| Belstar Microfinance Limited | ||||
| Rating reaffirmed at 'CRISIL AA-/Stable'; rated amount enhanced for Bank Debt | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed the ‘CRISIL AA-/Stable’ rating on the long-term bank facilities and debt instrument of Belstar Microfinance Ltd (Belstar).
The rating centrally factors in the strong articulation of financial support to Belstar from its parent Muthoot Finance Ltd (Muthoot Finance; ‘CRISIL AA+/Stable/CRISIL A1+’) because of the strategic importance of Belstar to Muthoot Finance. The rating also factors in the adequate capitalisation and earnings of Belstar and benefits of operational support from the Hand in Hand group. These strengths are partially offset by the geographical concentration in the company’s portfolio, moderation in its asset quality and the susceptibility of the microfinance sector to regulatory and legislative risks.
Belstar had assets under management (AUM) of Rs 2,631 crore as on March 31, 2020, up 52% over two years. The growth momentum was curbed by lower disbursements in the first six months of fiscal 2021 on account of the Covid-19 pandemic. With a gradual revival in business activity through the second half of the fiscal, the AUM increased to Rs 3,299 crore (provisional) as on March 31, 2021, up 28.5% on-year.
Collection efficiency (including overdues but excluding prepayments) revived towards the end of the first quarter of fiscal 2021, and reached 85% in September 2020. Efficiency improved close to 100% in March 2021 because of collection of high overdue payments. Given the sharp spike in cases due to the second wave of Covid-19 and localised lockdown by states to curb the pandemic, the ability of the company to sustain collections and eventually reach the pre-pandemic level of over 99% on a steady-state basis remains a key monitorable. With steady improvement in collections and initial revival in economic activity, disbursements have improved. Belstar started disbursing from June, and with significant improvement in collections, disbursements increased and stood at Rs 2,435 crore till March 2021. However, the pace slowed in April and May 2021 due to lockdown restrictions.
Given the disruption in the cash flows of many borrowers amid the pandemic and considering the potential challenges in recovering overdues, the company made a provision of Rs 81 crore in fiscal 2021. Under the one-time restructuring scheme announced by the Reserve Bank of India (RBI) as a Covid-19 relief measure, Belstar invoked restructuring of eligible loans in December 2020 and had restructured loans of Rs 101 crore in January 2021. Nevertheless, asset quality remained moderate and the 90+ days past due (dpd) stood at 2.9% as on March 31, 2021, compared with 1.1% as on March 31, 2020. However, the intermittent lockdowns and localised restrictions because of the second wave of the pandemic could delay collections in upcoming months due to the impact on the cash flows of borrowers. Any change in the payment discipline of borrowers will also affect delinquency levels.
The second wave of the pandemic has also increased the risk of credit loss and its potential impact on capitalisation. Due to higher disbursements in the last quarter of fiscal 2021, adjusted gearing rose to 6.4 times as on March 31, 2021 (5.1 times a year earlier). Belstar is likely to receive funding support from the promoter and outside investors in fiscal 2022, keeping its gearing at 5- 6 times on a steady state basis over the medium term.
On a standalone basis, Belstar has sufficient liquidity buffer to cover debt obligation and operating expenses in the coming months. As on May 31, 2021, the company had liquidity of Rs 360 crore (excluding term loans and securitisation lines) and undrawn term loan of Rs 650 crore. It has debt obligation (including operating expense and excluding PTC/DA) of Rs 414 crore between June and August 2021. Total collection was around Rs 195 crore in April 2021 (excluding prepayments). Monthly collections are adequate to meet monthly debt obligation and operating expenses. Belstar has liquidity cover (assuming 75% collections and excluding PTC/DA payments) of 2.2 times for three months. Furthermore, Belstar will receive need-based timely financial support from its parent after exhausting undrawn limits from the bank. Nevertheless, the ability to enhance collection efficiency to the pre-Covid-19 level in the coming months will remain a key monitorable. |
Analytical Approach CRISIL Ratings has assessed the standalone financial and business risk profiles of Belstar and has factored in the company's strategic importance to, and the strong financial support expected from, its parent, Muthoot Finance. |
Key Rating Drivers & Detailed Description Strengths: * Strategic importance to and expectation of continued financial support from parent, Muthoot Finance
* Adequate capital position Belstar is adequately capitalised as indicated by its networth of Rs 542 crore and adjusted gearing (including securitisation) of 6.4 times as on March 31, 2021. The gearing should remain at 5-6 times on a steady state basis over the medium term. Belstar should remain adequately capitalised over the medium term on the back of the strong financial flexibility of the Muthoot group to infuse equity both for growth as well as in times of distress.
