Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A-/Stable’ rating on the long-term bank facilities and non convertible debentures of Fusion Micro Finance Private Limited (Fusion).

 

The rating continues to centrally factor in the healthy capitalisation of Fusion, strengthened by regular equity infusion and rich pedigree of investors. The rating also factors sound risk management and audit processes, experienced leadership and comfortable liquidity, supported by a diverse resource profile and the ability to raise funds at competitive rates. These strengths are partially offset by the inherently modest credit risk profile of borrowers, ability to manage asset quality and control credit losses and potential risk from local socio-political issues inherent to the microfinance sector.

 

Assets under management (AUM) stood at Rs 3,607 crore as on March 31, 2020, registering a two-year compound annual growth rate of 52%. However, this momentum was curbed by lower disbursements in the first half of fiscal 2021 due to the ongoing Covid-19 pandemic. Eventually, with gradual revival in business activity through the second half of fiscal 2021, AUM increased to Rs 4,637 crore (provisional) as on March 31, 2021, registering an on-year growth of 28.5%.

 

On the asset quality side, the collection efficiency (including overdue but excluding prepayments) revived towards the end of the first quarter of fiscal 2021 and reached 85% in September 2020. It has steadily improved since then and stood at over 100% in March 2021 because of high overdue collection while current collections stood at 87%. With the sharp spike in number of cases due to the second wave of the pandemic and various forms of lockdown being imposed by states to curb the spread of Covid-19, the ability of the company to sustain collections and eventually reach pre-pandemic levels of over 99% on a steady-state basis will remain a key monitorable. The company started disbursing from July 2020, with overall disbursements at Rs 3,676 crore in fiscal 2021. In addition to disbursing loans to fresh borrowers, the company also offered to pre-close the loans of existing borrowers and disbursed fresh loan to provide them with 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.

 

Given the disruption in cash flow of many borrowers due to the ongoing pandemic and considering the potential challenges in recovering overdue, the company has undertaken provisioning of Rs 143 crore during the nine months ended December 31, 2020, in addition to Rs 51 crore of Covid-19 provision already done in the last quarter of fiscal 2020. Asset quality remained moderate and the 90+ days past due (dpd) stood at 2.8% as on March 31, 2021, compared with 1.0% as on March 31, 2020. However, the second wave of Covid-19 pandemic has resulted in intermittent lockdowns and localised restrictions. This could delay collections in upcoming months due to impact on the underlying borrower cash flow. Further, any change in the behaviour of borrowers on payment discipline can affect delinquency levels.

 

The second wave of Covid-19 pandemic has also increased the risk of rise in credit loss and its potential impact on capitalisation metrics. Capitalisation remains healthy, reflected in adjusted gearing of 3.4 times as on December 31, 2020 (5.0 times in fiscal 2019). The sharp correction in gearing was due to Rs 500 crore equity infusion by Warburg Pincus (via Honey Rose Investment Ltd) and Creation Investments in December 2019.

 

Liquidity, on a standalone basis, is sufficient to manage liability-side outflows as per schedule. As on March 31, 2021, the liquidity buffer to cover total debt and operating expense obligations over the following three months was 1.7 times even after assuming nil collections. Further, Fusion is likely to continue receiving timely, need-based support from shareholders.

Analytical Approach

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

Key Rating Drivers & Detailed Description

Strengths:

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

Over the last few years, the company has on-boarded investors such as Warburg Pincus and Creation Investments, capital support from whom has strengthened Fusion’s capital position significantly. The capital position, reflected in adjusted networth (provisional) of Rs 1,239 crore as on December 31, 2020, is adequate in relation to the current scale of operations. Between April 01, 2016, and December 31, 2020, the company raised Rs 1,033 crore, which is demonstrative of the constant support from investors and Fusion’s ability to attract new investors. Warburg Pincus (via Honey Rose Investment Ltd), which became the largest shareholder in the company after infusing Rs 300 crore in December 2018, has further infused Rs 500 crore along with Creation Investments in the third quarter of fiscal 2020. Other key investors, apart from the promoter, – Mr Devesh Sachdev, are Oikocredit and Global Financial Inclusion Fund. Though adjusted gearing has been on a relatively higher side, post equity infusion by Warburg Pincus in fiscals 2019 and 2020, adjusted gearing moderated to 3.4 times as on December 31, 2020. With a rich pedigree of investors and demonstrated capital support received from them, capitalisation metrics are expected to remain comfortable -- despite the potential rise in credit losses due to the Covid-19 pandemic-led disruption -- in the near future.

 

The company’s ability to ramp up internal accretion so that it is able to self-sustain its capital position and, thereby, keep gearing within the targeted cap of 5 times remains a monitorable. Nevertheless, going by the past track record, Fusion has been able to raise the required equity capital and ensure that overall capital position remains adequate. This would also substantiate maintenance of adjusted gearing at around 5 times and an overall capital adequacy ratio of 20% on a steady-state basis.  

 

* Sound risk management practices

Fusion has developed adequate risk management systems and practices over the last few years as it expands operations to new markets. This enabled the company to maintain its asset quality performance in existing regions; it also assists in the identification of newer regions. The company evaluates the potential area of operations on Area Lucrative Index, which involves assessment of parameters denoting the credit potential of the region. The company also has an extensive audit team of over 200 members, 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.

 

AUM was Rs 3,607 crore as of March 2020, registering an on-year growth of 36%. However, owing to lower disbursement and lockdown in various regions due to the ongoing Covid-19 pandemic, the growth momentum was curbed in the first half of fiscal 2021. Eventually, as business activity picked up during the second half of fiscal 2021, AUM increased to Rs 4,637 crore (provisional) as on March 31, 2021, registering an on-year growth of 28.5%.

