Structured Finance - India Ratings Finance ... India Rating’s analysis made use of two models: ... credit appraisal processes, credit underwriting process, ...

Structured Finance

www.indiaratings.co.in 30 December 2013

Small Business Loans

Privilege Trust Series – 7 New Issue

Capital Structure

Class

Principal

Outstanding (INRm) Final Maturity Long-Term Rating CE

a

(%) Outlook Complexity

Indicatorb

Series A PTCs

1,012.7 Jan 2018 IND AAA(SO) 7.25 Stable High

Closing Update: The transaction was closed on 30 September 2013. This report includes the key characteristics of the

transaction as of the closing date.

a Credit enhancement as a percentage of future principal outstanding as of 15 September 2013

b Ind-Ra’s complexity indicators are an opinion on the relative complexity of a broad category of instruments expressed

on an ordinal scale of ‘Low Complexity’, ‘Moderate Complexity’ and ‘High Complexity’. ‘High Complexity’ refers to an instrument where the relationship between the numerous interdependent risk factors and intrinsic return characteristics is highly involved, requiring forward-looking analysis and projections

Transaction Summary

The transaction is a securitisation of a pool of loans to small businesses secured by property

mortgages and originated by Shriram City Union Finance Limited (SCUF, ‘IND AA-

’/Positive/‘IND A1+’). The transaction has a par structure. The final rating is based on the

quality of the collateral, the originating and servicing capabilities of SCUF, the financial

structure of the transaction and the available Credit Enhancement (CE).

The rating addresses the timely payment of interest and principal by the scheduled maturity, in

accordance with the transaction documentation.

Key Rating Drivers

Performance: Since September 2010, India Ratings & Research (Ind-Ra) has rated 15

transactions backed by small business loans originated by SCUF. In these transactions, the

90+ days past due (dpd) rate has been well within the agency’s initial expectations.

Base Case Default Rate: Ind-Ra has derived the base case net default rate from historical

static pools for loans originated from October 2005 to March 2012. The static pool covers

reasonable stress in the Indian economy in 2008-2009. The agency has assumed a base case

net default rate that is in the same range as the median observation of the static pool.

Asset Outlook: The pool assigned to the trust consists of micro and small enterprise loans,

which are extended for business needs and not to fund the underlying collateral. Such loans

are sensitive to economic activity, as in GDP growth and the Index of Industrial Production, as

over 65% of such enterprises are manufacturing companies. However, performance as

exhibited by the static pools of SCUF has been largely stable, though rising input costs and

slowing demand could lead to deterioration of asset quality.

Rating Sensitivity: An analysis was conducted to study the impact on the rating of changes to

the assumed base case default rate and recovery rate. If the assumptions of both these factors

were simultaneously worsened by 20%, the model-implied rating sensitivity suggests that the

rating will be downgraded by single notch.

Inside This Report

Capital Structure 1 Transaction Summary 1 Key Rating Drivers 1 Key Information 2 Transaction and Legal Structure 2 Asset Analysis 4 Liability Analysis 8 Rating Sensitivity Analysis 9 Counterparty Risk 9 Performance Analytics 10 Appendix A: Origination and Servicing 11 Appendix B: Pool Characteristics 13 Appendix C 15

Related Research

2013 Outlook: Indian Structured Finance-Ratings Stable, Asset Quality Concerns Remain (January 2013)

Ind-Ra Revises Outlook on Shriram City Union Finance to Positive (March 2013)

Analysts

Amit More

+91 22 4000 1703

[email protected]

Saurabh Singh

Structured Finance

Privilege Trust Series – 7

December 2013 2

Data Adequacy, Criteria Application and Model

SCUF has provided Ind-Ra with a set of data, which includes all key data fields used in the

agency’s analysis of small business loan pools. This includes:

1. monthly static pool information for over six years between 2005 to 2012, updated till June 2012

2. the performance of 15 previous Ind-Ra-rated SCUF

3. dynamic pool data segmented by parameters such as geography, tenor, as of June 2012

The methodology used to rate the transaction is based on Ind-Ra’s India ABS criteria report,

Rating Criteria for Indian Asset-Backed Securitisations and Structured Finance Rating Criteria,

both published 12 September 2012.

