Moody's downgrades Indiabulls Housing Finance's rating to Ba2 from Ba1

Global rating agency Moody's on Wednesday downgraded Indiabulls Housing Finance (IBH) long- term corporate family rating to Ba2 from Ba1, while changing its outlook to negative from stable.

The company's foreign-currency senior secured rating has been downgraded to Ba2 from Ba1 and the foreign-and local- currency senior secured MTN program ratings to (P)Ba2 from (P)Ba1.

The international rating agency said the downgrade reflects renewed pressure on the cost and availability of funds for Indiabulls Housing Finance (IBH) and certain other finance companies in the country.

"The company's (IBH) incremental cost of funding increased 45 basis points quarter-on-quarter ending June 2019, while the company's balance sheet declined by 7 per cent over the same period," the agency said.

This rise in funding costs was a key driver for the 28 basis points decline in spreads in the same period, although profitability remains comparatively strong relative to its peer group.

The downgrade also factors in deterioration seen in asset quality in the quarter ended June 2019, wherein stage 3 loans went up by 57 per cent on a quarter on quarter basis, albeit from a low base, it said.

Most of the increase in stage 3 loans has come from the company's corporate loan segment.

This segment is facing significant headwinds for the overall finance company sector driven by a combination of very tight refinancing conditions and weak borrower profiles.

"This segment will continue to be a key source of asset quality risk for the company," it said.

The ratings also reflect the solid capital and profitability of the company, both of which remain relative credit strengths, the agency said.

In April 2019, IBH had announced a plan to merge with Lakshmi Vilas Bank and thus get converted into a bank. This proposal is awaiting regulatory approval from RBI.

"If approved and consummated, it would be a significant credit positive event for the company," Moody's said.

The agency said the outlook of the company has been changed to negative to reflect the possibility that the tight funding conditions may persist for some time, which could further pressure other aspects of IBH's credit profile, such as profitability and asset quality.