* Above-average earnings, albeit moderated on account of higher provisioning in the current fiscal to combat the pandemic Belstar has adequate earnings backed by moderate operating and credit costs and reduced leverage. Its operating cost (5-5.5% for the past three years) is lower compared with other microfinance institutions (MFIs) due to its branch-based collection model. The credit cost also has been low historically in the range of 0.2-1.3%. Return on managed assets (RoMA) stood at 3.6% in fiscal 2019 and 3.5% in fiscal 2020. However, net profit fell to Rs 47 crore in fiscal 2021 from Rs 99 crore in fiscal 2020, primarily due to higher provisioning of Rs 81 crore to account for contingencies arising from delinquencies. Consequently, the annualised RoMA stood at 1.3% for fiscal 2021. Nevertheless, Belstar ability to keep credit costs at the pre-pandemic level will be a key rating sensitivity factor in the near term.
Weakness: * Geographical concentration of portfolio Tamil Nadu accounts for a large proportion of the portfolio though its share has reduced from 72% as on September 30, 2018, to 47% as on March 31, 2021. 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, 17% of the loan book is concentrated in three districts and 28% in six districts, all of which are located contiguously. The AUM in the top three districts is around 106% 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 a key monitorable
* Moderation in asset quality The 90+ dpd was around 1% and the 30+ dpd at 1.4-1.7% for the past three years. Their portfolio was Rs 453 crore as of December 2016, with more than 75% in Tamil Nadu, which was relatively less impacted by the demonetisation of high-value currency notes in November 2016. Additionally, the self-help group (SHG) model has helped as it involves inculcation of a savings habit among members before disbursement. Moreover, the company has taken steps through adoption of technology such as usage of tablets and 100% NEFT disbursements to reduce instances of employee fraud.
However, asset quality weakened in fiscal 2021 amid the pandemic. The 90+ dpd and 30+ dpd stood 5.3% and 10.3%, respectively, as of December 2020, but improved to 2.9% and 4.0%, respectively, as on March 31, 2021, owing to initiatives such as restructuring of accounts and formation of a special task force for collections from overdue accounts. Nevertheless, sustenance of adequate asset quality with expansion of the portfolio will be a key monitorable.
* Susceptibility to regulatory and legislative risks associated with the microfinance sector The microfinance sector 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 the demonetisation in 2016. The Andhra Pradesh government ordinance exposed MFIs to regulatory and legislative risks. It triggered a chain of events that adversely affected the business models of MFIs by impairing their growth, asset quality, profitability and solvency. The sector witnessed high delinquencies post demonetisation and subsequent socio-political events. The MFI Bill, 2020, passed by the Assam Assembly may increase asset quality challenges. Announcement of any loan waivers may worsen matters due to their impact on repayment discipline. However, as of March 31, 2021, the company had no presence in Assam. 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 Belstar had cash and equivalent, including liquid investments, of Rs 360 crore as on May 31, 2021. It has debt obligation of Rs 414 crore (including operating expense and excluding PTC/DA) over the three months through August 2021. The liquidity is supported by steady monthly collection of Rs 195 crore (excluding prepayments) in the past 2-3 months, which were adequate to meet monthly debt obligation and operating expenses. Belstar has liquidity cover (assuming 75% collections and excluding PTC/DA payments) of 2.2 times for three months. Liquidity is cushioned by Rs 650 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 Stable The outlook on Belstar reflects the outlook on its parent, Muthoot Finance. CRISIL Ratings believes Belstar will continue to receive strong operational, financial and managerial support from Muthoot Finance, and maintain adequate capitalisation and healthy earnings over the medium term. |
Rating Sensitivity factors Upward factors * Improvement in earnings with RoMA of over 2.5% on steady-state basis * Significant geographical diversification while maintaining asset quality * Upward revision in the rating on Muthoot Finance or change in the company name to reflect stronger association with the parent
Downward factors * Downward revision in the rating on Muthoot Finance or change in the support philosophy of the parent * Increase in steady-state adjusted gearing to over 6 times * Weakening earnings due to deterioration in asset quality |
About the Company Belstar was incorporated in January 1988 in Bengaluru. It obtained a non-banking financial company (NBFC) license 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 70% as on March 31, 2021. Belstar had a portfolio of Rs 3,299 crore as on March 31, 2021, with operations in 18 states and 148 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 (JLG) 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: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Yet to be issued |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||
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Criteria Details
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