India Rating’s analysis made use of two models: the simulation model - to estimate gross

default rates from net default rates - and the cash flow model. The latter was used to test

whether the stressed asset cash flows as well as the CE provided in the transaction were able

to cover timely interest and principal payments for Series A PTCs.

Transaction and Legal Structure

The transaction has a par structure where a pool of loans is assigned for a purchase

consideration equal to the pool’s principal balance. The underlying loan receivables, including

security interest in any underlying assets, are assigned to the trust for the benefit of the PTC

investor. Through such an assignment, the trust has become the absolute legal and beneficial

owner of the respective loan receivables.

Figure1

Payment Structure

Expected future payouts from the pool will be collected for each month by the servicer and

deposited in the collection and payout account (CPA) maintained with the approved bank, not

later than one business day before the scheduled payout dates. PTC payouts, consisting of the

collections from the amounts due, amounts overdue and prepayments in the month, are

payable one month after. This exposes the transaction to commingling risk. This risk is

mitigated by the Short-Term Issuer Default Rating of the servicer and certain structural

mitigating factors mentioned in the transaction documents (please refer to the Counterparty

Risk section).

Structure Diagram

Note: This diagram represents Ind-Ra's interpretation of the transaction structure as represented in the

transaction documents

Source: Transaction documents

PTC Investors

Underlying Borrowers

Originator/Servicer

TrustCredit Enhancement Provider

PTC PayoutsPTC Issuance

ProceedsPTC Issuance

Periodic

Collections

Purchase

Consideration

Assignment of

Loans

Loan

RepaymentLoan

Key Information Pool Assets: Small business loans

Originator: SCUF

Servicer: SCUF

Account Bank: Andhra Bank Ltd

Credit Facility provider: SCUF

Trustee: IDBI Trusteeship Services Ltd (ITSL)

Transaction Structure: Par

Pool Cut-Off Date: 15 September 2013

Opening Principal Outstanding: INR1,012.7m (15 September 2013)

Series A PTCs Outstanding: INR1,012.7m

Scheduled Pool Maturity: December 2017

Scheduled Maturity for the PTCs: January 2018

Structured Finance

Privilege Trust Series – 7

December 2013 3

If the collections are less than the amount due to the investor, the trustee will use the monies

collected from overdues and excess interest spread. If there is a shortfall, it will be met by using

cash collateral.

Priority of Payments

On the payout date, payments will be made from the available distribution amount in the

following order of priority.

Figure 2 Summary of Payments Waterfall

1 Statutory or regulatory dues 2 Fees and expenses (if any) 3 Overdue interest and principal payouts to Series A PTC investor 4 Schedule interest and principal payouts to Series A PTC investor 5 Replenishment of CE facility to the extent of utilisation 6 Residual cash flow back to the issuer

Source: Transaction documents

Credit Enhancement

The transaction benefits from both internal and external CEs.

The internal CE is in the form of an excess interest spread (EIS), which according to the

schedule is 14.3% of principal outstanding (POS) at the closing of the transaction. The excess

spread would be used to provide for any shortfalls for payouts in the next payout month on a

use-it-or-lose-it basis, and any unused EIS would flow back to the originator.

The external CE of 7.25% of POS is made available to cover shortfalls in PTC payouts on

account of defaults, delinquencies and pool prepayments. The CE is provided in the form of

fixed deposits held in trust with Andhra Bank Ltd and lien marked in favour of trustee.

Clean-Up Call Option

The originator/seller has a clean-up call option to repurchase fully performing residual loan

assets at a purchase consideration equal to the outstanding amount, if, in aggregate, they form

less than 10% of the original pool balance. This option will be applicable only to the performing

assets at the sole discretion of the seller.

Legal Analysis

Ind-Ra reviewed the final transaction documentation to understand whether the terms and

structure of the transaction conformed to information previously received.

The key documents relating to the transaction include:

the trust deed

the deed of assignment

first loss credit facility agreement

security trustee agreement

collection and processing agent’s agreement

power or attorney

The legal opinion provided by the transaction counsel covers the following key issues:

Enforceability of documents: The transaction documents have been duly authorised, executed and delivered and constitute legal, valid and binding obligations of the parties thereto and are enforceable against each of them in accordance with their terms.

