Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Positive’ rating on bank facilities and debt instruments of CreditAccess Grameen Limited (CAGL).

 

On February 15, 2023, CAGL intimated that the company has filed copy of the final Order of Merger approving Scheme of Amalgamation (CAGL and Madura Microfinance Limited; MMFL) issued pursuant to the order of the National Company Law Tribunal, Bengaluru Bench along with required Form with the Registrar of Companies (RoC), Karnataka. Further, the Board of Directors of CAGL have noted that the Scheme has become effective from February, 15, 2023 or such other date as may be identified by the RoC, Karnataka.

 

In September 2020, CAGL acquired 76% stake in a Tamil Nadu based microfinance institution – MMFL – vide a scheme of arrangement between the two companies. Over the course of time, various regulatory requirements pertaining to this scheme have been fulfilled. Having met all the requirements under the scheme of amalgamation, this scheme has come into effect from February 15, 2023, with the undertaking of Madura Microfinance Ltd (MMFL), including all of its assets, estate, rights, claims, title, interest and all liabilities relating to it - as on the effective date - have been transferred and vested in CAGL.

 

Prior to amalgamation, CAGL held 76.32% stake in MMFL. For the shareholders holding balance 23.68, as per the scheme of amalgamation, 157 shares of CAGL will be issued in exchange for every 100 shares of MMFL, to leading to ~ 1.72% dilution in existing shareholding of CAGL. Beyond this, there is no anticipation of any additional payout requirement to the shareholders of MMFL.

 

As part of its existing analytical approach used for evaluating the credit risk profile of CAGL, CRISIL Ratings has been factoring in the consolidated position of CAGL (including MMFL). After the scheme of amalgamation coming into effect, MMFL – which was operating as a subsidiary of CAGL till date will merge into CAGL fully and, cease to exist as a separate entity. This development is in line with CRISIL Ratings’ earlier expectation and will not tantamount to any change in the analytical approach used for evaluating the credit risk profile of CAGL.

 

Earlier on September 22, 2022, CRISIL Ratings had revised the rating outlook on the bank facilities and debt instruments of CAGL to ‘Positive’ from ‘Stable’ while reaffirming rating at 'CRISIL A+'. The revision in outlook was primarily driven by demonstrated resilience in CAGL's profitability supported by strong pre-provisioning operating profits (PPOP) which allowed the company to manage Covid-19 related challenges over the last two years. Additionally, CRISIL Ratings expects a notable improvement in overall profitability of the company backed by further improvement in net interest margins as the company migrates to risk-based pricing.

 

The rating continues to reflect strong market position and long track record of CAGL in the Indian microfinance sector, improving asset quality backed by sound risk management processes, healthy capitalization and, stable operating profitability. These strengths are partially offset by high, though improved substantially, geographical concentration in portfolio, inherently modest credit risk profile of the borrowers and, high susceptibility of asset quality to local socio-political issues.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has been factoring in the consolidated credit risk profile of CAGL (including MMFL) thus far. Following the implementation of the scheme of arrangement, MMFL will merge into CAGL and, will cease to exist as a separate legal entity. Therefore, as part of the analytical approach hereafter, CRISIL Ratings will factor in the standalone credit risk profile of CAGL including the effect of amalgamation with MMFL.

 

Please refer Annexure - List of a Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strong market position in the Indian microfinance sector with long track record

Having grown at a 3-year CAGR of 32.4% through fiscal 2022, CAGL remains to be the largest standalone microfinance institution in the country with an established track record of over two decades. The company has been able to scale the business at a robust rate in terms of size as well as operational presence, and all this while maintaining the operational parameters and infrastructure at comfortable levels. As customers with long credit history and association with CAGL have matured across loan cycles, the company started its retail finance portfolio in 2016 under which seasoned customers are offered loans of a higher ticket size (ATS close to Rs 1.0 lac) however, this portfolio forms merely 1.1%of the total AUM as on date. Over the near term, the company’s portfolio is expected to remain focused on microfinance business which is its core competence. On December 31, 2022, the company had an AUM of Rs 17,786 crore of which ~6.2% was off book. The company has a network of 1727 branches across 14 states and 1 union territory and, a major footprint in the west and south.

 

• Improving asset quality on back of resilience shown during pandemic period

After having operated at low delinquency levels over many years, CAGL’s asset quality moderated in the aftermath of the pandemic. The company’s collection efficiency remained volatile over fiscal 2021 and the first nine months of fiscal 2022, owing to two massive pandemic waves and the following challenges. During this period, the company also extended a repayment deferment/ EMI holiday of 7-37 days to selected borrowers due to restrictions on field movement. Eventually, as restrictions were uplifted and field movement resumed, collections started to restore and for December 2022 – CAGL reported a consolidated collection efficiency of 98%. The company had a restructured portfolio of about Rs 37 crore (0.21%of its gross advances as on date) of which 28% was in NPA and 68% was current as on December 31, 2022.

