Tata Capital's risk adjusted capital to improve to 10% in 2 years: S&P

Company to benefit from infusions by the Tata group and planned IPO, says rating agency

Tata Capital's risk adjusted capital (RAC) ratio is expected to improve to about 10 per cent over the next two years from 8.0 per cent in March 2023, said S&P Global Ratings on Monday

Tata Capital's capitalisation will likely remain strong despite the projection of above-average loan growth, said the rating agency in a statement. The capitalisation is likely to benefit from regular infusions by the Tata group, a proposed Initial Public Offering (IPO) by 2025, and Tata Capital's investments in subsidiary and associate companies.

The Reserve Bank of India requires large finance companies to list on an Indian stock exchange by September 2025.

S&P Global assigned "BBB-" long-term and "A-3" short-term issuer credit ratings to Tata Capital. The long-term rating has a 'stable' outlook, reflecting the agency's view that the company will benefit from its promoter linkages (Tata group) and maintain a good capital position and average asset quality over the next two years.

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Being part of a conglomerate has also enabled it to grow rapidly and build its franchise over the past few years. Tata Capital lends to suppliers for Tata group companies.

Tata group linkage enhances the company's ongoing banking relationships and ability to tap capital markets. Therefore, the company has better funding access at competitive rates relative to peers. It has a high reliance on commercial paper, which accounts for about eight per cent of its total borrowing, compared with three per cent for the industry.

S&P Global said Tata Capital is among the 10 largest finance companies in India, although its market share in the overall financial sector is small at 0.6-0.7 per cent. The company has a granular and diversified loan book, with more focus on the retail asset class.

Tata Capital's asset quality is expected to remain adequate. Its gross non-performing assets, also known as stage 3 assets, stood at 1.6 per cent as of September 30, 2023, in line with the industry, said S&P.

Tata Capital operates in a high-risk and high-return segment, focusing on the retail and small and midsize enterprise (SME) segment. It aims to maintain such exposure at more than 80 per cent. Within the retail segment, besides affordable housing, its focus is on inherently risky segments such as personal loans. In addition, Tata Capital has a higher corporate exposure than some of the other retail-focused finance companies.