Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

* Strong market position in the Indian microfinance sector with long track record

Having grown at a 3 year CAGR of 47% through March 2020, CAGL has evolved as one of the largest microfinance institutions in the country over its operational history of over two decades. The company has been able to scale the business at a robust rate in terms of size as well as operational presence, and all this while maintaining the operational parameters and infrastructure at comfortable levels. As customers with long credit history and association with CAGL have matured across loan cycles, the company started its retail finance portfolio in 2016 under which seasoned customers are offered loans of a higher ticket size (ATS close to Rs 1.0 lac) however, this portfolio forms merely 4 of the total AUM as on date. Over the near term, the company’s portfolio is expected to remain focused on microfinance business which is its core competence.

After acquiring Madura Microfinance Ltd in fiscal 2020, CAGL’s consolidated AUM stood at Rs 11,996 crore as of March 31, 2020 – of which about one-fourth came from MMFL. Post Covid-19 outbreak, the company’s consolidated AUM registered a moderate growth of 13% over fiscal 2021 to reach Rs 13,587 crore as on March 31, 2021 which, following the second pandemic wave, declined to Rs 12,664 crore by June 30, 2021. Disbursements, after peaking in March 2021, also retreated in the first quarter on account of sporadic lockdowns across states and restrictions on field movement.

* Sound ground level practices

CAGL’s risk management practices have remained sound and evolved over the years – to suit the increasing scale of business. However, the key maxims of the Grameen business model like focus on rural markets, weekly kendra meetings and collections, attendance discipline, audit, etc. have remained intact. The company has garnered a sound understanding of the business model and customer group over the years. 90% of the field employees are hired as freshers and, from neighboring livelihoods so as to have a strong connect with the borrowers. Each such employee undergoes a 4 week pre-hiring training and during their employment tenure – all branch officers have a fixed rotation policy. These policies allow CAGL to maintain very high stability at mid-level management and operate with low attrition rate. In terms of credit appraisal, new customers undergo a mandatory 5 day CGT/ GRT training and a home visit by the loan officer. Credit scores are checked before disbursals, over 90% of which are in cashless mode and most of the collections happen weekly which result in small EMIs. The company also has an audit team of 166 members which conducts – head office, branch and field audits. Accredited to these practices, CAGL’s ultimate credit loss on account of demonetization was only 3.5%, significantly lower than the reported industry average.

Even recently, after the first pandemic wave when business activity was completely shut for April and May 2021, the company made attempts to remain in touch with its borrowers, constantly educating them about various aspects of the pandemic, lockdown and, the moratorium. CAGL, during this period, also extended additional emergency funding of average ticket size of Rs 2000 – 3000 to regular borrowers. In addition, the company also offered to pre-close existing loans of borrowers with good track record and avail a fresh loan of the subsequent cycle. Similarly, after the second wave, the company allowed a repayment deferment to selected borrowers who were residing in areas which were under strict lockdowns

* Healthy capitalisation with low gearing

In relation to its scale and nature of operations, CAGL’s capitalisation has remained healthy supported by its internal accruals and parentage of CAI which has demonstrated track record of extending equity support to the company. Over the last five years, the peak adjusted gearing was at 4.9 times. On June 30, 2021 – CAGL had a reported networth of Rs 3,715 crore (consolidated) and an overall capital adequacy ratio (consolidated) of 28.6%. Adjusted gearing on the same date stood at 2.6 times and has remained comfortable in the past as well. In October 2020, the company has raised Rs 800 crore through Qualified Institutional Placement (QIP) which has further strengthened its capital position. Over its 5 year association with CAI as its majority stakeholder - which holds 73.97% stake in CAGL after the Qualified Institutional Placement (QIP), the latter has received need based capital from it which has allowed the company to maintain growth momentum while maintaining adequate cushion to absorb risks alongside. In the near to medium term, CAGL’s capital position is expected to remain adequate with a steady state gearing philosophy of 4 times and a tier I CAR of above 20%.

* Stable operating profitability

CAGL has sustained its operating profitability across business cycles, anchored by lower than industry average operating expenses. The company’s pre-provisioning profitability has remained above 5% for the last five fiscals. Even in the aftermath of demonetisation while credit losses for CAGL rose to 3.5%, its RoMA still remained far better than most MFIs at 2.4% for fiscal 2017. For fiscal 2021, the company reported a consolidated profit of Rs 142 crore (Ind AS) against Rs 328 crore for the previous fiscal – resulting in a RoMA of 0.9% vis-à-vis 3.1% for the previous year. The reduction in RoMA for fiscal 2021 is a factor of additional covid-19 related credit costs of Rs 771 crore (including Rs 461 crore of write offs) incurred during the year.

