India Ratings and Research (Ind-Ra) has assigned Mahindra and Mahindra Financial Services' (MMFSL) additional proposed Rs 20 billion non-convertible debentures (NCDs) an 'IND AAA' rating with a stable outlook.

The ratings reflect the credit strength of MMFSL's parent - Mahindra & Mahindra (M&M; 'IND AAA'/Stable) which holds a 51.2% stake. The ratings are underpinned by Ind-Ra's expectation of strong, timely financial support to MMFSL from M&M, if required. Ind-Ra considers MMFSL to be a core subsidiary of M&M due to its high importance to M&M. Ind-Ra has factored in support from M&M to MMFSL while arriving at the rating of M&M. In FYE15, M&M’s liquid investments were sufficient to cover the debt obligations of both M&M and MMFSL payable over a quarter.

The company has high rural penetration and provides finance to customers with a weak credit profile, making it crucial for M&M's rural and semi-urban products (tractors, pick-up vans). Given limited alternative financial channels for this segment of borrowers, MMFSL is likely to remain vital for M&M.

MMFSL' delinquencies continued to rise with gross non-performing assets of 8.7% at end-June 2015 (FY15: 6.4%, FY14: 4.8%). Unseasonal rainfall in March 2015 and slow economic activity have significantly impacted the cash flow of borrowers in the agriculture sector especially in Maharashtra, Madhya Pradesh, Uttar Pradesh and Rajasthan, which contribute around one-fourths to MMFSL's portfolio.

Asset quality stress could worsen if the monsoon were to be materially deficient and uneven monsoon this year or if rural construction and infrastructure activity continues to remain subdued.