Investing.com -- On Tuesday, Fitch Ratings upgraded the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of India-based Shriram Finance Limited (SFL) to ’BB+’, up from ’BB’. The outlook for the company remains stable.
The upgrade is attributed to a sustained improvement in SFL’s standalone profile in recent years, especially in terms of funding diversity, risk management, portfolio quality, and profitability. Since merging with Shriram City Union Finance Limited (SCUF) in 2022, SFL has shown steady performance. The ratings also acknowledge SFL’s established franchise in used commercial-vehicle financing, its experienced management team, risk controls, and adequate balance-sheet buffers.
India’s robust medium-term growth potential and large, diversified economy are expected to continue supporting the business prospects and profitability of non-bank financial institutions (NBFIs) in the medium term. The country’s NBFIs are primarily domestically focused.
Vehicle lending is projected to remain the majority of SFL’s loan portfolio (74% at the end of FY25) in the medium term. However, the merger with SCUF has introduced additional loan products, such as small business, two-wheeler, personal, and gold loans, adding diversity to SFL’s portfolio.
Fitch noted that SFL’s risk controls and loan management practices have tightened over the years, improving the company’s ability to maintain asset quality and navigate macroeconomic shocks. Enhanced risk management and recovery practices have resulted in reduced delinquency rates and are expected to continue containing credit losses.
Fitch expects the asset quality to remain broadly steady in the medium term, supported by a generally resilient economy. SFL’s non-performing loan (NPL) ratio has declined steadily, reaching 4.6% by FYE25. The company’s risk practices, based on close borrower contact and careful vehicle collateral valuation, have helped contain credit losses to an average of 2.4% over FY22-FY25.
SFL’s net interest margin (NIM) improved to 8.5% over FY25, reflecting the addition of SCUF’s higher-yielding product mix and the group’s rural and semi-urban customer base. The company’s debt/tangible equity ratio was broadly stable at 4.6x at FYE25.
Over the past few years, SFL has diversified its funding channels, reducing its reliance on domestic wholesale funding and improving its flexibility to source steadier and lower-cost funds. The liquidity buffer - liquid assets/total assets - is moderate (FYE25:10.9%) but a well-matched asset-liability maturity profile underpins adequate liquidity inflows to meet short-term obligations.
The ratings on SFL’s US dollar medium-term note (MTN) programme and foreign-currency senior secured debt are at the same level as its Long-Term Foreign-Currency IDR, in line with Fitch’s rating criteria. The ratings on these are sensitive to its Long-Term Foreign-Currency IDR. Any action on the Long-Term Foreign-Currency IDR will drive similar action on the MTN programme and foreign-currency senior secured debt ratings.
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