Adherence to the Reserve Bank of India (RBI) guidelines and true sale: The transaction complies with the RBI Guidelines on Securitisation of Standard Assets dated 1 February 2006, 7 May 2012 and 21 August 2012. The assignment of the assets by the seller to the trustee by way of the deed of assignment satisfies the test of a true sale as set out under the securitisation guidelines.

Structured Finance

Privilege Trust Series – 7

December 2013 4

Bankruptcy remoteness of assets: The assets purchased by the trustee are held by it in trust for the benefit of the PTC holders and therefore would not form a part of the originator’s assets in the event of liquidation or winding up of the originator.

Bankruptcy remoteness of CE (FD) from the seller: The CE will be provided as fixed deposits in a bank, rated at least ‘IND A’/Stable by Ind-Ra, in the name of the originator, to be held in trust for the benefit of trustee with a lien marked in favour of trustee. The CE to be thus provided is bankruptcy remote from the originator. (see Counterparty Risks section).

Valid constitution of the trust: The trust is validly constituted under the trust deed and will be recognised as a duly constituted trust over the assets against any liquidator, receiver, administrator or other insolvency official of the trustee following insolvency of the trustee.

Adherence to minimum retention requirement (MRR): The transaction adheres with the MRR requirement as per the RBI’s Securitisation Guidelines of 2012.

Disclaimer

For the avoidance of doubt, India Ratings relies, in its credit analysis, on legal and/or tax

opinions provided by transaction counsel. As the agency has always made clear, India Ratings

does not provide legal and/or tax advice or confirm that the legal and/or tax opinions or any

other transaction documents or any transaction structures are sufficient for any purpose. The

agency draws your attention to the disclaimer at the foot of this report, which makes it clear that

this report does not constitute legal, tax and/or structuring advice from India Ratings, and

should not be used or interpreted as legal, tax and/or structuring advice from India Ratings.

Should readers of this report need legal, tax and/or structuring advice, they are urged to

contact relevant advisers in the relevant jurisdictions.

Asset Analysis

Ind-Ra’s asset analysis of the pool is based on a four-step process.

Step 1. Originator and servicer review

Step 2. Analysis of asset characteristics of the pool

Step 3. Base case assumptions, derived for three key performance variables: defaults, recoveries and prepayments (based on historical data and the economic environment and asset class outlook).

Step 4. Stressed scenarios for the rating level

Originator/Servicer

Ind-Ra conducted a complete review of the originator/servicer of this transaction and will

continue to do so at regular intervals. The review included an assessment of the origination and

credit appraisal processes, credit underwriting process, collection and recovery processes,

operational and financial stability, and the soundness of its internal control procedures.

SCUF’s origination and servicing capabilities are of an acceptable standard. For the detailed

originator and servicer review, please refer to Appendix A.

The strengths and weaknesses of SCUF’s servicing and origination functions are as follows.

Strengths SCUF extends business loans to customers who have had a clean credit track record with

the Shriram group. Also, it only lends to borrowers who have been in business for at least three years.

SCUF has conservative underwriting practices and all loans above INR2.5m are approved by senior and experienced personnel in the head office.

The branch that disburses a particular loan is responsible for its collections and this means that the branch develops a better understanding of the customer, which helps it to service the loan better.

Weaknesses and Mitigating Factors Micro and small businesses tend to lack detailed financial information given their size and

therefore present difficulties in loan origination. This risk is mitigated by SCUF maintaining close contact with the borrowers to gain knowledge of their businesses.

Structured Finance

Privilege Trust Series – 7

December 2013 5

Asset Characteristics

All the loans in the pool are current as of cut-off date. This is a significant strength of the pool.

Figure 3 Pool Characteristics Characteristic

Number of loans 644 Total principal outstanding (INRm) 1,012.7 Average loan balance (INR 000) 1,572.6 Average original loan (INR 000) 1,955.8 WA seasoning (months) 8.1 WA IRR (%) 17.3 WA original maturity (months) 43.4 WA balance tenor (months) 35.3 WA pool amortisation (%) 18.4

Source: SCUF, Ind-Ra’s analysis

Collateral Security

Unlike auto and home loans, these loans are not used to finance the underlying collateral. They

are backed by non-depreciating collaterals, such as property mortgages.

