CRISIL has assigned its 'CRISIL BBB-/Stable' rating to the long-term bank facility of Epimoney Private Limited (Epimoney; part of the Epimoney group). Epimoney is the lending entity of the group and has a subsidiary, Flexiloans Technologies Pvt Ltd (FTPL), together referred to as the Epimoney group.
 
The rating reflects the group's comfortable capitalisation metrics and easily scalable business model driven by technological systems and processes leading to high automation. These strengths are partially offset by limited track record of operations, inherent vulnerability of asset quality given that the portfolio comprises completely of unsecured loans, and constrained earnings profile due to high operating expenses given nascent stage of operations.
 
The group started operations in 2016 as an online market place with focus on providing unsecured micro, small and medium enterprises (MSME) business loans. Currently, 100% of its portfolio comprises unsecured loans. Epimoney adopts a branchless model with focus on automating the entire loan procedure, leading to all processes (from origination to disbursements) happening digitally. Consequently, it has been able to grow its assets under management (AUM) at a CAGR (compound annual growth rate) of 135% during fiscals 2017-20, to Rs 159 crore as on March 31, 2020 (Rs 125 crore as on March 31, 2019). This was despite low growth in the month of March'20 as disbursements slowed down from early March'20. However, amid the current environment, AUM de-grew to Rs 130 crore as on September 30, 2020.
 
Capitalisation metrics are comfortable, with reported networth of Rs 52.7 crore as on September 30, 2020, and adjusted gearing of 1.8 times at a standalone level (similar at a consolidated level). Capital position has been supported by regular capital infusion, with the group having raised Rs 137 crore since inception, of which Rs 50 crore was infused in the third quarter of fiscal 2021. This improved networth to over Rs 100 crore.
 
However, given the limited track record of operations, the loan portfolio lacks seasoning. The asset quality, as measured by 90+ days past due (dpd), stood at 4.2% as on March 31, 2020 (1.2% as March 31, 2019). The inch-up in 90+ dpd in fiscal 2020 was due to change in write-off policy. 90+ dpd improved to 1.6% as on September 30, 2020, on account of moratorium, freeze on asset classification and write-offs of earlier impaired loans. Since the company follows a policy of writing off 100% of loans at 270+dpd, (including last 12 months' write-offs), adjusted 90+ dpd remained high at 6.8% as on September 30, 2020, compared to 7.1% as on March 31, 2020 (6.8% as on March 31, 2019). In light of the Reserve Bank of India's (RBI) regulatory measures under the Covid-19 Regulatory Package, whereby lenders were permitted to grant moratorium, Epimoney had given moratorium on opt-in basis to its borrowers. Around 56% of the overall loan book (including partner book) was under moratorium as on May 31, 2020, which improved to around 30% for August 2020 post-relaxations in lockdown. Consequently, collection efficiency improved from 36%¹ in May 2020 to 83%1 in September 2020. While the group has put in place adequate risk management systems and processes to manage these risks, its ability to manage its asset quality and collections over the medium term will remain a key monitorable.
 
Due to the nascent stage of operations, earnings profile remains constrained with losses incurred since inception. Operating expenses are elevated as the group has made significant investments in setting up a technology infrastructure and hiring senior management personnel. However, the group is well-placed to achieve operational leverage while growing the AUM, Therefore, ability to achieve operational efficiency and manage credit costs, especially amid the current macro-economic environment, will be a key monitorable.
 
On the liabilities side, Epimoney had applied for moratorium from its lenders as per the Reserve Bank of India (RBI) announced regulatory measures under 'Covid-19 - Regulatory Package'. CRISIL notes that the company received moratorium from few of its borrowers but continued to make payments (as per the original schedule) wherever it did not receive the moratorium.
 
On the liquidity side, as on October 30, 2020, cash and liquid investments stood at Rs 25.3 crore along with unutilised cash credit/working capital demand loan (CC/WCDL) line of Rs 1.9 crore, nearly covering three months of cash outflows of Rs 27.9 crore (from November 2020 till January 2021). Additionally, the group received an equity infusion of Rs 25 crore in the first week of November 2020 which further supports the liquidity position of the group. Furthermore, monthly collections during lockdown and moratorium (From Mar'20 to Aug' 20) amounted to Rs 14 crore on an average, which is expected to go up over the near term and support liquidity.

