Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A3+’ rating to commercial paper programme of Digikredit Finance Private Limited (Digikredit) and reaffirmed its 'CRISIL BBB-/Stable’ rating to the existing bank facilities and debt instruments.

 

The rating continues to reflect the significant experience of its promoters and top management, healthy capitalisation metrics supported by regular capital raising and adequate appraisal policies and processes. These rating strengths are partially offset by small scale of operations, exposure to asset quality risks inherent in the unsecured business loans segment, and weak earnings profile.

 

Amidst the weak and challenging macro-economic environment, asset quality metrics weakened as adjusted 90+ dpd (after adding back last 12 months write-offs) increased to 8.2% (6.6% after excluding portfolio with no risk-sharing clause with partners) as on Mar-21 from 4.4% (3.1% after excluding portfolio with no risk-sharing clause with partners) as on Mar-20 at consolidated level including partner book. At the own book NBFC level as well, adjusted 90+ dpd (after including last 12 months write-offs) increased to 5.9% as on Mar-21 from 5.1% as on Mar-20. Digikredit has restructured around 4.9% (under restructuring 1.0) of its portfolio till May-21 and is expected to restructure further under restructuring 2.0 till Sep-21.

 

Collection efficiency on a monthly basis after dropping to 20%[1] in May-20 due to imposition of nationwide lockdown, improved and remained stable at around 87%-88%1 in Q4 FY21. Digikredit over the last fiscal tightened its underwriting risk scorecards i.e. lending to only essential goods industries and reducing the maximum ticket size etc. It also enhanced its existing collection and risk management infrastructure by investing significantly in technology. Nevertheless, collection efficiencies dipped a bit amidst the second Covid-19 wave during April-May’21. However, with the reopening of the lockdowns, the collection efficiency for the company is expected to have improved in June. Having said that, the ability to sustainably improve the collection efficiency and hence manage asset quality especially amidst uncertain macro-economic environment will continue to be a key monitorable.

 

While Digikredit has reduced its operating expense, it continues to remain high due to low growth on account of pandemic impact and continuous significant investment on enhancing risk management & collections infrastructure and hiring of senior management professionals. Furthermore, the earning profile also remains vulnerable to high credit cost owing to vulnerable customer segment and aggressive provisioning policy. Therefore, earnings profile hinges upon the ability to lower operating expenses and manage credit costs, hence the ability to do so will remain a key monitorable.

 

Capitalisation metrics remain comfortable aided by regular capital raises. Adjusted gearing (including securitisation) stood at around 2.6 times as on March 31, 2021. The company has regularly raised capital, having raised around Rs 193 crore since inception from private equity funds as well as promoters and high networth individuals (HNI) on a regular basis with the recent equity infusion taking place in March 2020 of Rs 110 crore. Digikredit is also in talks to raise around Rs 200-250 crore of equity capital this fiscal which would further enhance the capital position of the company.

[1] Total collections excluding prepayments divided by current billing assuming no moratorium during moratorium period

Analytical Approach

CRISIL has analysed the standalone business and financial risk profiles of Digikredit.

Key Rating Drivers & Detailed Description

Strengths:

• Significant experience of promoters and senior management

The company’s founder, Mr Samir Bhatia, is a senior banking professional having over 30 years of experience in the financial sector and held senior leadership positions in institutions like Citibank, HDFC Bank, Barclays Bank and Equifax. He was a founding team member at HDFC Bank. Top management has extensive experience in handling various functions in similar businesses, including collections, backend operations, credit, and legal. The management is also focused on building good governance systems. It has an experienced board and has appointed reputed auditors.

 

Given their significant experience, the management has been focused on putting in place sound systems and risk management processes since an early stage itself. The Company has invested significantly in analytics capability, underwriting capabilities, data science, and risk analytics. This is especially important as the unsecured business loans market has inherent risk. Management has, therefore, put in place a completely in-house collections team with high focus on early bucket delinquencies and control on bounce rates. The operational risk aspect has been minimised through IT systems as all the deviation approvals and disbursals are automated and done through a centralised system.

 

CRISIL Ratings believes that the experience of the promoters and management will stand Digikredit in good stead as it scales up its portfolio.