Figure 4 Collateral Security Type Pool (%)

Property security 100.0 Chit security 0.0 Others 0.0 Total 100.0

Source: SCUF, Ind-Ra

Loan-to-Value Ratio (LTV)

The LTV at the time of origination of the pool are provided below.

Figure 5 LTV Distribution

(%) Pool (%)

0 to <=50 94.6 50.01 to <=60 5.0 60.01 to <=70 0.1 70.01 to <=80 0.2 80.01 to <=100 0.0 100.01 and above 0.0

Source: SCUF, Ind-Ra

Delinquency rates are likely to be higher for the higher LTV loans and vice versa. Ind-Ra has

adjusted the borrower-specific default rate on a pool level basis using the LTV and also

reduced recovery assumptions by capping the maximum recovery to the collateral value.

Loan Size

As the loan size increases, its impact on transaction performance also increases. All loans

above INR2.5m require approval from the originator’s head office. The figure below shows the

distribution of the pool by principal balance on the pool cut-off date.

Figure 6 Distribution of Loans by Principal Balance (Current Loan Amount) (INRm) Pool (%)

Less than 0.5 0.0 0.5 to 1.0 13.1 1.0 to 2.0 42.0 >2.0 44.9

Source: SCUF, Ind-Ra

Structured Finance

Privilege Trust Series – 7

December 2013 6

Seasoning and Amortisation

The pool is seasoned by 8.1 months on an average. The higher the loan seasoning and the

greater the amortisation the lower is the probability of default.

Figure 7 Seasoning

Months Pool (%)

0 to 3 0.0 3 to 6 25.5 6 to 9 45.6 9 to 12 28.9 >12 0.0

Source: SCUF, Ind-Ra

Geographical Distribution of Assets

There is a significant degree of geographic concentration with 89.0% of the pool originating

from Andhra Pradesh. However, the concentration risk is significantly reduced by the fact that

the pool has been originated from many branches.

Figure 8 Geographical Distribution State Pool (%)

Andhra Pradesh 89.0 Gujarat 4.3 Maharashtra 4.3 Madhya Pradesh 1.1 Chattishgarh 0.6 Rajasthan 0.4 New Delhi 0.3 Karnataka 0.1

Source: SCUF, Ind-Ra

Base Case Assumptions

Ind-Ra’s credit analysis has focussed on stressing the key performance parameters to ‘IND

AAA(SO)’ stress level.

Having analysed pool characteristics, Ind-Ra established its base-case assumptions via

following three key performance variables, which collectively affect the credit risk in a

transaction:

default rate

recovery rate

prepayment rate

Default Rate

To estimate the portfolio base-case default rate, Ind-Ra analysed over six years of static pools

for monthly originations from January 2006 to March 2012 updated till June 2012.

Structured Finance

Privilege Trust Series – 7

December 2013 7

Figure 9

The weighted-average 90+dpd loans of monthly static pools for each of the six years are

shown above. The weighted average (WA) peak net default rate observed was 3.7% for loans

originated in 2010. The agency has considered the long-term historic performance trends in its

analysis while estimating its base case assumptions.

In this pool, since no loans are delinquent after 8.1 months of average seasoning, the

corresponding default rate is likely to be lower than seen historically.

The 90+ dpd chart for static pools is net of recoveries. The base case net default rate is

adjusted for recovery to reach a portfolio gross base case default rate.

Pool-Specific Adjustments

Ind-Ra has assumed higher base-case defaults for those segments of the pool that are riskier

than the portfolio average: loans with higher LTVs, lower seasoning, longer tenors and higher

interest rates (IRR). Following these adjustments, the agency assumed a base-case gross

default rate in the range of 3.5% to 4.5%.

Recovery Rate

Ind-Ra has based the recovery rate on the value and type of collateral securing the loans.

Considering a stressed market value decline of the property mortgage as collateral and

associated costs of recovery, the stressed recovery for the pool is in the range of 55% to 65%.

Prepayment Rate

The loans to small businesses originated by SCUF have shown high prepayments as and when

there are large cash inflows into the businesses. Ind-Ra has analysed historical prepayments

from the static pools. The average cumulative prepayment rate is around 7.0% in 24 months.

The agency has assumed a base case prepayment rate in the same range as that observed in

the static pools.

