The rating downgrade is driven by the sharp deterioration in IFCI's (Q,N,C,F)* asset quality, and the continued stress on the entity's loan book with very high proportion of loan book being in the 120-150 days past due and under the stand-still clause and hence not recognised as NPAs so far.
In line with RBI's asset classification norms, the entity's NPA recognition criterion will change from March 31, 2017 to 120+ dpd from the current 150+ dpd. Given the limited resolution of NPAs and the high proportion of 120+ dpd advances currently in IFCI's loan book, ICRA expects the entity's reported asset quality and profitability to weaken further in the near term, unless there the pace of resolution is improved significantly.
While IFCI's reported capitalisation as on December 31, 2016 appears comfortable with Tier I capital at 12.17% and capital to risk weighted assets ratio (CRAR) at 17.65% (as against Tier I of 11.52% and CRAR of 16.9% as on March 31, 2016), the metrics are supported by the decline in advances and hence risk weighted assets during 9MFY2017.
ICRA also notes that the entity's minimum Tier I capital requirements will also increase to 10.0% by March 31, 2017 from the 8.25% applicable now. With reduced internal capital generation expected in FY2017 and FY2018, ICRA expects the entity's capitalisation to weaken from current levels.
IFCI may need to raise additional capital or divest some strategic investments to absorb any further asset quality related shocks. ICRA has taken note of the expected capital support to IFCI from GoI in the near term and given the stress in the loan book, the size and timing of the capital infusion would be critical determinant of IFCI's credit profile in near term.