Rationale

 The ratings factor in Aavas Financiers Limited’s (Aavas) track record in the affordable housing finance space. The company’s assets under management (AUM) increased at a compound annual growth rate (CAGR) of 24% during FY2019-FY2024 and stood at Rs. 17,313 crore as on March 31, 2024. ICRA favourably notes that Aavas’ capitalisation level remains healthy along with a strong liquidity position and a diversified funding mix. Although the managed gearing1 is expected to increase from 4.2x as on March 31, 2024 with incremental business being funded by fresh borrowings, ICRA expects the company to maintain a prudent capitalisation profile over the medium term. The ratings also take into account Aavas' satisfactory profitability trajectory, supported by healthy net interest margins (NIMs) and controlled credit costs. The ratings consider the company’s portfolio vulnerability, given its target borrower profile. Aavas' operations remain focussed on low-and-middle-income self-employed borrowers (60% of the AUM as on March 31, 2024), who are relatively more vulnerable to economic cycles and have limited income buffers to absorb income shocks. Thus, delinquencies in the softer buckets could remain volatile. ICRA, however, draws comfort from Aavas’ good underwriting systems and collection infrastructure, which is reflected in the relatively low one days past due (1+ dpd) of 3.1% as on March 31, 2024. Further, losses on default are expected to be limited, considering the secured nature of the portfolio with moderate loan-to-value (LTV) ratios and the low ticket size. Moreover, the assets are largely self-occupied residential properties, thereby supporting the asset quality. The gross stage 3 assets remained stable at 0.9% as on March 31, 2024. The ratings also factor in the limited portfolio seasoning, given the high portfolio growth, and the geographical concentration of the portfolio, though the same is improving. Despite the geographical expansion, dependence on the home state of Rajasthan remains high, albeit declining. The Stable outlook on the long-term rating reflects ICRA’s expectation that the company will continue to grow its business volumes while retaining the healthy operational and financial metrics trajectory.