Rating Rationale
July 10, 2019 | Mumbai
Digikredit Finance Private Limited
'CRISIL BBB-/Positive' assigned to bank debt
 
Rating Action
Total Bank Loan Facilities Rated Rs.250 Crore
Long Term Rating CRISIL BBB-/Positive (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL BBB-/Positive' rating to the Rs 250 crore proposed long-term bank loan facility of Digikredit Finance Private Limited (Digikredit).
 
The rating reflects the significant experience of its promoters and top management, healthy capitalisation metrics supported by regular capital raising, strong appraisal policies and processes and strong liquidity policy. These rating strengths are partially offset by small scale of operations, exposure to asset quality risks inherent in the unsecured business loans segment, and high operating expenses that constrain earnings profile.
 
The company started off in 2015 as an online market place (SME Corner) connecting small and medium enterprises (SMEs) with over 30 institutional lenders. From fiscal 2017, it transitioned to a partnership model, and subsequently into a non-banking finance company (NBFC) from February 2018 post-receiving license from the Reserve Bank of India (RBI). Digikredit adopts two business models: own book lending and partnership model. Currently, the company has six partners with first loss default guarantee-based lending model, and intends to increase the number of affiliated partners over the medium term. After receiving the RBI license, assets under management (AUM) increased to Rs 198 crore as on March 31, 2019, from Rs 18 crore as on March 31, 2018. Around 45% of the AUM comprised of own book lending. The company's focus is on lower ticket and lower tenure unsecured business loans, which accounted for around 85% of the AUM as on March 31, 2019; while the remaining is constituted by loans against property. Given the focus, the average ticket size of the portfolio stood at Rs 7.2 lakh, with average tenure of 31 months (unsecured business loans: 28 months; loans against property: 153 months). The 90+ dpd (days past due) was at 0.9% as on March 31, 2019. However, the loan book is not seasoned and hence, ability to scale up portfolio while maintaining asset quality metrics is a key monitorable.

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. 
 
Given their significant experience, the management is focused on putting in place sound systems and risk management processes at 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.
 
The management is also focused on building good governance systems. It has an experienced board and has appointed reputed auditors.
 
CRISIL 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 83 crore since inception from private equity funds as well as promoters and high networth individuals (HNI) on a regular basis. Consequently, networth was comfortable at Rs 60 crore as on March 31, 2019, while gearing was healthy at 1.6 times. The company plans to raise an additional Rs 100-120 crore of equity in fiscal 2020; with this, despite planned portfolio growth, gearing would remain within 2.0 times by March 2021.
 
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 licence in February 2018, Digikredit commenced on-book lending. As on March 31, 2019, the AUM of the entity has grown to Rs 198 crores of which around Rs 90 crores is on own book. Of this, 85% was towards unsecured business loans with the rest being constituted by loans against property. The promoters 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. While growth momentum is expected to continue 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. Gross non-performing assets (GNPA) ratio for Digikredit stood at 0.9% as on March 31, 2019, against nil in the previous fiscal. However, loan book is new and asset quality metrics are expected to inch up as the loan book seasons.
 
The company has put in place 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. Nevertheless, the company's ability to contain delinquencies within manageable levels will need to be demonstrated over the medium term.
 
* Earnings profile currently constrained due to high operating costs
Given nascent stage of operations, earnings profile is currently constrained amid high operating costs given the branch expansion and technological investments being undertaken. The company reported a loss of Rs 14.9 crore in fiscal 2019. High employee costs formed the bulk of the operating expenses. Operating costs are expected to reduce over the medium term as the newly opened branches achieve scale, and employee costs normalise even as the company continues to increase its network to 39 branches by the end fiscal 2020 and 114 branches by the end fiscal 2021, from 15 as on March 31, 2019. With a branch typically taking around 9 months to break-even (excluding allocation of head office costs), operating efficiencies would flow in only over the medium term. Nevertheless, the central underwriting model will support operating leverage.
 
Furthermore, the high-yield portfolio with IRR ranging 20-30% across all segments supports earnings profile: net interest margins were 12% for fiscal 2019. As the portfolio scales up and gearing increases, ability to raise resources at competitive costs will be important. Additionally, ability to manage asset quality, and therefore, credit costs will be a key determinant of profitability over the medium term.
Liquidity

Digikredit has a strong liquidity policy. The company plans to maintain a minimum 4-5 months of debt repayment in the form of cash and investments in fixed deposits and liquid mutual funds. As on March 31, 2019, asset liability maturity profile was comfortable with positive cumulative mismatches in the up to 1 year bucket. As on July 3, 2019, debt repayment was Rs 19 crore till November 2019; their scheduled collection for the same period is estimated at Rs 31 crore. Additionally, Digikredit has cash and cash equivalents of Rs 26 crore and unutilised banks limit of Rs 26 crore. 

Outlook: Positive

CRISIL believes Digikredit will benefit from its experienced promoters and management and will maintain its healthy capitalisation metrics over the medium term. However, asset quality performance will be demonstrated only over time and profitability is also likely to remain subdued with continued high operational expenditure.

Upside scenario:
* Growth in loan book while keeping asset quality under control
* Sizeable capital infusion

Downside scenario:
* Profitability does not show an improving trend over the medium term
* Deterioration in asset quality metrics.

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 15 branches in three states: Gujarat, Maharasthra and Rajashtan. 

Key Financial Indicators
As on/for the year ended March 31 Unit 2019 2018
Total assets Rs crore 160.7 14.9
Advances Rs crore 198.1 17.6
Total income Rs crore 22.5 2.6
Profit after tax Rs crore -14.9 -4.8
Gross NPA % 0.9 Nil
Adjusted gearing Times 1.6 Nil
Return on assets % Negative Negative

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)
ISIN Name of instrument Date of
allotment		 Coupon
rate (%)		 Maturity
date		 Issue size
(Rs crore)		 Rating assigned 
with outlook
NA Proposed Long Term Bank Loan Facility NA NA NA 250 CRISIL BBB-/Positive
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  250.00  CRISIL BBB-/Positive    --    --    --    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Proposed Long Term Bank Loan Facility 250 CRISIL BBB-/Positive -- 0 --
Total 250 -- Total 0 --
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Finance Companies
CRISILs Bank Loan Ratings

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