Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Expected strong support from Mannapuram Finance

The ratings centrally factor in the company’s strategic importance to, and expectation of financial support from, Mannapuram Finance. The microfinance segment is strategically important to the Manappuram group as it is the largest business after gold loans. Asirvad accounted for around 27% of the asset mix of Mannapuram Finance as on June 30, 2024. Mannapuram Finance holds 97.6% equity in Asirvad and will continue to infuse capital as and when required. The parent infused equity of Rs 371 crore in fiscal 2019 and Rs 250 crore in September 2022. Mr VP Nandakumar (managing director) and two other directors of Mannapuram Finance are on the board of Asirvad. Mannapuram Finance will continue to hold majority stake in Asirvad.

Adequate capital position

The company’s capital position has remained adequate, supported by infusion from the parent. Mannapuram Finance infused Rs 371 crore in Asirvad in fiscal 2019 and Rs 250 crore in fiscal 2023. As on June 30, 2024, networth and gearing stood at Rs 2,249 crore and 4.7 times, respectively, as against Rs 2,149 crore and 4.7 times, respectively, as on March 31, 2024 (Rs 1,544 crore and 5.5 times, respectively, as on March 31, 2023). The capital position also remains supported by healthy internal accrual; reported net profit, which stood at Rs 100 crore during the first quarter of fiscal 2025, as against Rs 458 crore in fiscal 2024 (Rs 218 crore in fiscal 2023). As microfinance is the second-largest business of Mannapuram Finance, the parent will continue to provide capital at regular intervals to Asirvad.

Moderate earnings profile, characterised by higher provisioning buffer

The profitability of the company has improved substantially during the last 4-6 quarters (till the fourth quarter of fiscal 2024). The average return on managed assets (RoMA) stood at 3.7% during fiscal 2024. However, from the fourth quarter of fiscal 2024 and first quarter of fiscal 2025, the company has witnessed negative impact on profitability primarily due to increased credit costs. This is primarily due to the increase in delinquencies owing to general elections and weather-related impact (heat wave) across several states. As a result, average credit cost elevated to 4.9% (annualised) during the first quarter of fiscal 2025, as against 3.7% in fiscal 2024 and 2.8% in fiscal 2023. Major contribution to the credit cost was the write-off of Rs 71 crore during the first quarter of fiscal 2025. The net interest margin (NIM; net interest income / average managed assets) stood largely flat at around 12.7% (annualised) from around 12.6% in fiscal 2024. Operational costs remained at around 5.6% during the last 4-6 quarters since the company’s focus was also on expanding the gold loan portfolio. Considering the impact of elevated credit cost, RoMA stood at 2.9% (annualised) in the first quarter of fiscal 2025. CRISIL Ratings believes the company’s ability to maintain portfolio quality will be critical especially in light restriction on fresh disbursements. Further, the extent of impact on profitability owing to these restrictions will also remain a key monitorable.

Weaknesses:

Geographic concentration of portfolio

Despite presence in 23 states and 2 union territories (UTs) through 1,751 branches (including microfinance loans and gold loans), southern states accounted for around 19.3% (Tamil Nadu, Andhra Pradesh, Telangana and Kerala) of the portfolio as on June 30, 2024, out of which Tamil Nadu and Kerala comprised majority share of 18.3%. The top three states, Bihar (14.3%), Tamil Nadu (13.5%) and West Bengal (12.4%), accounted for 40.2% of the portfolio. However, the portfolio is well diversified across districts, with the top five districts accounting for only 5.9% of the portfolio as on June 30, 2024. Owing to restriction in fresh disbursements, the ability maintain stable systems and processes to avoid any asset quality pressures will remain key monitorable.

Modest asset quality

In terms of asset quality, 90+ days past due (dpd) as on June 30, 2024, stood at 4.0% (adjusted 90+ dpd including the write-off during the first quarter of fiscal 2025 stood at 4.6%). As on March 31, 2024, the 90+ dpd stood at 4.4% (adjusted 90+ dpd comprising of write-offs in fiscal 2024 stood at 5.8%), as against 3.7% a year earlier (adjusted 90+ dpd stood at 5.1%). The company saw higher delinquencies in the third and fourth quarters of fiscal 2024 and first quarter of fiscal 2025 owing to debt waiver campaigns during the recent elections in certain pockets. Also, there were prolonged heat waves accompanied by delayed monsoons in several northern states. Nevertheless, the collection efficiency (including prepayments) stood in range of 97% during Q1 fiscal 2025, while excluding prepayments it stood between 90-91%. However, considering the floods and heavy rainfall in southern states, overall portfolio quality is expected to remain at similar levels over the near term.

The company maintains higher provisioning; total credit cost stood at 4.6% (annualised), which is worth Rs 171.5 crore, during the first quarter of fiscal 2025, as against 3.6 times in fiscal 2024, worth Rs 463.7 crore (2.8 times in fiscal 2023, worth Rs 273.7 crore). The company wrote-off Rs 71 crore during the first quarter of fiscal 2025, as against Rs 166 crore in fiscal 2024 and Rs 113 crore in fiscal 2023. Consequently, net non-performing assets (NNPAs) were 1.36% as on June 30, 2024, compared with 1.71% as on March 31, 2024, and 1.1% as on March 31, 2023. CRISIL Ratings believes the ability of the company to manage its asset quality (especially in the light of the restrictions) and maintain healthy collection across buckets will remain key monitorable.

Potential risks from the legislative and regulatory changes in the microfinance sector

The microfinance sector has witnessed various events over the years, including regulatory and legislative challenges that have disrupted operations. Some of these events include the Andhra crisis, demonetisation in 2016, Covid-19 pandemic and sociopolitical issues in certain states. These events have adversely affected the sector, elevating delinquencies and hurting the profitability and capitalisation metrics of non-banking financial company-microfinance institutions (NBFC-MFIs). These challenges underscore the vulnerability of the microfinance business model to external risks. Covid-19, in particular, introduced new challenges, aggravating existing vulnerabilities in the microfinance sector by heightening credit risks and the likelihood of loan default by borrowers. While the sector has navigated these events, it remains susceptible to issues, including local elections, natural calamities, and borrower protests, which may increase delinquencies for a while. Nevertheless, Asirvad was able to manage its portfolio well without any significant impact on recoveries. However, MFIs remain vulnerable to socially sensitive factors and the macroeconomic scenario. Further, the sector is regulated by multiple bodies which, from time-to-time, have been providing several directives to maintain credit discipline and avoid over indebtedness for borrowers.