Yield Compression

The agency reviewed the yield distribution of the assets in the pool and assumed that 40% of

borrowers (depending on the rating level) with the highest interest rate loans will either prepay

or default. The percentage reduction in the pool yield was then deducted from the month-on-

month WA pool yield and applied to the interest collections in Ind-Ra’s cash flow model.

Liquidity Risk

Ind-Ra observed the peak 1–90 dpd delinquencies for all the static pools to determine the

liquidity shortfall the originator may face in case of a temporary delinquency, i.e., less than 90

dpd. The probable shortfall on account of these loans is then arrived at to determine whether

the liquidity facility component of the CE is sufficient to cover 1–90 dpd delinquencies.

0

1

2

3

4

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59

W-2006 W-2007 W-2008 W-2009 W-2010(%)

90+dpd Rates

Source: India Ratings Ananlysis, SCUF

Structured Finance

Privilege Trust Series – 7

December 2013 8

Obligor Concentration Risk

There are only 644 borrowers in the pool leading to some amount of borrower concentration

risk. Ind-Ra have checked for top 20 borrower concentration risk and tested whether the

expected loss from these borrowers is covered by the available CE.

Stress Scenarios

After developing base case assumptions for gross defaults, recoveries and prepayment rates,

Ind-Ra stressed these variables for the rating level.

Gross Default Rate Stresses

A stress multiple in the range of 4.0x to 5.5x is applied to the base case default rate in this

transaction. This range of stress multiple is commensurate with the ‘IND AAA(SO)’ stress level

for Indian ABS ratings. The stress multiples have been benchmarked against historical peak

default data of Indian structured finance transactions.

Default Timing Stress

The timing of defaults has a significant impact on the performance of a transaction. Ind-Ra

formulates its default curves using historical performance data to observe trends exhibited by

static pools and fully seasoned securitisation transactions. The agency employs various default

timing scenarios depending on assets tenure to assess the ability of the structure to withstand

various clusters of defaults at three different points in the transaction lifecycle: front, middle and

back, as shown in the table below.

Figure 10 Default Timelines Months Front (%) Middle (%) Back (%)

M1–M6 35 25 15 M7–M12 35 25 15 M13–M18 15 25 35 M19–M24 15 25 35

Source: Ind-Ra analysis

Recovery Rate Stresses

Ind-Ra’s recovery rate stresses recognise the pro-cyclical nature of defaults and recoveries,

with lower recoveries occurring during periods of higher defaults. In ABS transactions backed

by secured loans, Ind-Ra assumes that the asset recovery rate is inversely related to the rating

level. For the ‘IND AAA(SO)’ stress level, as in this case, the recovery rate stress assumed is

60% of the base case recovery rate.

Liability Analysis

Ind-Ra uses its cash flow model to test whether the stressed asset cash flows, as well as the

CE and excess interest spread provided in the transaction, are able to cover for the timely

interest and timely principal payments on the rated PTC.

Cash Flow Modelling

Ind-Ra’s cash flow model considers two sides of the transaction: assets and liabilities. Key

assumptions for the asset side of the cash flow model are base case defaults, timing of

defaults, recoveries, pool yield and prepayments. These assumptions are subject to rating-

specific stresses within the cash flow model.

Stressed asset cash flows are then applied to the liability side of the cash flow model, based on

the priority of payments/waterfall set out in the transaction documentation.

In summary, stressed asset cash flows are applied to specified liability waterfall. The shortfall in

each period is calculated to determine whether the CE provided in the transaction exceeds Ind-

Ra’s breakeven CE and liquidity facility amount.

The section on rating sensitivities is designed to provide information about the sensitivity of the rating to model assumptions. It should not be used as an indicator of possible future performance.

Structured Finance

Privilege Trust Series – 7

December 2013 9

Rating Sensitivity Analysis

This section provides an insight into the model-implied sensitivities of the transaction when

base case assumptions with respect to one or more variables are changed, while holding

others equal. The results below should only be considered as one of the many potential

outcomes, given that the transaction is dynamically exposed to multiple risk factors.

Rating Sensitivity to Defaults

The rating migration that will occur if the base case default rate of each loan is increased or

decreased by a relative amount is demonstrated in the Rating Sensitivity to Default Rate table.

For example, if the actual base case default rate increases (i.e. worsens) by 20%, it will result

in a rating affirmation of the transaction.

