Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL A3+' rating to the short-term non-convertible debentures of CapFloat Financial Services Private Limited (Capital Float; previously Zen Lefin Pvt Ltd).

 

The rating reflects Capital Float’s adequate capitalisation and experienced management. These strengths are partially offset by the company’s weak asset quality and profitability.

 

Capital Float is one of the early entrants among non-banking financial companies (NBFCs) focused on technology-led lending, having started operations in 2014. The company started off with offering unsecured loans to small and medium enterprises (SMEs) and later, in 2018, diversified into consumer finance segment. The key product offering in the SME space is fast loans, which are unsecured loans with an average ticket size of around Rs 3 lakh. For consumer finance, the company has partnered with Amazon for an online checkout finance product. It has also acquired an app, Walnut, which is a personal finance and expense management app, wherein it offers personal line of credit. 

 

From 2014-2018, as Capital Float diversified into additional products targeting the SME segment, it faced asset quality challenges owing to external macro-economic events and product-specific challenges. The company’s 90+ dpd (including write-off of last 12 months) increased to 4.1% (Rs 45.1 crore) as of March 2018. It further increased to 16.3% (Rs 168 crore) as on March 31, 2020, and 19.6% (Rs 163 crore) as on September 30, 2020 due to delinquencies from legacy book and decline in assets under management (AUM).

 

Nevertheless, the company has taken corrective measures and tightened its credit underwriting and risk-management processes, as well as refined its product strategy to focus on segments that have performed better from a delinquency perspective. Also, the management took a cautious approach towards new lending, resulting in a slowdown in disbursements and AUM. AUM degrew to Rs 1,031 crore as of March 2020 from Rs 1,404 crore as of March 2019. Further, given the Covid-19-related uncertainties and the consequent challenging environment, AUM further reduced to Rs 833 crore as on September 30, 2020. Degrowth in AUM, as well as high credit costs, has adversely impacted earnings of the company. Nevertheless, the company has now opted for credit guarantee scheme with more than 70% of the AUM covered under CGTMSE scheme as on September 30, 2020. Further, the company also carries macro-prudential provisions of Rs 50 crore as on same date; these measures should help in limiting the impact of earnings likely on account of potential stress induced by challenging macro environment.

 

From an industry perspective, the nationwide lockdown to contain the spread of Covid-19 impacted disbursements and collections of financial institutions. The lockdown has been eased in phases. Delay in return to complete normalcy will continue to constrain collections and asset quality of financial institutions. Additionally, any change in the payment discipline of borrowers can affect delinquencies. Nevertheless, the collection efficiency[1] improved to 104% for the month of November 2020, which is in line with its pre-Covid level collection efficiency. However, the ability to improve asset quality and profitability will remain a monitorable.

 

On the resources side, the company has been using co-lending as a major funding source. The company has partnerships with several banks and large financial institutions, which provide funding support while Capital Float leverages on its technological capabilities for sourcing and underwriting. Co-lending is expected to continue being a key element in the business model of the company. As of September 2020, 38% of the funding was from co-lending (35% as of March 2020).

 

Capital Float availed of moratorium from some of its lenders during March 2020 to August 2020 as a part of Reserve Bank of India's Covid-19 Regulatory Package, to conserve liquidity. However, Capital Float has adequate liquidity. Total liquidity was Rs 276.3 crore as on December 31, 2020, comprising cash and cash equivalents worth Rs 140.1 crore and liquid mutual investments and fixed deposits worth Rs 136.1 crore, as against upcoming debt repayments of Rs 121.8 crore for the next three months. As a liquidity policy, the company maintains six months of operating expense and debt repayments in the form of liquid investments.

1 Collection efficiency is defined as the sum of current collection and overdue collections for the month divided by current billing of that month

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Capital Float and its subsidiary, Thumbworks Technologies Pvt Ltd (Walnut) because the two entities have significant operational, financial and managerial integration.