For arriving at its rating, CRISIL has combined the business and financial risk profiles of Epimoney and its wholly owned subsidiary, Flexiloans Technologies Pvt Ltd (FTPL), together referred to as the Epimoney group. However, FTPL is currently very small, with total assets of just Rs 0.03 crore as on September 30, 2020. The companies have strong operational and financial linkages, common senior management, and shared brand.

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

Strengths:
* Comfortable capital position
Capitalisation metrics are strong supported by regular capital infusions. The group has raised about Rs 137 crore of equity since inception from the promoters and high networth individuals, of which Rs 50 crore was raised in the third quarter of fiscal 2021. Consequently, networth stood at Rs 52.7 crore with adjusted gearing at 1.8 times as on September 30, 2020 (similar at consolidated level). After the recent equity infusion of Rs 50 crore, capital position has strengthened further with networth going above Rs 100 crore. Gearing is expected to remain under 4 times at a consolidated level on a steady state basis. Capitalisation is expected to remain comfortable over the medium term, supported by improvement in internal accrual and regular capital infusion, thus providing a cushion against asset-side risks.
 
* Easily scalable business model with high focus on automation
The group has adopted a branchless business model with most of its operations (from origination to disbursements) happening digitally. Sourcing strategy is two-fold: partnering with digital players/aggregators called ecosystem partners and targeting vendors on these platforms; and direct digital marketing. As on September 30, 2020, 62% of the AUM was originated through digital marketing as against 16% as on March 31, 2017 given the group's focus on sourcing via this channel. Consequently, AUM through digital marketing channel has grown at CAGR of 261% during Mar-17 to Mar-20 as against 87% through other channels. Going forward as well, sourcing via this channel is expected to be the focus area over the medium term. As the group has high focus on automation for scale, it has made heavy investments in developing in-house technological infrastructure such as several application programming interface (API) integration with partners and many interfaces for digital marketing for customer acquisition; image classifiers to verify documents and rule engines to pre-qualify leads for faster application processing; and proprietary credit scoring model for faster credit appraisal.
 
Consequently, the group has been able to grow its AUM at a CAGR of 135% during fiscal 2017-2020 to reach Rs 159 crore as on March 31, 2020. This was despite low growth in the month of March'20 as disbursements slowed down from early March'20. However, amid the economic environment, AUM de-grew by 18% from March 31, 2020, to September 30, 2020, to Rs 130 crore. Nevertheless, the group is expected to pick-up growth faster by virtue of being a technology-driven enterprise as and when the situation normalises. Having balance sheet strength of co-lending partners (21% of total AUM with four partners as on September 30, 2020 as against 18% as on March 31, 2020) will also support growth.
 
Weaknesses:
* Asset quality susceptible to risks inherent in unsecured loans; loan book lacks seasoning
Given the focus on unsecured MSME loans, asset quality is susceptible to risks associated with the weak credit risk profiles of borrowers. The MSME segment is vulnerable to cash flow cyclicality, which could result in potential slippages, and given the unsecured nature of the loans, recovery could also be limited. Nevertheless, the asset quality, as measured by 90+ days past due (dpd), stood at 4.2% as on March 31, 2020 (1.2% as March 31, 2019). The inch-up in 90+ dpd in fiscal 2020 was due to change in write-off policy. While the same improved to 1.6% as on September 30, 2020, it was mainly on account of moratorium, freeze on asset classification and write-offs of earlier impaired loans, hence, including last 12 months write-offs, adjusted 90+ dpd remained more or less stable at 6.8% as on September 30, 2020 as compared to 7.1% as on March 31, 2020 (6.8% as on March 31, 2019). In light of the Reserve Bank of India's (RBI) regulatory measures under the Covid-19 Regulatory Package, whereby lenders were permitted to grant moratorium, Epimoney had given moratorium on opt-in basis to its borrowers. Around 56% of the overall loan book (including partner book) was under moratorium as on May 31, 2020, which improved to around 30% for the month of Aug-20 post relaxations in lockdown. Consequently, collection efficiency improved from 36%² in May 20 to 83%2 in September 2020.
 
Furthermore, the group began operations in 2016 as an online market place. While it largely grew through own book lending, it started doing securitisation and co-lending recently and plans to focus on off-book growth over the medium term. As the scale-up in loan portfolio has happened over the last three fiscals, loan book lacks seasoning and hence the ability to manage asset quality while scaling up is a monitorable.
 