Figure 11 Rating Sensitivity to Default Rate Rating

Original rating IND AAA(SO) Base case increase by 10% IND AAA(SO) Base case increase by 20% IND AAA(SO)

Source: Ind-Ra

Rating Sensitivity to Recovery Rates

The rating migration that will occur if the base case recovery rate of each loan is increased or

decreased by a relative amount is demonstrated in the Rating Sensitivity to Recovery table. For

example, if base case recovery rate decreases (i.e. worsens) by 20%, it will result in a rating

affirmation of the transaction.

Figure 12 Rating Sensitivity to Recovery Rates Rating

Original rating IND AAA(SO) Base case decrease by 10% IND AAA(SO) Base case decrease by 20% IND AAA (SO)

Source: Ind-Ra

Rating Sensitivity to Shifts in Multiple Factors

The table below summarises rating sensitivities attributed to stressing default rate and recovery

rate assumptions simultaneously.

Figure 13 Rating Sensitivity to Multiple Factors (Default Rate and Recovery Rate) Default rate

Recovery rate Base case Base case + 10% Base case + 20%

Base case IND AAA(SO) IND AAA(SO) IND AAA(SO) Base case – 10% IND AAA(SO) IND AAA(SO) IND AA+(SO) Base case – 20% IND AAA(SO) IND AAA(SO) IND AA+(SO)

Source: Ind-Ra

Counterparty Risk

Credit Enhancement Provider

The CE is maintained as fixed deposits in the account bank in the name of the CE provider

(SCUF) and with lien marked to the trustee. The counterparty risk is mitigated by a rating

trigger incorporated in the transaction documents. If the rating of the CE provider falls below

‘IND A’ or ‘IND A1’, by any credit rating agency accredited by SEBI, the fixed deposit accounts

will be transferred in the name of the trustee within 30 calendar days.

Structured Finance

Privilege Trust Series – 7

December 2013 10

Servicer

The agency recognises the importance of the servicing counterparty role being fulfilled by

SCUF (‘IND AA-’/‘IND A1+’) in the performance of the underlying loan portfolio.

The transaction documents contain a servicer replacement event, where if the servicer’s rating

falls below ‘IND A1’ or ‘IND A’, the trustee will have an option to replace the existing servicer

with a new servicer within 30 calendar days.

Since the collections from the borrowers remain with the servicer for one month, the transaction

is exposed to commingling risk, which is mitigated by the current rating of the originator. Also,

the rating trigger in the transaction document specifies that if the servicer’s rating falls below

‘IND A’/‘IND A1’, investors will have an option to either direct all underlying obligors to pay their

EMIs directly into the collection and payout account with the approved bank or ask the

originator to cover the one month commingling exposure, if required by an additional cash

reserve.

Account Bank

The CE is provided in the form of fixed deposits with the account bank (Andhra Bank Ltd) in the

name of the originator, with lien marked to the trustee. If the designated bank is downgraded

below ‘IND AA’ publicly or privately by Ind-Ra, the seller will ensure that the CE is placed with

another bank whose rating is equivalent to or higher ‘IND AA’ within 30 calendar days.

Performance Analytics

Ind-Ra initiates surveillance only once final ratings have been assigned to the transaction. The

agency has a dedicated team of analysts which monitors and reviews Ind-Ra-rated Indian ABS

transactions. Clear and timely reporting is essential in assessing performance of a transaction

and forming an accurate credit view.

The report from the servicer is likely to provide the following information with respect to

collections from the pool contracts during the previous month:

billed amount to the borrowers

actual collections from borrowers towards this billed amount during the month

the amount and number of contracts of prepayments/advance payments from the borrowers

ageing analysis of overdues

actual payments made to the Series A1 and Series A2 PTCs

any prepayments from borrowers or foreclosures (number of contracts and amounts obtained thereto)

revised cash flow schedule

contract details

Structured Finance

Privilege Trust Series – 7

December 2013 11

Appendix A: Origination and Servicing

Originator Profile

SCUF was established in 1986 and is part of the 30-year-old Chennai-based Shriram Group.

As a deposit-taking non-banking financial company (NBFC), it is one of India's larger financial

services companies, specialising in retail finance.