 

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

Key Rating Drivers & Detailed Description

Strengths:

• Adequate capitalisation with track-record of raising capital from marquee investors

The capital position of Capital Float is adequate for the current scale of operations. It has a demonstrated track record of raising capital from marquee investors such as Ribbit Capital, Elevation Capital, Amazon, Sequoia Capital, Creation Investments and Aspada Investments. Since inception, it has raised a total capital of about Rs 795.0 crore out of which Rs 37.1 crore was raised in fiscal 2021, Rs 72.7 crore in fiscal 2020, Rs 124.3 crore in fiscal 2019, Rs 292.5 crore in fiscal 2018, Rs 170.0 crore in fiscal 2017 and Rs 97.9 crore in fiscal 2015. Further, the company is in the process of raising further capital of Rs 300 crore, which is expected to be completed by fiscal 2022.

 

At a consolidated level, Capital Float had adequate capitalization with reported networth of Rs 428.6 crore and adjusted gearing[2] of 2.2 as on March 31, 2020. On a steady-state basis, adjusted gearing is expected to remain below 3 times. Capitalisation should continue to be adequate over the medium term, supported by proposed capital raise and improvement in profitability, thus providing a cushion against asset-side risks.

 

• Competent management team, that benefits from the experience and involvement of Board members

Capital Float was started by co-founders in 2013 and an experienced management team, which had worked in the lending business for most of their career of 15-20 years, was also brought in -- the team has experience across risk, credit, technology and operations.

 

With this, the company was able to set up the business and diversify its product offerings in the SME segment and eventually in the consumer finance segment as well.

 

The company also benefits from the experience of its investors. Capital Float has eight board members, four of whom have been nominated by key investors. They provide guidance and support through connect with global peers, bringing in partnerships, establishing best practices and enhancing governance standards. All of this should stand the company in good stead as it scales up business hereon.

 

Weaknesses:

• Weak asset quality and profitability

Capital Float has weak profitability, reporting, at a consolidated level, a loss of Rs 184.9 crore on total income of Rs 345.5 crore in fiscal 2020 as against a loss of Rs 160.0 crore on a total income of Rs 228.0 crore in fiscal 2019. This was primarily because of weak asset quality, leading to high credit costs, as well as high operating expenses.

 

Capital Float commenced operations in 2014 with the unsecured SME finance segment. From 2014 to 2018, the company offered a wide range of products to underserved segments, mainly to SME. It was primarily offering SME loans with a ticket size of Rs 25-30 lakh. The sourcing of loans was mainly through direct sales agents, which led to high customer acquisition costs. Over the years, Capital Float diversified into multiple products.

 

Given modest credit risk profile of a large proportion of its borrowers, significant competition, product-specific challenges and external macro-economic events such as demonetization, roll out of the Goods and Services Tax, ban of liquor on highways, the company faced asset quality challenges leading to high credit costs. Further, reliance on external agencies on collections led to sub-optimal recovery levels. Its 90+ dpd (including write-off of last 12 months) increased to 4.1% (Rs 47 crore) as of March 2018. Further, owing to challenges in the legacy book and degrowth in AUM, it further increased to 16.3% (Rs 168 crore) as of March 2020 and 19.6% (Rs 163 crore) as of September 2020. Operating expenses were also high at 13.5% of average managed assets for fiscal 2020 and 13.0% for fiscal 2019.

 

Based on the experience gained during 2014 to 2018, the company took corrective actions. It took a strategic call to slow down disbursements. It stopped all the products, wherein it faced challenges, tightened its underwriting, risk management process and improved collections infrastructure. In SME finance, the company, reduced the ticket size to about 10 lakh in 2019 and then to Rs 3-4 lakh now. The same also led to lower competition and better risk-adjusted pricing, along with improving the control mechanism with Capital Float being the first or second lender. The company also diversified into consumer finance with partnership with Amazon for online checkout finance and acquired Walnut, wherein it offers personal line of credit. With increase in focus towards consumer finance, the company has moved from SME finance being 100% of the AUM as on Mar-16 to about 60% as on Mar-20. Further, interest rates of about 22-24% on consumer finance products should support risk-adjusted returns to the company.

