| Belstar Microfinance Limited | ||||||||
| 'CRISIL AA-/Positive' assigned to Subordinated Debt | ||||||||
| Rating Action | ||||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||||
| 1 crore = 10 million | ||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its 'CRISIL AA-/Positive' rating on the Rs 100 crore Subordinated Debt of Belstar Microfinance Limited (Belstar). CRISIL Ratings has also reaffirmed its ratings on the bank facilities and debt instruments at 'CRISIL PPMLD AA-/Positive/CRISIL AA-/Positive/CRISIL A1+'.
The rating reflects the expectation of continued improvement in the earnings profile supported by higher NIMs and controlled credit costs. Further, with the revised regulatory framework, the company has now implemented risk-based pricing. The company has increased its interest rate by 200 to 400 bps for select markets and customers in fiscal 2023. With the revision in the interest rates and controlled credit costs, the Return on managed assets (RoMA) is expected to be higher than 2.5% in fiscal 2024.
The ratings further reflects the continued comfortable capitalization profile, continuation of support from its parent, Muthoot Finance Ltd (Muthoot Finance; ‘CRISIL AA+/Stable/CRISIL A1+’) given the high strategic importance and benefits of operational support from the Hand in Hand group. These strengths are partially offset by geographical concentration in portfolio, susceptibility of the microfinance sector to regulatory and legislative risks.
Further, the ratings factor in strong collection efficiencies and low delinquency for originations of the last 18 months. In terms of collection efficiency, company has shown improvement post second wave of covid from July 2021 onwards. The portfolio which was generated post June 2021 - 98% of the AUM as of March 2023 - is performing well with 90+ dpd at 1%.
As on March 31, 2023, assets under management (AUM) stood at Rs 6,192 crore from Rs 4,364 crore as of March 31, 2022, registering an on-year growth of 42%. Average disbursement stood at Rs 483 crore per month in fiscal 2023.
Belstar’s capital position remains adequate, supported by capital infusion of Rs 275 crore from Arum Holdings, Muthoot Finance and MAJ Invest in fiscal 2022. Further, in first quarter fiscal 2023, the company received capital of Rs 110 crore from Augusta Investments Zero PTE Ltd and Arum Holdings. With this infusion, networth stood at Rs 1092 crore and adjusted gearing at 6.0 times as of March 2023 as compared to 6.2 times in March 2021. |
Analytical Approach CRISIL Ratings has assessed the standalone financial and business risk profiles of Belstar and has factored in its strategic importance to, and the strong financial support expected from, Muthoot Finance. |
Key Rating Drivers & Detailed Description Strengths: Strategic importance to, and expectation of continued financial support from, the parent Muthoot Finance will likely continue to support Belstar both on an ongoing basis and during distress, given its majority ownership and presence on the board of directors of Belstar, and the strategic importance of the latter to the group. Muthoot Finance is expected to maintain majority shareholding in the company. The microfinance business helps diversify the financial product suite of the parent. The business is established and growing at a healthy pace and formed ~7% of the group AUM as on December 31, 2022. Also, the business is scalable and expected to grow steadily over the medium term. Muthoot Finance has infused Rs 211.83 crore in Belstar till date. While Belstar does not have a common branding with the Muthoot group, it carries a tagline as part of its name to clearly state that it is a subsidiary of Muthoot Finance. The Muthoot group has a strong presence on the board of Belstar through Mr George Alexander (son of the managing director of Muthoot Finance), Mr George M Jacob (son of the joint managing director of Muthoot Finance) and Mr K R Bijimon (key management person).
Adequate capital position Belstar’s networth stood at Rs 856 crore and adjusted gearing (including securitisation) 5.0 times as of March 2022 as compared to Rs 542 crore and 6.0 in the previous fiscal. The company has received Rs 275 crore in March 2022 from Arum Holdings, Muthoot Finance and MAJ Invest. Further, in first quarter fiscal 2023, the company received capital of Rs 110 crore from Augusta Investments Zero PTE Ltd and Arum Holdings. This has improved its networth to Rs 1092 crore and adjusted gearing at 6.0 times as of March 2023. With the expected internal accruals, overall capitalization profile is expected to remain adequate. Gearing should be around 6 times on a steady state basis over the medium term.
Expected improvement in earnings profile Belstar has adequate earnings backed by moderate operating and credit costs. Operating cost (5-5.5% for the past three fiscals) is lower compared with other microfinance institutions (MFIs) due to its branch-based collection model. Credit cost also has been low historically at 0.2-1.3%. Return on managed assets (RoMA) stood at 3.5% in 2020. However, in fiscal 2021, net profit fell to Rs 47 crore from Rs 99 crore in fiscal 2020, primarily due to higher provisioning of Rs 81 crore to account for contingencies arising from delinquencies. Consequently, RoMA stood at 1.3% for fiscal 2021. However, pre-provisioning profit stood at Rs 138 crore in fiscal 2021 against Rs 156 crore in fiscal 2020. Similarly, in fiscal 2022, the company reported pre-provisioning profit of Rs 206 crore and provisioning of Rs 150 crore, which led to profit after tax of Rs 45 crore and RoMA of 1.0%. In fiscal 2023, company reported pre provisioning profit of Rs 314 crore translating into return on PPOP at 4.8% Resultantly, despite the credit cost of 2.2% in fiscal 2023 company reported a RoMA of 2.0%
With the revised regulatory framework, company has increased its interest rate by 200 to 400 bps for select markets and customers in fiscal 2023. Company has shown improvement in profitability in fiscal 2023 owing to improvement in the average yield on the incremental disbursement, income from the off-book portfolio and controlled credit cost. 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 strengthen 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.
