| Fincare Small Finance Bank Limited | ||
| Rating reaffirmed at 'CRISIL A1+' | ||
| Rating Action | ||
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| 1 crore = 10 million | ||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the certificate of deposits programme of Fincare Small Finance Bank Limited (Fincare SFB).
The rating continues to reflect the company’s adequate capital position, experienced board and leadership team, adequate risk management systems and practices bolstered by increasing digitisation, and increasing share of retail deposits. These strengths are partially offset by higher cost of funds, low current account and savings account (CASA) base, modest credit risk profile of the borrowers and limited seasoning in the non-microfinance portfolio.
Over the years, Fincare SFB has ramped up its deposit franchise to attain a deposit base of Rs 5,318 crore as on March 31, 2021, which marks a growth of 14% over the past fiscal and forms 79% of overall external borrowings. Commensurate to this growth, the share of retail deposits (CASA and retail terms deposits) has also increased from 73.6% as on March 31, 2020, to 87.6% a year later.
The share of CASA in the overall deposit base also showed robust growth in fiscal 2021 and stood at 23.7% in March 2021 compared with 11.9% in March 2020. In terms of external liabilities, CASA stood at 18.8%, which is comparable with most other SFBs but lower than banks.
Assets under management (AUM) grew by 14% in fiscal 2021 to Rs 6,072 crore, driven by 13% growth in microfinance loans, which account for the largest share (about 80%) in the AUM. Despite gradual expansion into non-microfinance products in recent years, its share in the bank’s total AUM remains small and Fincare SFB’s ability to profitably scale up this portfolio will remain a rating sensitivity factor.
Collection efficiency revived towards the end of the first quarter of fiscal 2021 and reached 89% in September 2020. Efficiency further improved to 92% in March 2021 and 93% in April but declined in May. Given the second wave of Covid-19 and localised lockdowns by states to contain the pandemic, the ability to sustain collection and eventually reach the pre-pandemic level of over 99% on a steady-state basis remains a key monitorable. With steady improvement in collections and revival in economic activity, disbursements have improved. Fincare SFB’s disbursement picked up from June 2020, and with significant improvement in collections, stood at Rs 4,751 crore as of March 2021. In addition to disbursing loans to new borrowers, the bank offered to pre-close the loans of existing borrowers and disbursed fresh loans to them, providing additional liquidity to revive their businesses, resulting in significantly higher prepayments in the fourth quarter of 2021. Sustainability of collections for the incremental disbursements will be closely monitored.
Because of disruption in cash flows of borrowers amid the pandemic and the potential challenges in recovering overdues, the company made a provision of Rs 252 crore in fiscal 2021. Under the one-time restructuring scheme announced by the Reserve Bank of India (RBI) as a Covid-19 relief measure, Fincare SFB restructured Rs 173 crore of the loan book in fiscal 2021. Owing to the second wave of Covid-19, the bank is expected to restructure in fiscal 2022 as well. Nevertheless, asset quality remained moderate and the 90+ days past due (dpd) stood at 5.1% as on March 31, 2021, compared with 2% as on March 31, 2020. For microfinance loans (80% of the AUM), the 90+ dpd stood at 4.9%, whereas for loan against property (11% of the AUM) and loan against gold (6% of the AUM) were 7.6% and 1.7%, respectively, as on March 31, 2021. However, the intermittent lockdowns and localised restrictions because of the second wave of the pandemic could delay collections in the near term because of the impact on the cash flows of borrowers. Any change in the payment discipline of borrowers will also affect delinquency levels.
Despite high provisioning in fiscal 2021, the bank reported net profit of Rs 113 crore translating to return on assets of 1.5%. Credit cost stood at 3.3% with PCR of 58% in fiscal 2021. Excluding the accelerated provisioning, profitability remained stable in fiscal 2021. Pre-provisioning profit rose to Rs 365 crore in fiscal 2021 from Rs 338 crore in fiscal 2020.
