Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL BBB+/Stable' rating to the Rs 10 crore non-convertible debentures (NCDs) of Dvara Kshetriya Gramin Financial Services Private Limited (Dvara KGFS) and has reaffirmed its ratings on the long-term bank facilities and outstanding debt instruments at ‘CRISIL BBB+/CRISIL PPMLD BBB+/Stable'.

 

CRISIL Ratings has also withdrawn its rating on the Rs 35 crore non-convertible debentures (see the Annexure - Details of Rating Withdrawn' for details) on receipt of independent confirmation that these instruments are fully redeemed, in line with its withdrawal policy.

 

The ratings centrally factor in the highly experienced profile of the company's board and management and continuous support of the founder-promoter, Dvara Trust (erstwhile, IFMR trust). The ratings also factor in the adequate capital position of Dvara KGFS, supported by steady equity infusion and diversified resource profile. These strengths are partially offset by average asset quality, low net profitability due to high operational costs, inherently modest risk profiles of the borrowers, and potential risk from local socio-political issues inherent to the microfinance sector.

 

The prefix 'PPMLD' indicates the principal amount of the debentures is protected while the returns are market-linked. Also, payments to investors are not fixed and are linked to external variables such as commodity prices, equity indices, foreign exchange rates or equity valuation of the company.

 

The assets under management (AUM) grew 55% year-on-year to Rs 1,750 crore as on March 31, 2023 (provisional), backed by pick-up in disbursements.

 

In terms of collection efficiency, the company’s collections (including overdues but excluding prepayments) were severely impacted during the pandemic. However, with collections stabilising during the last 3-4 quarters, collection efficiency recovered to 99% by the end of March 2023; month-on-month collection efficiency averaged 97%. Furthermore, in terms of restructured portfolio, the book steadily declined to Rs 38.61 crore as on March 31, 2023 (provisional), from Rs 110.7 crore as on March 31, 2022.

 

CRISIL Ratings notes that Dvara KGFS had acquired 25.9% stake in Saija Finance Pvt Ltd (Saija) for Rs 7.57 crore. The acquisition was done with the strategic intent to foray into the geography of Bihar, Uttar Pradesh and deeper into Jharkhand and thereby help in the geographical diversification endeavour. Subsequent to the quarter ended December 31, 2022, Dvara KGFS concluded a slump sale with Saija to acquire the assets and liabilities of the latter through a business transfer agreement (BTA) effective January 1, 2023. The company hopes to leverage the vast customer base and branches of Saija and organically grow its business with this BTA. It is obtaining the valuation relating to this purchase.

Analytical Approach

CRISIL Ratings has evaluated the standalone business and financial risk profiles of Dvara KGFS.

Key Rating Drivers & Detailed Description

Strengths:

• Experienced board and management profile

The management has experience of more than two decades in the rural financing industry. The board comprises Ms Bindu Ananth, Mr Samir Shah and others. The company started ramping up its management in 2018, after which it appointed the chief executive officer (CEO), chief business officer (CBO), chief financial officer (CFO), deputy CFO, chief risk officer, chief human resources officer, chief technology officer and several other key members. These members have significant senior-level experience in the micro-finance institution (MFI) and non-banking finance company (NBFC) space and have helped to strengthen systems and processes. The management has been in the microfinance industry over the past several years and has developed a strong understanding of the underlying cash flow and various financial product requirements of customers. Dvara Trust has been in the rural financing space since 2008 and has incubated the business model, systems and processes of Dvara KGFS. Dvara Trust is also the founder of Northern Arc Capital Ltd (previously, IFMR Capital Finance Ltd) and holds 9.9% stake in the entity. The promoter will support Dvara KGFS for the equity requirement that might arise over the medium term by paring down its stake in other companies owned by the trust.

 

• Adequate capitalisation

Capitalisation is strong for the ongoing scale of operations. Networth and adjusted gearing were Rs 324 crore and 4.3 times, respectively, as on December 31, 2022, against Rs 298 crore and 3.4 times, respectively, as on March 31, 2022. The ratings centrally factor in the steady capital infusion by Dvara Trust and other investors that has supported the company's operations. The capital infusion is expected to continue. External investors such as Nordic Microfinance, Stakeboat Capital, Leapfrog Investment and Accion International have infused a total of Rs 150.5 crore so far in Dvara KGFS, in the form of compulsorily convertible preference shares (CCPS), the latest being a Rs 23.5 crore infusion by Accion and Nordic Microfinance in September 2022 and Rs 6.5 crore by Dvara Trust in March 2023. Besides, Dvara Trust, erstwhile IFMR trust, is the single largest shareholder and holds 36% stake in the company, followed by Leapfrog Financial Inclusion India (II) Ltd and Accion Africa-Asia Investment Company (21.7% and 20.5%, respectively). On a steady-state basis, adjusted gearing is expected to be below 5.5 times in the long term, and any material increase in gearing will remain a key rating sensitivity factor.

