Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable’ rating on the long term bank facilities of Fusion Micro Finance Limited (Fusion). CRISIL Ratings has withdrawn its rating on Non Convertible Debentures of Rs 50 crore (See Annexure 'Details of Rating Withdrawn' for details) in line with its withdrawal policy. CRISIL Ratings has received independent confirmation that these instruments are fully redeemed.

 

The rating reflects the substantial improvement in the company’s earnings driven by higher net interest margin (NIM) and controlled credit cost and its increased scale of operations with improving asset quality.

 

In line with the revised regulatory framework, Fusion enhanced its risk-based pricing by increasing its yields by 200 to 300 basis points (bps) during fiscal 2023 leading to expansion in NIM to 10.5% during the fiscal from 8.2% in the previous fiscal. The expansion in NIMs is further supported by Fusion’s ability to manage its borrowing cost. Credit cost remained low at 2.2% supported by collection efficiency consistently over 99% for new originations. The better NIM and lower credit cost, boosted profitability, as reflected in return on managed assets (RoMA) of 4.3% for fiscal 2023 and 4.5% for the first half of fiscal 2024. The company will likely sustain its improved profitability over the medium term.

 

The company has grown its portfolio steadily and is among the top five microfinance institutions (MFIs) in India. Its assets under management (AUM) rose 25% on year to Rs 10,026 crore as of September 2023 (Rs 9,296 crore as of March 2023). The company focussed equally on asset quality improvement along with growth. Its GNPA improved to 2.7% as on September 30, 2023 from 3.5% as on March 31, 2023 and 5.7% as on March 31, 2022. CRISIL ratings notes that Fusion did not sell any portfolio to asset reconstruction companies (ARCs) and wrote off Rs 307 crore (3.2% of the portfolio as of June 2023) in the past 15 months. Collection efficiency has remained strong with low delinquencies for loans originated in the past 12-18 months. This has resulted in lower incremental credit costs.

 

The company has maintained healthy capital position. It raised Rs 600 crore through an initial public offering (IPO) in the third quarter of fiscal 2023. This along with substantial improvement in accretion, increased the networth to Rs 2,576 crore in September 2023 from Rs 2,322 crore as on March 31, 2023 and Rs 1,338 crore as on  March 31, 2022. Adjusted gearing also improved stood to 3.3 times as on September 30, 2023 from 3.3 times as on March 31, 2023 (4.8 times as on March 31, 2022). With steady ramp-up of operations, ability to maintain adjusted gearing below 4.0 times will remain key rating sensitivity factor. 

 

The rating continues to reflect the experienced leadership and senior management team of Fusion, the company’s healthy capitalisation, and improving profitability and asset quality with sound risk management/audit processes. These strengths are partially offset by the inherently modest credit risk profile of borrowers, and potential risk from local socio-political issues inherent in the microfinance sector.

Analytical Approach

CRISIL Ratings has evaluated the business and financial risk profiles of Fusion on standalone basis.

Key Rating Drivers & Detailed Description

Strengths:

Healthy capitalisation, supported by regular equity infusion and rich pedigree of investors

On November 2, 2022, Fusion issued its Initial Public Offering with fresh issuance of Rs 600 crore and offer for sale of around Rs 500 crore. The fresh issuance and internal accrual strengthened capitalisation with networth at Rs 2,322 crore and adjusted gearing at 3.3 times as on March 31, 2023, compared with Rs 1,338 crore and 4.8 times, respectively, a year earlier. As of September 2023, the networth was Rs 2,576 crore and adjusted gearing was 3.3 times. Going by the past track record, Fusion has raised the required equity capital and ensured that its capital position remains adequate in the past. It will likely maintain adjusted gearing below 4 times and overall capital adequacy ratio of 20% on a steady-state basis.

 

Improving profitability

Operating profitability has improved over the past two years The company reported pre provisioning profitability of 5.3% in fiscal 2021 and 5.7% in fiscal 2022. Resultantly, despite the credit costs rising to 4.2% for fiscal 2021 and 5.3% for fiscal 2022, the company maintained its positive bottom line with RoMA of 0.8% for fiscal 2021 and 0.3% for fiscal 2022. Also, with the revised regulatory framework (de-regulation of NIM), the company has raised their interest yields by 200 - 300 bps on incremental disbursements in the past 4-5 quarters. Owing to increase in interest income and controlled credit cost, company reported a PAT was Rs 387 crore and RoMA 4.3% in fiscal 2023. In first half of fiscal 2024, Fusion reported a PAT of Rs 246 crore and a RoMA of 4.5% (annualised). The company is expected to sustain improved profitability over the medium term.

 

Improving asset quality with sound risk management practices

Fusion asset quality has been improving with GNPA declining to 3.5% in March 2023 as compared to 5.7% in March 2022, which further improved to 2.7% in September 2023. CRISIL ratings notes that company didn’t sell any portfolio to ARCs and wrote off Rs 307 crore (3.2% of the portfolio as of June 2023) in last 15 months. Its collection efficiency has remained strong with low delinquencies for loans originated in the past 12-18 months. This has resulted in lower incremental credit costs. While the asset quality will continue to improve gradually, return to the pre-pandemic level and sustenance remain monitorable.