The financial risk profile remains supported by the bank’s adequate capitalisation, reflected in absolute networth of Rs 1,017 crore and tier I capital adequacy ratio (CAR) of 24.9% as on March 31, 2021. In terms of cost of funds, while the metric has improved gradually since Fincare SFB transitioned into a bank, it was higher than the other mid-sized banks and is a key monitorable
Owing to Fincare SFB’s long track record of operations before converting to a bank, its operations are spread across 15 states and union territories through 803 banking outlets. On March 31, 2021, the top three states (Tamil Nadu, Gujarat and Karnataka) accounted for 62% of the total portfolio, of which Tamil Nadu alone corresponded to 25%. While regional diversity has increased over the years, there is further scope for improvement.
Fincare SFB continues to benefit from the improved market perception, systemic liquidity support and lower cost of funds on account of transition to a bank from a non-banking financial company (NBFC).
Liquidity coverage ratio (LCR) was healthy at 306% as on March 31, 2021, and will remain stable in the near term. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has assessed the standalone credit risk profile of Fincare SFB. |
Key Rating Drivers & Detailed Description Strengths:
The bank’s capital position was adequate despite seasonal volatility in asset quality owing to socio-political issues. In fiscal 2020, the bank raised Rs 95 crore by issuance of rights to existing shareholders. This, in addition to a stable cash accrual, resulted in networth of Rs 1,017 crore as on March 31, 2021, and tier I CAR of 24.9%. On a steady state basis, the bank intends to maintain its tier I CAR at 20%. Gearing was moderate at 6.7 times as on March 31, 2021, and is expected at less than 6 times over the medium term.
In addition, CRISIL Ratings believes that Fincare SFB enjoys strong flexibility to raise equity, whenever required, given the diverse group of investors with high pedigree; some of whom have been associated with the entity since 2010.
Fincare SFB benefits substantially from the presence of experienced professionals from across the financial sector. The transition from being just a promoter-driven entity to an entity managed by a team of experienced professionals happened almost a decade ago. The senior management team is highly experienced. Leadership team, including Mr Rajeev Yadav, Mr Keyur Doshi, Mr Soham Shukla and Mr Mahendar Chawla, has been stable for many years now. Other top executives, such as Mr Pankaj Gulati, Mr Chandar Rao and Mr Kishore Mangalvedhe, have also been with the entity for over 5 years.
The board, chaired by Mr Pramod Kabra, a partner with True North, comprises eminent persons from the financial and allied sectors. They have rich domain expertise and extensive experience in the fields of microfinance and self-help groups, audit and accounts, taxation, technology and strategy.
Over its operational history, previously as an MFI and now as a bank, Fincare SFB has been able to acclimatise its systems and processes according to its scale and nature of business while keeping technology in the forefront. This enabled the scaling-up of the operationally intensive microfinance business and remains an anchor for the bank’s retail portfolio. Adequate audit and internal control mechanisms have been put in place, which include a separate operational risk function. Ever since Disha Microfin and Future Financial Services have been amalgamated, the board and senior management team have taken multiple initiatives to increase the digital orientation of operations. As part of its long-term strategy, the bank has launched ‘101 first account’, a zero balance digital savings account with instant account opening feature. ‘Kaizala’ a secure employee communication and productivity application has digitised field processes such as password resets, audits, UPI collection, and branch controls, providing greater visibility on the activities of the field staff. The bank has already implemented its DLite and M-Care process flows, which involve tablet-based loan application followed by real-time credit bureau check and instant credit decision.
Deposit base stood at Rs 5,318 crore as on March 31, 2021, driven by growth in compound annual terms of 61%, constituting 79% of the total external liabilities. This growth was coupled with an increasing share of retail deposits in the overall liability franchise, anchored by the bank’s ability to leverage its existing base of over 2.5 million retail borrowers on the asset side, of which majority are now deposit customers as well. The share of retail deposits (CASA and term deposits of less than Rs 2 crore) in the total deposit base (including CDs) has increased from 73.6% on March 31, 2019, to 87.6% and is expected to grow further.
While the traction in retail deposits imparts granularity to liabilities, CASA share rose to 23.7% of total deposits and 18.8% of total borrowings as on March 31, 2021, from 11.9% and 9.3%, respectively, in the previous fiscal. The CASA share is comparable with other SFBs but lower than other universal banks. Ability to sustain growth in retail deposits and increase the share of CASA in the overall deposit and liability base remains a key monitorable.
