ICRA has reaffirmed [ICRA]A+ (pronounced ICRA A plus) rating assigned to Rs.240 crore long-term bank limits programme of DHFL Vysya Housing Finance Limited (DVHousing). The rating carries a stable outlook. The rating factors in DVHousing's good parentage (94.6% owned by Dewan Housing Finance Limited – DHFL1 & promoters), centralized appraisal systems, track record in lending to a niche segment in Karnataka and Andhra Pradesh enabling it to earn stable risk adjusted returns and continued focus on small-ticket size „housing loan segment‟ (91% of portfolio as on March 31, 2011). ICRA has taken note of DVHousing‟s equity investments of Rs.30 crore in Aadhar Housing Finance Ltd. (AHFL) 2in FY2011 for a 30% stake that along with 37% growth in portfolio resulted in a decline in Tier-1 to 14.2% on March 31, 2011 from 25.3% on March 31, 2010. However, good internal capital generation and possible support from the parent – DHFL would keep the capitalisation at adequate levels in the medium term. In addition, DVHousing continues to enjoy management, systems & funding support from DHFL; which is a key driver for the ratings. ICRA has also taken note of deterioration in the company's asset quality in FY-11 and Q1‟FY-12 with Gross NPAs increasing from 0.88% on Mar-10 to 1.02% on Mar-11 and further to 1.40% on Jun-11 owing to slippages in builder loan segment. The slippages are mainly in the projects in Hyderabad and Vijawada where the real estate market got affected owing to uncertain political environment. Nevertheless, the company has adequate collateral on these exposures, has initiated legal actions and is in the process of recovering its dues. Following systemic increase in interest rates in FY-11, the company increased the tenure of the existing loan book while keeping the size of EMI constant in order to pass on the higher cost of funds and thus protected its lending spreads at around 3%. As a result, the residual maturity of the portfolio in more than 15 years bucket increased significantly to 24% on Mar-11 as compared to NIL as on Mar-10. With the interest rates further rising in the current financial year (2011-12), the company would be forced to increase the size of EMI. As the target customers of the company belong to LMI (Lower Middle Income) segment; any additional monthly financial burden might result in asset quality issues. Going forward, the company is targeting incremental spreads of 2%; the ability of the company to maintain its interest spreads while protecting its asset quality in the rising interest rate scenario, is a key rating sensitivity. The rating continues to remain constrained on account of company's small size of operations (portfolio size: Rs. 579 crore on March 31, 2011), moderate operating expenses (1.49%3 in 2010-11) and geographical concentration which exposes it to market volatility. Although the company is exposed to the ALM mismatches in the short to medium-term, it is likely to maintain comfortable liquidity profile with expected high prepayments, access to NHB4 / banking lines and support from the parent – DHFL.