For the first quarter of fiscal 2022, the company reported a consolidated PAT of Rs 20 crore after making provisioning of Rs 109 crore and writing off Rs 79 crore. Corresponding to this elevated credit costs of 4.6% (annualised), the company’s RoMA for the quarter was 0.5% (annualised). The operating margins, though comfortable at ~5%, have remained susceptible to interest reversals and cost of carrying excess liquidity over the last few quarters. While some provisioning has been created in advance in H2 2021, the adequacy of it is yet to be tested as the ground level situation in some of the large states like Maharashtra, Karnataka and Tamil Nadu is still restoring. The company’s ability to curtail incremental slippages that may further elevate credit costs, will remain crucial.

Weakness:

* Moderation in asset quality in the aftermath of the pandemic

Since January 2018, the company has operated at an average 0+ dpd of sub 3.0%. However, since the pandemic outbreak in March 2020 – a lagged recovery in current collections and increased partial repayments have resulted in delinquencies remaining elevated. Over the second half of fiscal 2021, the pace of improvement in collections had increased alongside relaxed lockdowns and regularizing economic activity. However, following the second pandemic wave in April 2021, collections for CAGL and MMFL declined from 97% and 91%, to 79% and 68%, respectively between March to May 2021. During this period, the company also extended a repayment deferment/ EMI holiday of 7-37 days to selected borrowers due to restrictions on field movement. As on June 30, 2021, 64% of CAGL’s AUM and 45% of MMFL’s AUM accounted for the portfolio wherein this repayment deferment was given. Eventually, as restrictions were uplifted and field movement resumed, collections restored to 97% for CAGL and 83% for MMFL, in July 2021. The company has restructured about Rs 78 crore (<1%) of its gross advances till date.

As the ground level situation remains volatile with some states witnessing a rise in Covid infections, the pace and magnitude of improvement in collection efficiency to pre-pandemic levels and its consequent impact on profitability, will be a key monitorable.

* High regional concentration in operations

Despite gradual diversification across states over the last few years, the regional concentration in CAGL’s loan portfolio remains high – with top 3 states accounting for almost 81% (consolidated) of the AUM as on March 31, 2021. From 70% in March 2015, the share of Karnataka, which is the largest state in terms of concentration – reduced to 51.5% of the loan book - by the end of March 2019. This was followed by Maharashtra accounting for 26.1% of the AUM and another 10.7% being housed in Tamil Nadu. With MMFL’s on-boarding in fiscal 2020, there has been further improvement on this front. On June 30, 2021 – exposure to Karnataka and Maharashtra reduced to 38.2% and 23.7% respectively, and in Tamil Nadu – which was MMFL’s core territory – exposure increased to 18.9%. Even at a district level – concentration has remained on a higher side with top 10 districts accounting for 23% of the consolidated AUM as of June 30, 2021, while it has reduced from 32% level as of March 2019. As of June 30, 2021, AUM exposure to top 10 districts was almost 0.3 time of the reported networth and the highest exposure to AUM for any single district was 3%

* Inherently modest credit profile of the borrowers

A significant portion of the portfolio comprises microfinance loans to clients with below-average credit risk profiles and lack of access to formal credit. Typical borrowers are cattle owners, vegetable vendors, tailors, tea shop owners, provision store owners, and small fabrication units. The income flow of these households could be volatile and dependent on the local economy. With the slowdown in economic activity after the lockdown, there was pressure on such borrowers’ cash flows at the household level in the immediate aftermath, thereby restricting the repayment capability of these borrowers. However, since more than 80% of the company’s borrower base is in rural areas wherein the impact of the pandemic and lockdown has been lower, the restoration in their occupational activities has been encouraging. Even though collections have started to revive from July 2021 onwards, the restoration to pre-pandemic level is some distance away, and CAGL’s ability to reinstate repayment discipline among its customers will be a monitorable.

* Given the large microfinance book, susceptibility of asset quality to local socio-political issues remains high

The microfinance sector has witnessed three 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, second - demonetisation in 2016 and lastly, Covid-19 outbreak in March 2020. 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. For CAGL, the impact of demonetisation was relatively lesser as compared to that for other peers. In the recent past, it did witness a marginal uptick in early bucket delinquencies as a consequence of the issues in North Karnataka and since March 2020, collections across most states have remained weak on account of Covid-19 and allied challenges. This indicates the fragility of the business model against external risks. As the business involves lending to the poor and downtrodden sections of the society, MFIs will remain exposed to socially sensitive factors, including charging of high interest rates, and consequently, tighter regulations and legislation.