Weaknesses:
Despite good traction in retail deposits over the past few quarters, the proportion of CASA in the total deposit and borrowing base remains low. While the share of CASA in the total deposit base increased to 23.7% in fiscal 2021 from 11.9% in fiscal 2020, it is lower than that of universal banks. As a proportion of total borrowings, CASA was even lower at 18.8% compared with the banking industry average of 30%. On the other hand, cost of funds was higher than the 5-6% of other mid-sized banks. While this metric has improved gradually since Fincare SFB transitioned into a bank, as incremental funds being in the form of low cost deposits and refinance from financial institutions. For fiscal 2017, cost of funds was above 10%, which declined to 8.6% in 2021 and is expected to reduce further.
A significant 79% of the portfolio comprises microfinance loans to clients with average credit risk profiles and lack of access to formal credit. These customers belong to the semi-skilled, self-employed category, and their income may be volatile and dependent on the local economy. With the slowdown in economic activity after the lockdown, the potential pressure on borrowers’ cash flows may restrict their repayment capability. Moreover, this segment of borrowers continues to be subjected to idiosyncratic risks on account of socio-political factors. With slowdown in economic activity owing to the second wave of the pandemic, the cash flow for such borrowers has been stretched, thereby restricting the repayment capability. The bank is in a process of identifying the more impacted customers due to the second wave of Covid 19 from this segment and restructured their loans in the coming months.
As revival to pre-Covid levels has been prolonged, the ability of Fincare SFB to reinstate repayment discipline among its customers will be a monitorable.
In the non-microfinance segment, which forms the remaining 21% of the bank’s AUM, Fincare SFB’s track record is limited with vintage of just over two years in affordable housing loans, loan against property, loan against gold and institutional finance. Other products such as two-wheeler loans have been introduced even more recently in fiscal 2019. Loan against property and gold loans form the bulk of the non-microfinance portfolio, and stood at 11% and 6% of the AUM, respectively, as of May 2021. However, asset quality in these segments has weakened, as reflected in 90+ dpd of 9.6% and 8.8%, respectively, as on May 31, 2021. In the long term, the bank’s ability to profitably scale its non-microfinance portfolio while maintaining sound asset quality will be a key rating sensitivity factor. |
Liquidity: Strong The bank had excess statutory liquidity requirement of Rs 1,117 crore and LCR of 306% as on March 31, 2021. Based on its structural liquidity statement dated March 31, 2021, there was nil material negative gaps in any buckets for up to one year. Liquidity is supported by access to refinance limits from financial institutions. As a scheduled commercial bank, Fincare SFB has access to liquidity adjustment facility, marginal standing facility and interbank markets in addition to certificate of deposits. |
Rating Sensitivity factors Downward factors
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About the Company Incorporated in June 2017, Fincare SFB is an amalgamation of two entities, Disha and FFSL. Promoted by Mr Sameer Nanavati, Mr Keyur Doshi, Mr Vivek Kothari and Mr Soham Shukla, Disha was engaged in the micro finance business since February 2009 in Gujarat. FFSL, promoted by Mr Dasaratha Reddy and his family members, was in the same business since 2007 in Tamil Nadu, Karnataka and Andhra Pradesh. In October 2010, Indium IV (Mauritius) Holdings Ltd (Indium IV), advised by India Value Fund Managers (IVF), acquired stake in Disha Microfin and Future Financial Services to integrate the entities. By mid-2012, the functional integration of Disha Microfin and Future Financial Services was completed with both companies using the same software and technology, having the same ground-level processes and similar organisation structure. Subsequently, a common brand, Fincare, was established in 2014.
In September 2015, Disha Microfin received in-principle approval from the RBI to set up a small finance bank with the objective of enhancing financial inclusion. The bank, under the name Fincare SFB, commenced banking operations in July 2017. Through a gazette dated April 13, 2019, the RBI directed the inclusion of the bank in the Second Schedule of Reserve Bank of India Act, 1934. |
Key Financial Indicators
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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)
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
Criteria Details
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