 

Fusion has developed adequate risk management systems and practices over the past few years with expansion into new markets. This has helped maintain asset quality in existing regions and identify new regions for expansion. The company evaluates the potential area of operations on the Area Lucrative Index, which involves assessment of parameters denoting the credit potential of the region. The company also has an extensive audit team of 329 members as of September 2023, with the number of branches being capped at two per auditor. The branches are graded twice a month on over 100 parameters, which helps the company detect any ongoing or potential issues. In terms of geographic diversity, as of September 2023, the company has expanded its presence to 22 states, with highest exposure to the top state being ~23% (33% as on March 31, 2016, prior to demonetisation) and the top five states being 70% (94% as on March 31, 2016). Besides geographical expansion, the robust growth over the past few years was supported by adequate monitoring of operational parameters, such as calibrated increase in ticket size and AUM exposure per branch, per district and so on.

 

Experienced senior management team

Fusion is promoted by Mr Devesh Sachdev, who is an alumnus of Xavier School of Management and had experience of over two decades before he started Fusion in 2010. The second line of management comprises professionals with average experience of over a decade in the commercial and retail lending, audit, operations, people management and information technology (IT). The board of directors has adequate representation of investors and extends strategic support to the company.

 

Weaknesses:

Inherently modest credit profiles of borrowers

A significant portion of the portfolio comprises microfinance loans to clients with below-average credit risk profiles and lack of access to formal credit. Typical borrowers are cattle owners, vegetable vendors, tailors, tea shops, provision stores and small fabrication units. The income flow of these borrowers could be volatile and depends on the local economy — any economic slowdown could lead to potential pressure on cash flow at the household level, thereby restricting their repayment capability. Fusion’s ability to reinstate repayment discipline among its customers, such that the pre-pandemic levels of periodic collections are achieved, will be a key monitorable

 

Potential risk from local socio-political issues in the microfinance sector

The microfinance sector has 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. In addition, the sector has faced issues of varying intensity in several geographies. Promulgation of the ordinance on microfinance institutions (MFIs) by the Government of Andhra Pradesh in 2010 demonstrated their vulnerability 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. Similarly, the sector witnessed high level of delinquencies post-demonetisation and the subsequent socio-political events. For Fusion, the ultimate credit loss due to disruption after demonetisation was close to 12.4%, which was borne over the following two fiscals. This indicates the fragility of the business model vis-a-vis external risks. As the business involves lending to the poor and downtrodden sections of the society, MFIs will remain exposed to socially sensitive factors, including charging of high interest rates and consequently, to tighter regulations and legislation.

Liquidity: Strong

Fusion has a comfortable asset-liability management (ALM) profile, with cumulative positive mismatches across all buckets up to one year as on June 30, 2023. Cash and equivalents were Rs 1,177 crore as on June 30, 2023. Liquidity buffer to cover total debt and loan repayments including operating expenses over the following two months was 1.1 times (assuming nil collections). In fiscal 2023, the company raised about Rs 6,421 crore of funds through terms loans, non-convertible debentures and Direct Assignment.

Outlook: Stable

Fusion will maintain adequate capitalisation over the medium term, supported by its ability to raise capital. The business risk profile will benefit from the expanding scale of operations and improving asset quality

Rating Sensitivity Factors

Upward Factors

• Increase in scale of operations while maintaining asset quality
• Sustained profitability (RoMA) above 4% while maintaining adjusted gearing below 3 times

 

Downward Factors

• Deterioration in asset quality or earnings profile, resulting in stressed profitability and capital position.
• Moderation in capitalization – evidenced by adjusted gearing increasing to and remaining above 5 times commensurate with a decline in tier I CAR to below 18%.

About the Company

Company was incorporated on September 5, 1994, as Ambience Fincap Private Limited and later in 2009 was takeover by Mr. Devesh Sachdev and changed name to Fusion Microfinance. Fusion started operation in 2010 as a non-deposit-accepting non-banking finance company and subsequently got converted into an MFI on January 28, 2014. Fusion provides financial services to poor women and predominantly follows the joint-liability group model, wherein each group has 5-7 members. The loans are provided mainly for agricultural and allied activities, business activities, and establishment and expansion of micro enterprises. As on September 30, 2023, the company had a network of 1,088 MFI branches and 76 SME branches spread across over 420 districts within 22 states, with a strong focus on rural and semi-urban areas.

 

Promoted by Mr Devesh Sachdev, the company has attracted domestic and global investors with high pedigree over the years. After capital infusion in fiscal 2019 and the third quarter of fiscal 2020, Warburg Pincus (through Honey Rose Investment Ltd) acquired a 48.6% stake in the company, making it the largest shareholder in Fusion. This marked the exit of Belgian, NMI, SIDBI and RIF from the investor group and reduction in the respective stakes held by Global Financial, Creation Investments and Oikocredit. Post the recent IPO, Warburg Pincus has remained the majority shareholding of the company along with exit of Global Financial and Oikocredit

Any other information: Not applicable