SCUF offers a comprehensive range of products to finance two-wheeler, three-wheeler and

four-wheeler vehicles (both new and pre-owned, domestic and commercial), personal loans,

small business loans and gold loans. This has made SCUF a dominant entity in retail finance

and the only NBFC to offer such a wide product range.

Origination

SCUF originates and manages its loans through its branches and through Shriram Chits, an

associate company.

It offers:

enterprise loans (working capital for small traders)

consumer durable loans

personal loans

gold loans

three wheelers and cars

loans for two-wheelers and light commercial vehicles (LCV) that are more than 10 years old

Shriram Chits has 1.5 million customers across four Indian states. SCUF’s origination

capabilities are built around in-depth local market and customer knowledge.

SCUF’s sales force operates through 650 branches, of which 420 belong to Shriram Chits.

Preliminary checks on the creditworthiness of customers are made using a standardised

template. If a customer passes the first check, his/her documents are sent to the branch office

for a thorough credit appraisal and field Investigation/ background check.

Business or enterprise loans are generally cross-sold to existing Shriram Chit customers that

have at least a three-year track record with the company. These loans are given to individuals

to support their businesses rather than for start-ups.

Credit Appraisal

SCUF has an internal unit for credit appraisals, which are done in three steps.

First, at the branch level, the company’s sales person does an initial check using a standard

credit template. The customer is required to provide details such as their residential address,

profession and bank account. The information must be backed by valid documents, which are

also checked at the branch level.

Secondly, also at the branch level, on receipt of the application and other documents, a phone

check is made of the customer’s residential address. A field investigation team then visits the

residence and does a thorough background check of the customer. In addition, an internal

Shriram Chits customer database is used to identify customers with doubtful credit histories.

Existing customers with satisfactory payment histories are given preference for loan

disbursements.

Thereafter, a credit memorandum is used to check on various parameters such as maximum

tenor, maximum net LTV, maximum loan amount, age, permanent phone connection, minimum

income and equated monthly instalment / net salary to gauge the customer’s creditworthiness.

Once the loan is sanctioned, a cheque is disbursed by the branch manager at the branch level,

Structured Finance

Privilege Trust Series – 7

December 2013 12

if the branch is a chit office. If it is not a chit office, a commercial officer takes the place of the

branch manager. The documents along with the field investigation report are sent to the state

head office, where a credit appraisal is performed and the cheque is sanctioned. The entire

credit appraisal process takes about a day.

Thirdly, for all loans above INR2.5m, credit approval is provided at by head office.

Once the loan is disbursed, all documents are sent to Chennai, where they are maintained in a

central server, which can be accessed by any of the branches at any time. Credit policy is

reviewed every quarter by head office, while minimum requirements for specific products are

reviewed every month at a regional level.

SCUF’s credit appraisal mechanism is fairly robust with exceptions or waivers being granted

only by regional head offices and product heads.

Collections and Recoveries

Only about 15% of SCUF’s total loan book relies on cash-based collections. The rest is

collected through post-dated cheques. The branch that disburses a particular loan is

responsible for its collections. SCUF has regional tie-ups with various banks for the collections

by cheques to be deposited. Collections are entered in the central server in Chennai and this is

used extensively by SCUF’s branches to follow up on disbursed loans and to act accordingly

on overdue amounts. The dealer/branch office through which the loan is disbursed is also

responsible if customer defaults. In some cases, the dealer has to provide for losses if the

customer is unable to pay.

If the customer misses a scheduled payment, the branch manager and the field investigation

team work together to resume collections. The branch manager calls the customer to remind

them of the missed payment and, if necessary, visits the customer’s residence along with the

field investigation team. These missed payments are generally collected in cash. If three or

more payments are missed, a legal notice is also sent to the customer along with continuing

branch manager and field investigation efforts. If more than six payments are missed and the

need arises, the collateral is enforced. However, most recoveries are achieved through

persuasion and this is the preferred option for customers to pay back overdue amounts.