 

• Healthy capitalisation metrics

The company has healthy capitalisation, supported by regular capital raising. It also has a comfortable leverage philosophy, with gearing not expected to cross 3 times over the next two years.  The company has been able to raise capital of around Rs 193 crore since inception from private equity funds as well as promoters and high networth individuals (HNI) on a regular basis with the recent equity infusion taking place in March 2020 of Rs 110 crore. Consequently, networth was comfortable at around Rs 82 crore as on March 31, 2021, while adjusted gearing (including securitisation) was healthy at around 2.6 times.  Digikredit is also in talks to raise around Rs 200-250 crore of equity capital this fiscal which would further enhance the capital position of the company. CRISIL Rating expects gearing to be maintained and supported by regular capital infusion. Furthermore, the company is also focussed on co-origination / business partnership models through tie-ups with banks and other NBFCs which will further strengthen the capital position of the company.

 

Weaknesses:

• Small scale of operations

The company began operations from fiscal 2016 as an online market place. From fiscal 2017, it entered the lending phase with loans being booked on partner books. After receiving the NBFC license in February 2018, Digikredit commenced on-book lending. Despite the economic environment, as on March 31, 2021, the assets under management (AUM) of the company stood at around Rs 455 crores, registering a growth of 19%. Previously, AUM grew at CAGR of 367% during fiscal 2018 to 2020. Given the business model of the company, around Rs 241 crores was on partner books with rest being on-book.  Unsecured business loans continue to constitute bulk of the portfolio at around 86% with the rest being constituted by loans against property (LAP). The promoter’s background, an experienced management and relationships in the market, along with an ability to raise capital should help in scaling up of portfolio going forward. Digikredit had achieved pre-pandemic level of disbursements till the end of fiscal 2021, however, the same got impacted post that amidst second wave of Covid-19.  Digikredit is expected to pick up its growth on expectation of economic rebound this fiscal and high usage of technology leading to very low turnaround time. Nevertheless, the same remains subject to macro-economic environment being favorable and hence, over the medium term, the company will remain a modest player in the overall financial ecosystem.

 

• Asset quality susceptible to risks inherent in unsecured business loans; loan book lacks seasoning

Digikredit’s asset quality is susceptible to risks associated with unsecured loans wherein the borrower credit profiles could be relatively weak. Amidst weak and challenging macro-economic environment, impact on the asset quality was visible as adjusted 90+ dpd (after adding back last 12 months write-offs) increased to 8.2% (6.6% after excluding portfolio with no risk-sharing clause with partners) as on Mar-21 as compared to 4.4% (3.1% after excluding portfolio with no risk-sharing clause with partners) as on Mar-20 at consolidated level including partner book. At the own book NBFC level as well, adjusted 90+ dpd (after including last 12 months write-offs) increased to 5.9% as on Mar-21 from 5.1% as on Mar-20. Digikredit has restructured around 4.9% (under both restructuring 1.0) of its portfolio till May-21 and is expected to restructure further under restructuring 2.0 till Sep-21.

 

Collection efficiency on a monthly basis after dropping to 20%[1] in May-20 due to imposition of nationwide lockdown, improved and remained stable at around 87%-88%1 in Q4 FY21. Digikredit over the last fiscal tightened its underwriting risk scorecards i.e. lending to only essential goods industries and reducing the maximum ticket size etc. It also enhanced its existing collection and risk management infrastructure by investing significantly in technology. Nevertheless, collection efficiencies dipped a bit amidst the second Covid-19 wave during April-May’21. However, with the reopening of the lockdowns, the collection efficiency for the company is expected to have improved in June. Having said that, the ability to sustainably improve the collection efficiency and hence manage asset quality especially amidst uncertain macro-economic environment will continue to be a key monitorable.

 

Furthermore, as Digikredit started its lending business from fiscal 2017, seasoning in the portfolio is limited. However, the company has put in adequate systems and processes in place to mitigate the potential asset quality challenges, by focusing on customer segments where there is an established track record of the customer in terms of credit history, vintage in running the business and stringent credit checks such as number of enquires in CIBIL etc. Digikredit keeps on enhancing its risk management systems on the basis of its past experience and external environment. Nevertheless, the company’s ability to contain delinquencies within manageable levels will need to be demonstrated over the medium term.