 

In terms of geographic diversity, the company has expanded its presence to 18 states, with highest exposure to a single state being 18% and the top five states being 66% as against 33% and 94%, respectively, prior to demonetisation as on March 31, 2016. Alongside expansion in geographical presence, the robust growth encountered over the last few years is supported by adequate monitoring of operational parameters, such as calibrated increase in ticket size and AUM exposure per branch, per district and so on.

 

However, considering the rapid growth in loan portfolio, significant expansion into new geographies and limited loan cycle vintage, Fusion’s ability to sustain its risk management processes and demonstrate strong asset quality performance in new markets remains a key monitorable.

 

* Experienced senior management team

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

 

Weakness:

* Ability to maintain asset quality performance and control credit losses in the near term remains a monitorable

In fiscal 2017, asset quality witnessed a sharp deterioration in the aftermath of demonetisation due to socio-political issues in North Uttar Pradesh and adjoining regions of Madhya Pradesh. Portfolio delinquencies - that is, 90+ dpd and 30+ dpd—were significantly impacted and stood at 12.1% and 23.1%, respectively, as on March 31, 2017. However, the delinquencies considerably improved to 3.6% and 3.9%, respectively, as on March 31, 2018, due to: focused efforts of the management to improve recovery and writing-off bad loans with limited recovery prospects. Fusion wrote off Rs 95.5 crore over the next two years post demonetisation, which was nearly 12.4% of the AUM at the time of demonetisation. However, the company continues to make dedicated efforts of recovery from accounts, which have been written off.

 

Post the moratorium period, 30+ dpd rose to 11.4% as on December 31, 2020. Overall profitability for the nine months ended December 31, 2020, was also impacted by higher pandemic-related provisioning requirement, evidenced by a decline in return on managed assets (RoMA) to 0.9% from 1.7% in fiscal 2020. As the situation around severity and longevity of Covid-19 impact evolves, sustainability of asset quality in the near-to-medium term will be monitored closely. Besides, with the risk of potential increase in credit losses in the near-to-medium term, profitability will remain closely monitored.

 

* Inherently modest credit profile 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 households could be volatile and dependent on the local economy. With the slowdown in economic activity due to the ongoing pandemic, there could be potential pressure on such borrowers’ cash flows at a household level, thereby restricting their repayment capability. Fusion's collection efficiency revived by the end of the first quarter of fiscal 2021 and has been steadily improving since then. It stood at over 100% in March 2021 owing to higher overdue collection, while the current collection stood at 87%. However, with sharp spike in number of cases due to second wave of the pandemic and various lockdown being imposed by the states to curb the spread of Covid-19, the ability to reinstate repayment discipline among its customers such that 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

Liquidity should continue to be healthy. Cash and equivalents were Rs 1,252 crore as on March 31, 2021. Liquidity buffer to cover total debt and loan repayments including operating expenses scheduled over the following three months was 1.7 times (assuming nil collections) as on March 31, 2021. In fiscal 2021, the company raised about Rs 3,561 crore of funds through terms loans and non-convertible debentures.

Outlook Stable

Fusion’s capitalisation metrics should remain adequate over the medium term, supported by its ability to raise capital frequently from a diverse investor base with high pedigree. The business risk profile will benefit from the expanding scale of operations, improving asset quality and moderate resource profile.

Rating Sensitivity factors

Upward Factors

• Improvement in scale and geographic diversity of operations with top five states accounting for not more than 50% of loan portfolio.
• Increase in earnings profile, leading to substantial internal accrual and networth.

 

Downward Factors

• Deterioration in asset quality or earnings profile, resulting in stressed profitability and capital position.
• Inability to maintain adjusted gearing below 5 times and Tier I capital adequacy at above 20%, on a steady-state basis. 

About the Company

Fusion was incorporated on September 5, 1994, 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 process of forming a new group involves an observation period of 2-3 months, whereby the group members are informed about the importance of savings, are trained to maintain their own accounts, and are inculcated with the habit of regular savings. The loans are provided mainly for agricultural and allied activities, business activities, and establishment and expansion of micro enterprises.

 

As on December 31, 2020, the company had a network of 657 branches spread across over 300+ districts within 18 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. Until 2018, key investors such as Creation Investments, Oikocredit, Belgian Investment Company (Belgian), NMI Frontier (NMI), RIF North II (RIF), Small Industries Development Bank of India (SIDBI) and Global Financial Inclusion Fund (Global Financial), acquired about a 90% stake in the company.

 

Subsequently, 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.

Key Financial Indicators

Particulars as on	Unit	December 2020	March 2020	March 2019	March 2018
		Provisional	Actual	Actual	Actual
AUM	Rs.Crore	4,107	3,607	2,641	1,556
Total income	Rs.Crore	609	666	512	267
Profit after tax (PAT)	Rs.Crore	34	70	65	(39)
RoMA	%	0.9	1.7	2.2	(2.3)
GNPA (90+ dpd)*	%	5.5	1.0	1.3	3.6
Adjusted gearing (including off book assets)	Times	3.4	2.7	5.0	8.3

*Performa

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 assigned with outlook
NA	Non-Convertible Debenture*	NA	NA	NA	50	Simple	CRISIL A-/Stable
NA	Long Term Bank Facility	NA	NA	NA	673.52	NA	CRISIL A-/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	326.48	NA	CRISIL A-/Stable

*Yet to be issued