Weaknesses: Geographical concentration of portfolio Tamil Nadu accounts for a large proportion of the portfolio, though its share has reduced to 49.1% as on March 31, 2023, from 72% as on September 30, 2018. The high geographical concentration is mainly on account of association with the Hand in Hand group, which has a strong presence in the state. More importantly, 11% of the loan book is concentrated in three districts and 19.9% in six districts, all of which are located contiguously. The AUM in the top five districts is around 93% of the networth. The concentration, especially in contiguous districts, is higher compared with other MFIs rated by CRISIL Ratings. This increases susceptibility to local socio-political risks inherent in the microfinance business. Nevertheless, the strong local presence of the Hand in Hand group in these districts might be a mitigant.
Belstar is focusing on other states to drive incremental growth and reduce the share of Tamil Nadu. Amidst fast growth in the portfolio, efforts to reduce concentration and establish presence in new geographies will be key monitorables.
Modest but improving asset quality Over the last two years asset quality has weakened owing to the pandemic. The 30+ dpd and 90+ dpd stood 4.0% and 2.9%, respectively, as of March 2021. Furthermore, the asset quality of the industry at large and that of Belstar was impacted by the second wave. The 30+ and 90+ dpd of the company rose to 10.5% and 8.1% respectively in June 2022 as compared to 9.1% and 5.8%, respectively, as on March 31, 2022.The rise in slippages in primarily due to the restructured portfolio as majority of the restructured book saw billing cycle start from Q4 2022 which has resulted in the rise in 90+ dpd. Nevertheless, company continued with higher provisioning carrying Rs 258 crore of ECL provisioning as of 9M 2023. Consequently, the net NPA stood at 2.03% as on December 31, 2022 as compared to 2.32% as on March 31, 2022.
However, in Q4 2023, company sold Rs 250 crore of the stressed portfolio to an ARC. This primarily constitute the restructured portfolio and 180+ dpd portfolio which has helped in reducing the 90+ dpd to around 2.6% in March 2023. Additionally, portfolio which was generated from July 2021 onwards (98% of the overall AUM as of March 31, 2023) is performing well with 90+ dpd stood at just 1.0%. While the company’s asset quality performance continues to restore gradually, its ability to achieve and sustain its pre-pandemic level of asset quality position remains critical and in the course of it, portfolio created post Covid-19 remains a monitorable.
Susceptibility to regulatory and legislative risks associated with the microfinance sector The microfinance sector has witnessed two 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 and the second was demonetisation in 2016. 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. The microfinance sector remains susceptible to regional issues such as elections, natural calamities and borrower protests, which may result in momentary spurt in delinquencies. This indicates the fragility of the business to external risks. As the business involves lending to the poor and downtrodden sections of society, MFIs will remain exposed to socially sensitive factors, including high interest rates, tighter regulations and legislations. |
Liquidity: Strong The asset-liability management (ALM) profile was comfortable, with cumulative positive mismatches across all buckets up to one year as on March 31, 2023 on provisional basis. Cash and equivalent, including liquid investments, stood at Rs 1,326 crore as on March 31, 2023. It has debt obligation of Rs 736 crore (excluding PTC/DA over the three months through June 2023). Liquidity is supported by steady monthly collection of over Rs 400 crore (excluding prepayments) in the past 2-3 months, which was adequate to meet monthly debt obligation and operating expenses. Belstar has liquidity cover (assuming nil collections and excluding PTC/DA payments) of 1.8 times for three months. Liquidity is cushioned by Rs 1,695 crore sanctioned by various financial institutions, which has not been utilised yet. CRISIL Ratings understands Muthoot Finance will provide funding support to ensure timely servicing of debt. |
Outlook: Positive CRISIL Ratings believes that the earning profile of the company will improve further. Additionally, Belstar will continue to receive strong operational, financial and managerial support from Muthoot Finance and maintain adequate capitalisation over the medium term |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Belstar was incorporated in January 1988 in Bengaluru. It obtained a non-banking financial company (NBFC) licence from the RBI in March 2001 and was reclassified as an NBFC-MFI in 2013. The company was acquired by the Hand in Hand group, a non-governmental organisation, in September 2008. Muthoot Finance, the largest gold loan NBFC in the country, made an equity investment in Belstar in 2016 and held stake of 57% as on March 31, 2023. Belstar had a portfolio of Rs 6,192 crore as on March 31, 2023, with operations in 18 states and 170 districts. Under the SHG model, it has groups of 10-20 people and an average ticket size of Rs 45,000, and in the joint liability group model, it has groups of 4-10 people and an average ticket size of Rs 25,000. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Yet to be issued |
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 01-June-23 in line with the lender-wise facility details as on 02-Mar-22 received from the rated entity.
Criteria Details
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