 

As on December 31, 2022, CAGL reported a GNPA and NNPA of 1.7% and 0.6% respectively as against 3.6% and 0.9%, respectively as on March 31, 2022. In the aftermath of the pandemic outbreak, CAGL’s 90+ dpd peaked at 6.3% as on August 31, 2021 and has been restoring thereafter. 30+ dpd (including write offs) has also corrected from ~14% levels to ~4% levels over the same period. While the company’s asset quality performance has been resilient during the challenges and continues to restore gradually, its ability to achieve and sustain its pre-pandemic level of asset quality position remains monitorable

 

• Sound ground level practices

CAGL’s risk management practices have remained sound and evolved over the years – to suit the increasing scale of business. However, the key maxims of the Grameen business model like focus on rural markets, weekly kendra meetings and collections, attendance discipline, audit, etc. have remained intact.  The company has garnered a sound understanding of the business model and customer group over the years. 90% of the field employees are hired as freshers and, from neighboring livelihoods so as to have a strong connect with the borrowers. Each such employee undergoes a 4 week pre-hiring training and during their employment tenure – all branch officers have a fixed rotation policy. These policies allow CAGL to maintain very high stability at mid-level management and operate with low attrition rate. In terms of credit appraisal, new customers undergo a mandatory 5 day CGT/ GRT training and a home visit by the loan officer. Credit scores are checked before disbursals, over 90% of which are in cashless mode and most of the collections happen weekly which result in small EMIs. The company also has an audit team of 166 members which conducts – head office, branch and field audits. Accredited to these practices, CAGL’s ultimate credit loss, in the normal course of business, has remained controlled.

 

Even recently, after the first pandemic wave when business activity was completely shut for April and May 2021, the company made attempts to remain in touch with its borrowers, constantly educating them about various aspects of the pandemic, lockdown and, the moratorium. CAGL, during this period, also extended additional emergency funding of average ticket size of Rs 2000 – 3000 to regular borrowers. In addition, the company also offered to pre-close existing loans of borrowers with good track record and avail a fresh loan of the subsequent cycle. Similarly, after the second wave, the company allowed a repayment deferment to selected borrowers who were residing in areas which were under strict lockdowns

 

• Healthy capitalization with stable gearing

In relation to its scale and nature of operations, CAGL’s capitalisation has remained healthy supported by its internal accruals and parentage of CAI which has demonstrated track record of extending equity support to the company. Over the last five years, the peak adjusted gearing was at 3.2 times. On December 31, 2022 – CAGL had a reported networth of Rs 4,598 crore and an overall capital adequacy ratio of 24.9%. Adjusted gearing on the same date stood at 3.3 times and has remained comfortable in the past as well. In October 2020, the company has raised Rs 800 crore through Qualified Institutional Placement (QIP) which has further strengthened its capital position. Over its 5-year association with CAI as its majority stakeholder - which holds 73.82% stake in CAGL after the Qualified Institutional Placement (QIP), the latter has received need-based capital from it which has allowed the company to maintain growth momentum while maintaining adequate cushion to absorb risks alongside. In the near to medium term, CAGL’s capital position is expected to remain adequate with a steady state gearing philosophy of 4 times and a CAR of above 20%.

 

• Stable operating profitability with gradually correcting credit costs

CAGL has sustained its operating profitability across business cycles, anchored by lower than industry average operating expenses. The company’s pre-provisioning profitability has remained above 5% for the last six fiscals. Even in the aftermath of demonetisation while credit losses for CAGL rose to 3.5%, its RoMA still remained far better than most MFIs at 2.4% for fiscal 2017. Earnings, after remaining muted for fiscal 2021 due to Covid-19 related write-offs, restored in fiscal 2022 – reflected in a reported PAT of Rs 357 crore after incurring credit costs of Rs 598 crore (including Rs 587 crore of write offs). Corresponding to this elevated credit costs of 3.9%, the company’s RoMA for the year was 2.0%. For 9M 2023, the company reported an annualized RoMA of 3.5%. The operating margins, though comfortable at ~5%, have remained susceptible to interest reversals and cost of carrying excess liquidity over the last few quarters. However, with stabilizing collections and asset quality performance and, ability to implement risk-based pricing under the revised guidelines for MFIs, the company’s operating profitability is expected to be strengthened further. Over the medium term, the company’s ability to maintain the quality of book created post pandemic will remain a crucial factor from an earnings perspective.