 

• Diversified resource profile

The company has more than 40 lenders comprising banks, small finance banks, NBFCs and domestic and foreign financial institutions. It also has relationships with NBFCs and banks to act as their business correspondent. Dvara KGFS has also been active in raising funds through securitisation. As on March 31, 2023 (provisional), total outstanding securitised book (direct assignment + pass through certificates) stood at Rs 463.6 crore (Rs 23.8 crore as of March 2019). As on March 31, 2023 (provisional), the resource profile comprised of term loans (47.3%), NCDs (15.3%), securitisation (PTCs and DA; 30.4%), external commercial borrowings (4.5%) and commercial paper (1.5%). In the first nine months of fiscal 2023, average cost of borrowing stood at 13.8% against 13.1% in fiscal 2022. Plans to target incremental funding from banks and foreign financial institutions will help reduce borrowing costs. The company is expected to raise funding through external commercial borrowings and other instruments over the medium term, which will also significantly reduce borrowing cost and open up more avenues of raising funds from the overseas debt market.

 

Weaknesses:

• Average asset quality

Asset quality was badly affected during the second wave of the pandemic, which resulted in 90+ days past due (dpd) reaching a peak of 14.1% (highest since its inception) as on November 30, 2021. With conditions returning to normal and the company writing off portfolio worth Rs 75 crore, the 90+ dpd improved to 8.2% as on March 31, 2022. Furthermore, reported gross non-performing assets, on expected credit loss basis, stood at 9.2% due to the impact of revised IRAC (income recognition and asset classification) norms issued by the Reserve Bank of India in November 2021. These norms are related to single-day NPA (non-performing asset) recognition and upgradation of NPA accounts only after all previous dues, along with arrears (if any), are cleared. As far as collection efficiency is concerned, with the stability in operations, it improved to 99% by end of March 2023. As a result of improvement in collections and the company undertaking write-off of Rs 53.8 crore during the first nine months of fiscal 2023, 90+ dpd improved to 4.6% as of December 2022. The company carried additional provision of Rs 48.2 crore as of December 2022 (3.2% of the book as of December 2022). The 90+ dpd further improved during fiscal 2023 and stood at 3.1% as on March 31, 2023 (provisional). Nevertheless, considering current overdue position, the ability of the company to sustain collections and eventually reach pre-pandemic level will remain a key rating sensitivity factor.

 

• Moderate profitability constrained by high operational costs

Profitability has remained under pressure due to elevated credit costs (related to the impact of the pandemic) and high operational expenses. While credit costs are expected to settle due to stability in collection efficiency, operating expenses remain elevated, resulting in negative impact on profitability. Operating expenses as a percentage of total assets increased to 9.3% during the first nine months of fiscal 2023 against 8.4% during the corresponding period previous fiscal. This increase can be partially attributed to service fee payments made to Saija during fiscal 2023 as Dvara KGFS had appointed them as business correspondent partner. Apart from this, the company also opened several branches till the end of fiscal 2020 (just prior to the start of the pandemic). These branches are taking longer to reach operating efficiency, which constrains profitability. Overall, AUM per branch for Dvara KGFS stood at Rs 5.2 crore as on December 31, 2022, which has been relatively lower than companies engaged in joint liability group (JLG) lending.

 

At pre-provisioning level, the company reported pre-provisioning operating profit (PPOP) of Rs 56 crore during the first nine months of fiscal 2023 against Rs 62 crore in the corresponding period of fiscal 2022. However, with high credit costs of 3.6% (annualised), net profit fell to Rs 13.5 crore during the first nine months of fiscal 2023. Hence, apart from operating expense, the management of recoveries and the ability to correct and maintain asset quality on a steady-state basis remains key monitorables.

 

• Exposure to risks linked to concentration of operations

Higher concentration in a particular geography exposes companies to local disruptive occurrences related to natural disasters and man-made events. As the borrower profile has substantial levels of correlations in the income profile, there is a high probability of delinquencies across same-geography borrowers on account of disruptive events. High concentration of portfolio exposes the company to state-specific and geography-specific credit issues. Any high-level impact of the disruptive events in these areas will most likely impact capitalisation. Presently, around 58% of the overall portfolio is based in Tamil Nadu, although this declined from 90% as on March 31, 2019. The company is focusing on decreasing the concentration further over the medium term. The acquisition of Saija was also done with the intention of diversifying into Bihar and deeper into Jharkhand. Their ability to diversify and reduce the concentration further will remain a key rating sensitivity factor.

 

• Inherently modest credit risk profiles of the borrowers

Despite Dvara KGFS operating as an NBFC (not NBFC-MFI), a significant portion of the portfolio comprises loans given to individuals under the JLG mechanism. Its customers generally have below-average credit risk profiles with lack of access to formal credit. Such borrowers are typically farmers, tailors, cattle owners/traders, small vegetable vendors, teashop owners and dairy farmers. The income flow of these households could be volatile and dependent on the performance of the local economy. With slowdown in economic activity in light of the pandemic, there could be potential pressure on the cash flows of such borrowers at a household level, thereby restricting their repayment capability.

