Moody's Ratings has affirmed the Ba1 long-term corporate family rating of Shriram Finance Limited while revising its outlook to positive from stable. The rating action follows the company's announcement of a planned strategic investment by MUFG Bank, which is expected to significantly strengthen the non-banking financial company's business and financial profile over the coming quarters.

Strategic Investment Details

MUFG Bank plans to acquire a 20% stake in Shriram Finance through a preferential allotment of shares worth ₹396.00 billion (approximately $4.40 billion). The transaction remains subject to regulatory approvals and is expected to close in 2026. According to Moody's, this investment will provide multiple strategic benefits to the company.

Capital Position Enhancement

The capital infusion is projected to materially improve Shriram Finance's capitalisation metrics. On a pro forma basis, the investment will increase the company's tangible common equity to tangible managed assets (TCE/TMA) ratio to over 29.00%, compared to 19.00% as of March 2025. This improvement would position the company among the highest capitalised non-bank finance companies in India.

Moody's expects the company to maintain a TCE/TMA ratio above 20.00% over the next four to five years, taking into account its projected credit growth.

Profitability and Funding Improvements

The rating agency anticipates strengthened profitability over the next 12 to 18 months, supported by lower funding costs and improved liquidity access. Moody's projects a reduction of approximately 100 basis points in the company's cost of funds over the next two years. The strategic partnership is expected to provide enhanced access to global funding channels and improved risk management practices.

The company's 12-month debt maturity coverage ratio is anticipated to rise to over 90.00%, up from 31.00% in March 2025, attributed to the large capital injection.

Rating Considerations and Outlook

Moody's clarified that affiliate support from MUFG Bank is not incorporated into the current rating, as the willingness to provide support during stress periods is expected to remain limited despite the 20.00% stake and board representation. The agency indicated it would re-evaluate affiliate support considerations if stronger financial linkages or documented support mechanisms are established.

Potential Rating Upgrade Triggers:

• Sustained net income to average managed assets ratio of around 3.50%
• TCE/TMA ratio maintained above 21.00%
• Stable asset quality preservation
• Reassessment of MUFG Bank's affiliate support

Potential Downgrade Triggers:

• Net charge-offs rising above 2.50% of average gross loans
• Problem loans to gross loans ratio increasing above 7.00%
• TCE/TMA ratio falling below 17.00%
• Significant regulatory changes affecting franchise strength

Moody's expects the company's asset quality to remain stable over the next 12 to 18 months, citing robust lending and collection practices, a stable macroeconomic backdrop, and a high share of collateralised loans.

Moody's Ratings has revised Shriram Finance Limited's outlook from stable to positive while affirming its long-term corporate family rating at Ba1. The rating action follows the company's announcement of MUFG Bank's planned acquisition of a 20% stake through preferential allotment of shares.

Strategic Investment Details

The transaction involves MUFG Bank acquiring shares worth ₹4.4 billion (approximately $296 million) and is subject to regulatory approvals with an expected closure in 2026. Moody's highlighted that this investment will provide multiple strategic benefits to Shriram Finance.

Expected Financial Improvements

Moody's expects the strategic partnership to materially strengthen Shriram Finance's business and financial profile. The rating agency projects significant improvements across multiple financial metrics following the capital infusion.

Strategic Benefits and Outlook

The positive outlook reflects Moody's expectations of strengthened business fundamentals supported by the strategic shareholder and significant capital increase. The investment is expected to provide access to global funding channels, improve funding diversity, and enhance risk management practices.

Key anticipated benefits include:

• Stronger capital base and improved capitalisation
• Enhanced access to onshore and offshore funding
• Gradual rise in profitability as cost of funds declines
• Reduced reliance on short-term debt
• Utilisation of new funds for loan origination

Performance Projections

Moody's forecasts that Shriram Finance's profitability will strengthen over the next 12-18 months, driven by lower funding costs and gradual transmission of central bank rate cuts. The company's operating leverage and improved funding access are expected to support overall performance.

Asset quality is projected to remain stable over the next 12-18 months, underpinned by robust lending and collection processes, a stable macroeconomic environment, and a high proportion of collateralised loans. The rating agency noted that the capital infusion will position the company among non-bank finance companies with the highest tangible common equity to tangible managed assets ratio in India by March 2025.