 

Weakness:

• High regional concentration in operations

Despite gradual diversification across states over the last few years, the regional concentration in CAGL’s loan portfolio remains high – with top 3 states accounting for over 77% of the AUM as on December 31, 2022. From 70% in March 2015, the share of Karnataka, which is the largest state in terms of concentration – reduced to 51.5% of the loan book - by the end of March 2019. This was followed by Maharashtra accounting for 26.1% of the AUM and another 10.7% being housed in Tamil Nadu. With MMFL’s on-boarding in fiscal 2020, there has been further improvement on this front. On December 31, 2022 – exposure to Karnataka and Maharashtra reduced to 34.7% and 21.0% respectively, and in Tamil Nadu – which was MMFL’s core territory – exposure increased to 20.8%. Even at a district level – concentration has remained on a higher side with top 10 districts accounting for 20% of the AUM as of September 30, 2022, while it has reduced from 32% level as of March 2019. As of December 31, 2022, networth coverage on AUM exposure to top 10 districts was almost 1.29 times and the highest exposure to AUM for any single district was 3% 

 

• Inherently modest credit profile of the borrowers

A significant portion of the portfolio comprises microfinance loans to clients with below-average credit risk profiles and lack of access to formal credit. Typical borrowers are cattle owners, vegetable vendors, tailors, tea shop owners, provision store owners, and small fabrication units. The income flow of these households could be volatile and dependent on the local economy. With the slowdown in economic activity after the lockdown, there was pressure on such borrowers’ cash flows at the household level in the immediate aftermath, thereby restricting the repayment capability of these borrowers. However, since more than 80% of the company’s borrower base is in rural areas wherein the impact of the pandemic and lockdown has been lower, the restoration in their occupational activities has been encouraging.  

 

• Given the large microfinance book, susceptibility of asset quality to local socio-political issues remains high

The microfinance sector has witnessed three major disruptive events in the past decade. The first was the crisis promulgated by the ordinance passed by the Government of Andhra Pradesh in 2010, second - demonetisation in 2016 and lastly, Covid-19 outbreak in March 2020. In addition, the sector has faced issues of varying intensity in several geographies. Promulgation of the ordinance on MFIs by the Government of Andhra Pradesh in 2010 demonstrated their vulnerability to regulatory and legislative risks. The ordinance triggered a chain of events that adversely affected the business models of MFIs by impairing their growth, asset quality, profitability, and solvency. Similarly, the sector witnessed high level of delinquencies post-demonetisation and the subsequent socio-political events. For CAGL, the impact of demonetisation was relatively lesser as compared to that for other peers. In the recent past, it did witness a marginal uptick in early bucket delinquencies because of the issues in North Karnataka and since March 2020, collections across most states have remained weak on account of Covid-19 and allied challenges. This indicates the fragility of the business model against external risks. As the business involves lending to the poor and downtrodden sections of the society, MFIs will remain exposed to socially sensitive factors, including charging of high interest rates, and consequently, tighter regulations and legislation.

Liquidity: Strong

As on December 31, 2022, the liquidity cover for debt obligations arising over the following 2 months, without factoring in any roll over or any incremental collections or unutilized bank lines, was at around 0.83 times. In addition, the company had unutilized funding lines to the extent of Rs 3,471 crore as on the same date.  Based on ALM statement dated December 31, 2022 – there were no negative mismatches in any time buckets up till 1 year.

Outlook Positive

CRISIL Ratings believes CAGL will sustain its market position in the microfinance sector and maintain healthy capitalization metrics. The company’s overall profitability is also estimated to improve supported by higher pre-provisioning operating profits.

Rating Sensitivity factors

Upward factors

• Overall profitability (RoMA) remaining above 4% while maintaining adjusted gearing at 3-3.5 times.
• Geographical diversification in operations alongside scale with reduction in state and district level concentration

 

Downside factors

• Deterioration in asset quality, leading to weakness in overall profitability reflected in RoMA remaining below 3%. 
• Moderation in capitalization – evidenced by gearing increasing to and remaining above 5 times commensurate to a decline in tier I CAR to below 18%

About the Company

Established in 1991 as Sanni Collection Private Limited in West Bengal, CAGL commenced its microfinance operations in 1998 as a division under T. Muniswamappa Trust (TMT), a registered public charitable trust/NGO. In 2007, it transformed into a microfinance institution under the brand name Grameen Koota and subsequently in the year 2016, the company started its retail finance portfolio. In 2018, its name was changed to CreditAccess Grameen Ltd and the company got listed in the same year. Subsequently in 2020, it acquired 76% stake in a Tamil Nadu based MFI – MMFL which it will eventually increase to 100% by March 3, 2023. The company’s operations are spread across 15 states (including 1 Union Territory) with a borrower base of over 4 million

Key Financial Indicators

Particulars as on 31	Unit	Dec-22	Mar-22	Mar-21
Assets under management#	Rs crore	17,786	16,599	13,587
Total income	Rs crore	2485	2749	2466
Profit after tax (PAT)	Rs crore	533	357	131
Return on managed assets#	%	3.5	2.0	0.9
GNPA	%	1.7	3.6	4.4
Adjusted gearing#	Times	3.3	3.8	3.0

#includes off book portfolio

$standalone

Any other information: Not applicable

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Madura Micro Finance Limited	Full	Subsidiary; similar line of business, operational synergies and common management