 

• Weak earnings profile

Given nascent stage of operations, earnings profile is currently constrained amid high operating costs given the low growth on account of pandemic impact and continuous significant investment on enhancing risk management & collections infrastructure and hiring of senior management professionals. Operating expenses have reduced in fiscal 2021 due to various cost saving measures taken by the company, however, the same remains high due to low growth. Operating costs are expected to reduce as the company achieves scale, and employee costs normalize. The central underwriting model and digital operations will also support operating leverage.

 

The earning profile remains vulnerable to high credit cost as well owing to vulnerable customer segment and aggressive provisioning policy as company writes-off loans at 180+ dpd. The same was witnessed in fiscal 2020 and fiscal 2021 wherein credit cost increased.

 

Consequently, the company reported a loss of Rs 49 crore in fiscal 2021 majorly contributed by credit cost of Rs 30 crore which was in turn high mostly due to pandemic impact.

 

Therefore, earnings profile hinges upon the ability to lower operating expenses and manage credit costs, hence the ability to do so will remain a key monitorable.

 

Additionally, as the portfolio scales up and gearing increases, ability to raise resources at competitive costs will also be a key monitorable.

[1] Total collections excluding prepayments divided by current billing assuming no moratorium during moratorium period

Liquidity: Adequate

The ALM profile of the company as on March 31, 2021 is comfortable with no cumulative negative mismatches upto one year bucket even after excluding line of credit committed from other institutions. The company has raised additional debt of 160 crore since April’20 till May’21. As of June 30, 2021, the liquidity cover for Digikredit for debt payments (including interest expense) until August 2021 was comfortable at around 1.1 times without giving the benefit of collections.  As on June 30, 2021, Digikredit had cash and liquid investments of Rs 20.3 crore. Against the same, they have total debt payments (including interest expense) of Rs 18.8 crore from July to August 2021 and Rs 27.2 crore from July to September 2021. Additionally, Digikredit also has unutilized term loan line of Rs 15 crore. The company’s average monthly collections were around Rs 19 crore from Jan-21 to May-21 which further supports the liquidity positon of the company.

Outlook: Stable

CRISIL believes that Digikredit’s capitalisation metrics will remain strong over the medium term supported by regular equity infusion as it scales up its operations. However, earnings profile and asset quality will remain weak given the weak macro-economic environment

Rating Sensitivity factors

Upward factors:

• Sustainable return to profitability without any deterioration in asset quality metrics as the portfolio scales up
• Capitalisation metrics remaining strong with adjusted gearing remaining below 3 times

 

Downward factors:

• Any adverse movement in asset quality with adjusted 90+ dpd (after adding back 12 months write-offs) remaining above 9% on sustainable basis
• Company continuing to have weak earnings profile
• Moderation in capitalisation metrics with a significant jump in gearing while scaling up the portfolio.

About the Company

Digikredit is a non-deposit taking non-systemically important NBFC that provides unsecured business loans and loans against property, with focus on the SME segment in India. It currently operates 18 branches in three states and one UT: Gujarat, Maharashtra, Rajasthan and Delhi.

Key Financial Indicators

As on/for the year/period ended	Unit	Mar-21*	Mar-20
Total assets	Rs crore	293.3	253.7
Advances (including partner book)	Rs crore	455.1	383.8
Total income	Rs crore	57.3	47.4
Profit after tax	Rs crore	-48.9	-39.2
90+ dpd (including partner book)	%	3.5	1.0
Adjusted 90+ dpd (including partner book after including last 12 months write-offs)	%	8.2	4.4
Adjusted gearing	Times	2.6	1.1
Return on managed assets	%	Negative	Negative

Note: Managed assets = Total reported own book asset + Securitisation

*Provisional based on unaudited financials

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned  with outlook
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	80	NA	CRISIL BBB-/Stable
NA	Term Loan 1	NA	NA	Sep-21	10	NA	CRISIL BBB-/Stable
NA	Term Loan 2	NA	NA	Jun-23	10	NA	CRISIL BBB-/Stable
NA	Non-convertible Debentures^	NA	NA	NA	5	Simple	CRISIL BBB-/Stable
INE01ED07036	Non-convertible Debentures	23-Feb-21	14.75%	30-Dec-22	10	Complex	CRISIL BBB-/Stable
INE01ED07028	Non-convertible Debentures	23-Feb-21	14.75%	30-Mar-23	10	Complex	CRISIL BBB-/Stable
NA	Commercial Paper	NA	NA	7-365 days	25	Simple	CRISIL A3+

^Yet to be issued