Nevertheless, the group has put in place comfortable credit risk management systems. Epimoney uses a proprietary credit risk model, which provides the score for each application filed that is used to evaluate credit decisions. The group relies heavily on analysing multiple data sets for doing the risk assessment of its customers. In order to extract data from multiple sources on real time basis, it has developed proprietary algorithms. Furthermore, by virtue of having partnership with digital players, the company gets access to additional set of information about the customer. Multiple proprietary algorithms are then used to analyse different types of data to arrive at a final score, based on which lending decision is taken. Currently, the model has been in use for four years and the group keeps on making timely upgrades to it based on the performance of the portfolio/collections experience. Additionally, having first charge over the funds getting transferred from anchor partner to the borrower as a result of presence of escrow mechanism agreement with the partner also provides additional comfort. As on September 30, 2020, around 40% of the portfolio of the company is covered under escrow mechanism.

Nevertheless, asset quality remains vulnerable to sharp increases given the credit risk profile of the underlying borrower segment. Therefore, the ability to maintain asset quality while scaling up the loan portfolio remains a key monitorable.
 
* Earnings profile currently constrained amid elevated operating expenses
Owing to nascent stage of operations, operating expenses (16.8% of average total managed assets in fiscal 2020) remained high due to heavy investments in setting up technology infrastructure and hiring of several employees at senior management level. Consequently, Epimoney has reported losses since inception, both at consolidated and standalone levels. The group continues to invest in technology, ramp up their existing credit model, and strengthen the employee base.

Furthermore, inherent vulnerability of the underlying borrower segment leading to high credit cost can also have a negative impact on the earnings profile due to stringent provisioning policy. The company writes off 100% of loans at 270+dpd. Having said that, high yields with average IRR of 24-28% supports earnings profile. Additionally, the group has 60-65% of its portfolio covered under Credit Guarantee Fund Trust for Micro and Small Enterprises, which support profitability.

Nevertheless, earnings profile hinges upon the group's ability to manage its credit costs and reduce operating expenses, which will remain key monitorables over the medium term.

Asset-liability maturity profile was comfortable as on September 30, 2020, with positive mismatches across buckets up to 1 year. As on October 30, 2020, Epimoney had cash and liquid investments of Rs 25.3 crore along with unutilised CC/WCDL line of Rs 1.9 crore, nearly covering three months of cash outflows of Rs 27.9 crore from Nov-20 till Jan-21. Additionally, the group received an equity infusion of Rs 25 crore in the first week of November 2020 which further supports the liquidity position of the group. Furthermore, the group has been collecting Rs 14 crore amount of collections on an average during lockdown and moratorium period (From Mar-20 to Aug-20), which is expected to go up going forward, therefore, strengthening the liquidity positon of the company further.

CRISIL believes the Epimoney group will benefit from its experienced promoters and management and will maintain its healthy capitalization 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.
 
Rating Sensitivity Factors
Upward factors:
* Continued comfortable capitalisation metrics with adequate gearing metrics
* Sustainability in asset quality with 90+dpd (excluding write-offs) being below 3.0% over the medium term and improvement in earnings profile
 
Downward factors:
* Any adverse movement in asset quality with 90+dpd, leading to impact on the earnings profile
* Moderation in capitalisation metrics with adjusted gearing inching to beyond 3 times.

Epimoney was set up in February 2016 as an online lending platform to solve the problem that SMEs face in accessing quick, flexible and adequate funds for growing their businesses. The platform houses proprietary lending model, evaluation from which leads to a lending decision. The focus is on providing unsecured business SME loans at a fast pace that are customised to borrowers' needs.

For fiscal 2020, Epimoney reported a net loss of Rs 13.9 crore on a total income of Rs 39.6 crore, compared to Rs 11.8 crore and Rs 25.2 crore, respectively, in fiscal 2019. On a consolidated basis, the group reported a net loss of Rs 13.9 crore on a total income of Rs 39.6 crore in fiscal 2020. 

¹Collection efficiency = Total collections including overdue collections but excluding prepayments divided by current billing assuming 100% of the book out of moratorium for the moratorium period
²Collection efficiency = Total collections including overdue collections but excluding prepayments divided by current billing assuming 100% of the book out of moratorium for the moratorium period.

Any other information: Not applicable