Structured Finance

Privilege Trust Series – 7

December 2013 13

Appendix B: Pool Characteristics

Figure 14 Original LTV Distribution (%) Pool distribution (%)

<=50.0 94.6 50.1 to 60.0 5.0 60.1 to 70.0 0.1 70.1 to 80.0 0.2 80.1 to 100.0 0.0 100.1 and above 0.0

Source: SCUF, Ind-Ra’s analysis

Figure 15 Current LTV Distribution (%) Pool distribution (%)

<=50.0 100.0 50.1 to 60.0 0.0 60.1 to 70.0 0.0 70.1 to 80.0 0.0 80.1 to 100.0 0.0 100.1 and above 0.0

Source: SCUF, Ind-Ra’s analysis

Figure 16 Geographical Distribution State Pool (%)

Andhra Pradesh 89.0 Gujarat 4.3 Maharashtra 4.3 Madhya Pradesh 1.1 Chattishgarh 0.6 Rajasthan 0.4 New Delhi 0.3 Karnataka 0.1

Source: SCUF, Ind-Ra’s analysis

Figure 17 Distribution by Original Loan Amount Amount (INRm) Pool (%)

Less than 0.5 0.0 0.5 to 1.0 0.0 1.0 to 2.0 44.4 >2.0 55.6

Source: SCUF, Ind-Ra’s analysis

Figure 18 Distribution by Original Tenor Tenor Pool (%)

<=24 months 19.1 24-36 months 20.9 36-48 months 13.1 48-60 months 46.9 60-72 months 0.0 72-84 months 0.0 >84 months 0.0

Source: SCUF, Ind-Ra’s analysis

Structured Finance

Privilege Trust Series – 7

December 2013 14

Figure 19

Distribution by IRR IRR Pool (%)

<10.0 0.2 10.1 to 15.0 2.5 15.1 to 17.5 97.3

Source: SCUF, Ind-Ra’s analysis

Structured Finance

Privilege Trust Series – 7

December 2013 15

Appendix C

Figure 20 Deal Comparison

Transaction name

Privilege

Trust Series I

SCUF EF Trust Dec 12

Series - I

Small Business

Trust 2013 Privilege Trust

Series 4 Privilege Trust

Series 7

Collateral type (%) Prop Mort: 30.1

Chit: 54.9

Prop Mort: 99.96

Chit: 0.04

Prop Mort: 30.4

Chit: 67.3

Prop Mort: 100.0

Prop Mort: 100.0

Pool above 80% original LTV (%)

89.7 1.1 75.4 22.1 Nil

WA original tenor (months)

28.6 46.7 28.8 67.5 43.4

WA seasoning (months)

9.5 8.8 8.3 11.3 8.1

Pool amortised (%) 30.7 17.7 32.3 10.4 18.4 WA IRR (%) 16.9 17.2 17.4 16.7 17.3 Geographical concentration (%)

AP: 31.3 TN: 60.4

AP: 82.1 TN: 11.4

AP: 63.5 TN: 28.0

AP: 53.2 GJ: 24.7 MH: 16.9

AP: 89.0 GJ: 4.3 MH: 4.3

1 month loans delinquent (%)

Nil Nil Nil Nil Nil

Transaction structure Par Par Par Par Par CE (% of POS) 10.10 8.25 11.70 10.90 7.25

Source: Ind-Ra

Structured Finance

Privilege Trust Series – 7

December 2013 16

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://WWW.INDIARATINGS.CO.IN/UNDERSTANDINGCREDITRATINGS.JSP IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

Copyright © 2013 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004.Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings, India Ratings & Research (India Ratings) relies on factual information it receives from issuers and underwriters and from other sources India Ratings believes to be credible. India Ratings conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of India Ratings factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of India Ratings ’ ratings should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information India Ratings relies on in connection with a rating will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to India Ratings and to the market in offering documents and other reports. In issuing its ratings India Ratings must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind. A rating provided by India Ratings is an opinion as to the creditworthiness of a security. This opinion is based on established criteria and methodologies that India Ratings is continuously evaluating and updating. Therefore, ratings are the collective work product of India Ratings and no individual, or group of individuals, is solely responsible for a rating. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. India Ratings is not engaged in the offer or sale of any security. All India Ratings reports have shared authorship. Individuals identified in a India ratings report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a rating by India Ratings is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of India Ratings. India Ratings does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. India Ratings receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. The assignment, publication, or dissemination of a rating by India Ratings shall not constitute a consent by India Ratings to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction including India. Due to the relative efficiency of electronic publishing and distribution, India Ratings research may be available to electronic subscribers up to three days earlier than to print subscribers.

The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings.