Fitch lowers outlook on Religare Finvest

Flagging concern over asset quality pressures, rating agency Fitch Ltd has revised outlook on Religare Finvest Ltd (RFL) to negative from stable.

The long-term rating has been affirmed at AA-.

The revision reflects concerns on the stability of RFL’s operating performance. The asset quality is expected to be under pressure on rapidly expanding loan portfolio. The main focus on loan expansion is on high risk small and medium enterprises.

The revision takes into account RFL’s funding and capital profiles, and capital infusions which may happen later this year. The capital infusion from its parent — Religare Enterprises Ltd — has been timely thus far. But the continued and worsening losses at REL could ultimately strain the group’s capitalisation, Fitch noted.

RFL’s asset quality may deteriorate given its rapid loan book growth (119 per cent) in financial year ended March 2011. A large part of its portfolio is unseasoned. It credit costs in the April-June quarter of 2011-12 alone exceeded the level in the whole of 2010-11. The net interest margins shrunk to 4.3 per cent in FY11 from 7.1 per cent in FY10. Also, cost-to-income ratio rose from 44.6 per cent in FY10 to 54.4 per cent for FY11.

RFL benefits from its parent’s established franchise in India, Fitch notes RFL’s funding profile has improved, and the company has been gradually increasing its reliance on long-term borrowings.