 

• Potential risk from local socio-political issues in 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 demonetisation in 2016. Promulgation of the ordinance on MFIs by the government of Andhra Pradesh in 2010 exposed them 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. The sector witnessed high levels of delinquencies post demonetisation and subsequent socio-political events. The MFI Bill, 2020 passed recently by the Assam Assembly may increase asset-quality challenges for MFIs. Furthermore, announcement of any loan waivers may worsen matters, due to their impact on repayment discipline. The sector also remains susceptible to regional issues such as elections, natural calamities and borrower protests, among others, which may result in momentary spurt in delinquencies. This indicates the fragility of the business model 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: Adequate

The company has liquidity cover of 1.25 times for a one-month period after assuming 75% collections. Cash and equivalent, including liquid investments, was Rs 86.53 crore as on March 31, 2023 (provisional), against debt obligation of Rs 240.5 crore for the two months through May 2023. Liquidity is also supported by the steady level of collections (over Rs 90 crore) that the company has been reporting for the last 2-3 months. Liquidity is further cushioned by need-based and timely funding support from the parent and investors.

Outlook: Stable

Dvara KGFS is expected to benefit from the experience of its promoter and management in the micro lending industry. CRISIL Ratings also expects the company to maintain adequate capitalisation.

Rating Sensitivity factors

Upward factors

• Improvement in geographical diversification, with concentration in single largest state declining to below 40% while maintaining sound asset quality metrics
• Improvement in return on assets to above 2.5% on sustainable basis
• Significant improvement in the capitalization profile

 

Downward factors

• Significant delay in asset quality recovering to pre-pandemic level
• Weakening of the earnings profile, resulting in stressed profitability and capital position
• Inability to maintain adjusted gearing below 5 times on steady-state basis

About the Company

Dvara KGFS was set up in fiscal 2008 by Dvara Trust for extending unsecured and secured loans to rural areas in the country. The company was founded by Ms Bindu Ananth and Mr Nachiket Mor. The company focuses on extending multiple financial products for the lending, savings and insurance requirements of individuals in rural areas. The company positions itself as a rural wealth manager providing loans and financial products to customers. It largely extends JLG and unsecured enterprise loans, which comprise more than 95% of the total loans. The JLG loans are up to a ticket size of Rs 50,000 and the enterprise loans up to Rs 5 lakh. The company lends at interest rates of 24-25% for the JLG loans and 26-28% for the enterprise loans.

 

During fiscal 2019, the business correspondents and corporate agency business of the IFMR Rural Channels and Services Pvt Ltd (holding company of Dvara KGFS) and IFMR Holdings Pvt Ltd (ultimate holding company) were amalgamated with the company.

Key Financial Indicators

Particulars	Unit	Dec 2022	Mar 2022	Mar 2021	Mar 2020
Total managed assets	Rs crore	1956.6	1577.5	1370	1193
Total income	Rs crore	267.4	286.8	245	207
Profit after tax (PAT)	Rs crore	13.5	-2.8*	0.8	3.8
Return on managed assets	%	1.0**	-0.2	0.1	0.4
Gross NPA (90+ dpd)	%	4.6	8.2	7.6	2.4
Adjusted gearing (including off-book)	Times	4.3	3.4	3.1	2.7

*including share of net loss of Rs 4.29 crore of associate, excluding which Dvara had reported a PAT of Rs 1.7 crore

**annualised
 

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
INE179P07282	Non-convertible debentures	12-Aug-22	11%	12-Feb-26	23.3	Simple	CRISIL BBB+/Stable
INE179P07175	Long-term principal-protected market-linked debentures	17-May-21	BSE SENSEX Linked	30-Sep-24	20	Highly complex	CRISIL PPMLD BBB+/Stable
INE179P07258	Non-convertible debentures	25-Apr-22	11%	24-Oct-25	38.1	Simple	CRISIL BBB+/Stable
INE179P07266	Non-convertible debentures	09-Jun-22	14%	07-Mar-25	22	Complex	CRISIL BBB+/Stable
INE179P07274	Non-convertible debentures	25-Jul-22	15%	25-Jul-25	10	Simple	CRISIL BBB+/Stable
NA	Non-convertible debentures*	NA	NA	NA	1.6	Simple	CRISIL BBB+/Stable
NA	Cash credit	NA	NA	NA	0.5	NA	CRISIL BBB+/Stable
NA	Cash credit	NA	NA	NA	10.0	NA	CRISIL BBB+/Stable
NA	Cash credit	NA	NA	NA	3.0	NA	CRISIL BBB+/Stable
NA	Term loan	NA	NA	17-May-24	12.5	NA	CRISIL BBB+/Stable
NA	Term loan	NA	NA	31-Dec-25	150	NA	CRISIL BBB+/Stable
NA	Term loan	NA	NA	30-Mar-24	22.2	NA	CRISIL BBB+/Stable
NA	Term loan	NA	NA	04-Mar-25	25.0	NA	CRISIL BBB+/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	111.8	NA	CRISIL BBB+/Stable

*Yet to be issued 

 

Annexure - Details of ratings withdrawn

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating
INE179P07167	Non-convertible debentures	18-Nov-20	14.25%	30-Mar-23	8	Simple	Withdrawn
INE179P07159	Non-convertible debentures	18-Nov-20	14.25%	30-Mar-23	27	Simple	Withdrawn