and The Lakshmi Vilas Bank Limited (LVB). ICRA notes that the amalgamation scheme has not been approved by the Reserve Bank of India (RBI) and consequently, the rating watch has been removed. The operating environment for non-banking finance companies (NBFCs) and housing finance companies (HFCs), especially for entities with sizeable real estate exposure, has been challenging over the past four quarters. The resulting slowdown in disbursements by NBFCs and HFCs has constrained the funding access for the real estate sector (especially residential), which has already been facing a prolonged slowdown due to subdued sales. This is expected to heighten the portfolio vulnerability and pose greater challenges in maintaining the asset quality. ICRA notes that IBHFL has hitherto maintained a healthy asset quality, despite some deterioration in Q1 FY2020 (gross non-performing assets or GNPA of 1.47% of assets under management (AUM) as of June 2019, up from 0.88% as of March 2019). Going forward, IBHFL's ability to achieve timely exits/refinancing of the real estate exposures would remain important for maintaining the asset quality. ICRA takes comfort from the healthy asset quality of IBHFL's home loan portfolio, which accounted for ~66% of AUM as on June 30, 2019