 

As it was strengthening its processes, degrowth in AUM affected the unit economics and pre-provisioning profits of the company, which averaged a negative 4.8% of managed assets for fiscal 2020 as against a negative 3.5% for fiscal 2019. Further, it updated its write-off policy and wrote-off accounts over 180 dpd level from the legacy book underwritten prior to 2018. Credit costs increased to 6.8% of average managed assets for fiscal 2020 as against 6.8% for fiscal 2019 and 3.6% for fiscal 2018.

 

However, with key products being identified, AUM is expected to grow from current levels, which will bring in operational efficiencies supporting the pre-provisioning profits of the company. Further, improvement in underwriting and risk management is expected to lower credit costs.

 

However, most of the products are relatively new and the ability to scale these up with improvement in asset quality and profitability needs to be demonstrated.

2 Adjusted gearing is a ratio of borrowing including co-lending book divided by reported networth

 

Liquidity: Adequate

Liquidity has been adequate, given the short tenor of assets. As per the asset liability management statement on December 31, 2020, it has positive cumulative mismatches in all the buckets up to one year. As on December 31, 2020, total liquidity was Rs 276.3 crore in the form of cash and cash equivalents worth Rs 140.1 crore and liquid mutual investments and fixed deposits worth Rs 136.14 crore as against upcoming debt repayment of Rs 121.8 crore over the next three months.

Rating Sensitivity factors

Upward factors

• Improvement in earning profile, with the company reporting return on managed assets greater than zero on a sustained basis
• Increase in scale of operations while improving asset quality

 

Downward factors

• Deterioration in capitalisation metrics, with adjusted gearing increasing above 4 times on a steady-state basis
• Delay in improvement of earnings profile, with the company reporting losses beyond fiscal 2022

About the Company

Capital Float is an NBFC registered with the Reserve Bank of India. It was founded in 2013 by Mr Sashank Rishyasringa and Mr Gaurav Hinduja, after graduating from Stanford Graduate School of Business. Since inception, it has raised total capital worth Rs 795 crore from marquee investors such as Ribbit Capital (Rs 171 crore), Elevation Capital (Rs 167 crore), Amazon (Rs 154 crore), Sequoia Capital (Rs 100 crore), Creation Investments (Rs 139 crore) and Aspada Investments (Rs 42 crore).

 

Capital Float is one of the first FinTech NBFCs of India. It started operations in 2014 with a focus on SME segments and, in 2018, it diversified into consumer finance segment. It started consumer finance by partnering with Amazon for an online checkout finance product, which has grown to Rs 44 crore as on March 2018 to Rs 127 crore as on September 2020. As a part of its strategy to grow into consumer finance industry, it acquired 60% stake in Thumbworks Technologies Pvt Ltd (Walnut) in September 2018.Walnut is a personal finance app available on Android and Ios. As on date, it had more than 1 crore downloads in Google App Store with about 10 lakh monthly active users.

 

Capital Float focuses on using technology in its underwriting and risk management processes. The company has developed in-house models based on which, credit decision making with respect to loans takes place with minimal human intervention. Nevertheless, for the SME segment it involves physical check with personal discussion with borrowers. The company operates with branch-less model with 24 hubs covering about 170 cities.

 

On a standalone level, Capital Float reported loss of Rs 90.9 crore on total income of Rs 87.2 crore for the first half of fiscal 2021, as against Rs 70.8 crore and Rs 121.9 crore, respectively, for the corresponding period in the previous fiscal.

Key Financial Indicators: (Consolidated)

As on/for the period ending	Unit	Mar-20	Mar-19
Total assets	Rs crore	1105.9	1271.9
Total AUM (including off-book)	Rs crore	1031.0	1403.6
Total on-book AUM	Rs crore	669.7	961.7
Total income	Rs crore	245.4	228.0
Profit after tax	Rs crore	-184.9	-160.0
90+ dpd on AUM	%	2.1%	2.0%
Adjusted gearing*	Times	2.2	2.4
Return on assets	%	Negative	Negative

*Adjusted gearing is a ratio of borrowing including co-lending book divided by reported networth

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (rs. Cr)	Complexity level	Rating outstanding with outlook
NA	Short Term Non Convertible Debenture	NA	NA	NA	100	Simple	CRISIL A3+

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Thumbworks Technologies Pvt Ltd	Full	Subsidiary