Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Expectation of continued support from the founders:

Promoted by Mr Ratan Tata and Mr Nandan Nilekani, Avanti has a strong parentage with a vision to ensure financial inclusion for 100 million households over the next 5-7 years. Mr Ratan Tata and Mr Nandan Nilekani (through NRJN Trust) hold 11.3% and 88.1% of equity stake, respectively, in the company as on December 31, 2021. Using technology to ensure timely availability of credit to the neediest sections of society is a dear cause for the founders. The company has raised capital of Rs 305 crore in the form of equity and convertible securities since its inception. Of the same, Rs 149 crore of equity was infused by the founders.

During fiscal 2022, Avanti raised capital of Rs 156 crore (in the form of compulsory convertible preference shares) from a diverse set of investors including Oikocredit, Nomura, Bill and Melinda Gates Foundation, and Dr K R Shroff Foundation. Post the conversion, the shareholding of NRJN Trust (Mr Nandan Nilekani) is expected to reduce to below 50%, subject to valuation at time of conversion. However, it will continue to be single largest shareholder. Further, as per covenants with lenders, NRJN Trust will continue to hold minimum 26% stake in Avanti and Mr Ratan Tata and/or Mr Nandan Nilekani will continue to be on the Board of Directors of Avanti. In view of the strong moral obligation and continued board level strategic support, the rating centrally factors in articulation of timely financial support from NRJN Trust. The NRJN trust has demonstrated its financial commitment by articulation of its intention to assist Avanti in organising for any shortfall in liquidity that may be required for timely repayment of debt and also for maintaining adequate capital as per applicable regulations.

Adequate capitalization:

The company has raised capital of Rs 305 crore in the form of equity and convertible securities since its inception. The networth and gearing as on September 30, 2021 stood at Rs 195.9 crore and 0.5 times respectively as compared to networth of Rs 81.5 crore and gearing of 0.8 times as on March 31, 2021. Avanti has indicated that it expects to maintain a steady state gearing at about 3 times.

The company has been incurring high operating expenses resulting from the head office and technology costs. However, Avanti has been able to raise equity funds at regular intervals to fund this cash burn.

CRISIL Ratings believes that Avanti would continue to raise capital either directly through the founders or through external investors, for its future requirements and, the same will support Avanti in maintaining its capitalisation at adequate levels

Management team and board of directors comprising industry veterans:

The high pedigree of the company’s board (comprising Mr Ratan Tata, Mr Nandan Nilekani and Mr Vijay Kelkar) helps in strategy formulation. The senior management consists of persons with extensive experience in their functional areas. The CEO, Mr Rahul Gupta, was the MD-Business Development for the complete portfolio of GE businesses in the ASEAN region prior to joining Avanti. The COO, Mr Manish Thakkar, has over 22 years of experience in the financial services sector. The Chief Product Officer, Mr Lalitesh Katragadda, responsible for building the Avanti technological platform, was the Google Head of India products. The Chief of Partnerships & Operations, Mr Sunil Kumar Tadepalli, has over 22 years of experience across industries in organisation effectiveness, strategy and executive coaching.

Avanti is expected to benefit from the guidance of the Board and significant experience of the senior management team as it builds its business model, operational setup and steadily scales up the loan book.

Digitisation of operations to increase scalability:

Avanti does not follow a brick and mortar model but uses an in-house technological platform to disburse loans. This unique platform-based lending model is used to digitally carry out end-to-end operations through a single application. The company has developed an in-house platform called the “Avanti Platform” based on the crowd sourced ‘Indihood platform’ developed by its Chief Product Officer (Mr Lalitesh Katragadda). The platform has on-boarding, disbursements, and loan management software with underwriting and collections capabilities. This platform will enable better scalability as the company adds new partners. The company has already started 100% cashless disbursements through partner networks, which help in better monitoring. Additionally, the company does not have any branches or any dedicated staff at partner locations as it is able to track loan movement online through the Avanti Platform with the help of its partners. The company offers loan products based on the specific needs of the end consumer and these nuances can be fed into the software and any deviations get flagged.

This platform is modular and scaleable and is critical for Avanti to build a service income/co-lending based capital efficient model. Additionally, it can work as a market-place platform. Avanti should continue to benefit from this platform as it gives options to build different business models in the long term.

Weaknesses:

Small scale of operations and lack of seasoning:

Being in the initial stage of operations, the company had a modest portfolio of Rs 107.3 crore as on March 31, 2021. Avanti has since then grown at a good pace during the first nine months of fiscal 2022, and loan book has reached Rs 284.5 crore as on December 31, 2021, registering a growth of 165% during the year. The partner networks have been associated with the end consumers since a long time, which creates a social pressure to repay loans. The commissions of the partner depend on the repayments by the end consumer which acts as an incentive to provide (to the partner) to ensure timely collections.

Asset quality remains susceptible to risks associated with unsecured lending as the borrower credit profiles may be weak as the pandemic proved. The pandemic situation has put additional asset quality pressures due to some of the partner networks adopting compassionate collections and few partner networks not being able to maintain collections at a healthy level. The 90+dpd (days past due) for the retail book stood at 8.8% as on December 31, 2021, as compared to 13.4% as on March 31, 2021. The institutional loan book, accounting for 7% of total portfolio, had only one partner with delinquencies. The 90+dpd for the entire book stood at 7.4% as on December 31, 2021. Avanti had an outstanding restructured book of Rs 2.3 crore as on December 31, 2021.

However, in the delinquent book, excluding the portfolio of the few partners, which faced challenges due to covid and where Avanti has since then reduced their exposure, the overall adjusted retail 90+ dpd stands at 0.9% as on December 31, 2021. This indicates Avanti’s ability to maintain stable asset quality for the majority of its portfolio, even amidst the current challenging conditions. Avanti’s ability to scale up its portfolio, backed by healthy asset quality, remains a key rating monitorable.

Weak earnings profile due to higher overheads:

Having started full-fledged operations only in fiscal 2019, Avanti is expected to incur higher operating expense despite high net interest margin over the medium term. Operating costs to total assets remains high at 13.6% as of September 30, 2021, although reduced from 19.7% in fiscal 2021. This primarily comprised of employee costs (43% of total operating expenses) and technology hosting and licensing fees (41%). The company is expected to incur Rs 10-15 crore annually towards hosting and licensing fees of the platform. Consequently, the company is expected to report losses till it benefits from operating leverage with scale up of portfolio.

Credit costs increased to 9.3% during fiscal 2021, compared with 6.4% during fiscal 2020. This was primarily due to the provisioning of Rs 11 crore done by Avanti in fiscal 2021, against the stress in the overall book due to the pandemic conditions. On cumulative basis, the company carries Rs 14.5 crore of provisions and the provision cover on the 90+ dpd loan book is high at 54.5%. Nevertheless, in the near term, Avanti’s ability to manage recoveries to pre-pandemic level would be a key monitorable.

Inherently modest credit risk profile of the borrowers:

The portfolio largely comprises unsecured loans to clients with below-average credit risk profiles and lack of access to formal credit and based in regions with limited credit history. Typical borrowers are rickshaw drivers, farmers, small store owners, and vegetable vendors. The income flow of these households could be volatile and dependent on the local economy. Pressure on the cash flow of these households due to unforeseen circumstances may affect the repayment capability of these borrowers. Additionally, in case if these borrowers miss more than one instalment, it may be difficult for them to pay multiple instalments together resulting in delinquencies.