Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the long-term bank facilities of Hindusthan Microfinance Private Limited (Hindusthan Microfinance) at ‘CRISIL BB+/Stable’.

 

CRISIL Ratings had upgraded its rating on May 30, 2022 to the long-term bank facilities of Hindusthan Microfinance to ‘CRISIL BB+/Stable’ from ‘CRISIL BB/Stable’.

 

The rating factors in company’s resilient performance during the pandemic with sustained track record of collection efficiency while scaling up of operations. Further, the company has demonstrated its ability to maintain strong tie-up with co-operative societies and ability to build lender base and diversify its borrowing profile. The rating also factors in adequate capital position, moderation in asset quality, however backed by risk-free business model and the extensive experience of founder and senior management in the financing space. These strengths are partially offset by moderate scale of operations within on-book portfolio and potential risk from local socio-political issues in the microfinance sector.

 

Hindusthan Microfinance has reported consistent growth in its assets under management (AUM) to reach Rs 284 crore as on March 31,2022 as compared to Rs 232 crore as on March 31, 2021. The company has managed this growth by maintaining strong relationship with co-operative societies which has helped them scale up their business correspondent (BC) portfolio. Furthermore, in fiscal 2022 the company has also managed to grow their on-book portfolio at annualised rate of ~100% which stood at Rs 31 crore as compared to Rs 15 crore in fiscal 2021. The capital position of the company continues to remain adequate for its current scale of operation at Rs 13.9 crore and gearing at 1.8 times as on March 31,2022 (Rs 13.5 crore and 0.6 times as on March 31,2021)

 

The company has also shown considerable improvement on resource raising front. During fiscal 2022, the company raised total debt of Rs 21 crore. During fiscal 2022, the company was able to add few banks to the lender base and lower its incremental cost of funds compared to previous fiscal. Incrementally, the management is expected to focus on raising funds from banks thereby maintaining competitive funding rates over medium term.

 

Hindusthan Microfinance has demonstrated ability to sustain its monthly collection efficiency ratio[1] despite the challenging times. The collections efficiency for the company stood above 90% from January 2021 till December 2021, however in Q4 of fiscal 2022, the collection efficiency stood between 85- 87% which then substantially improved and stood at 93% in April 2022.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has evaluated the standalone business and financial risk profile of Hindusthan Microfinance

Key Rating Drivers & Detailed Description

Strengths:

Strong management team with experience in leninding space

Hindusthan Microfinance was established by Mr Anil Jadhav with view to provide financial services through JLG (Joint Liability Group loans). The prime business of the company involves acting as banking correspondent (BC) wherein the counterparties are mainly co-operative credit societies. Prior to establishment of Hindusthan Microfinance, Mr Jadhav was associated with many co-operative societies and helped them to roll-out newer financing products. He has total experience of over 4 decades in working with co-operative societies. Prior starting NBFC, in the year 1992, Mr Jadhav established Hindusthan Cooperative Credit Society. This society was an early entrant to start microfinance loans for the urban borrowers in the year 2003. Later, Mr Jadhav established Hindusthan Microfinance (NBFC-MFI) and started microfinance operations (on-book as well as BC) through this company. Mr. Satishkumar Rao has also joined as one of the key management personnel on the board of Hindusthan Microfinance. Mr Rao has been associated with banking industry for more than 2 decades and has worked with many large domestic and foreign banks. Mr Rao looks after some of the critical verticals that includes risk management, audit, IT systems, etc. He is also responsible for managing the treasury (primarily debt funding and equity) for Hindusthan Microfinance.

 

Adequate capital position

As on March 31, 2022, the networth of the company stood at Rs 13.9 crore. Given the 89% of the overall AUM is under BC portfolio the company doesn’t rely majorly on any external borrowings. The gearing of the company has slightly increased from previous levels and stood at 1.8 times as on March 31, 2022 as compared to 0.6 times as on March 31,2021 on account of scaling up of on-book portfolio supported by fund raising. Given that the arrangement between societies and that of HMPL is such that in case of delays or default, the company is not liable to pay credit losses to the society, team believes that current capital position is adequate for managing the on-book portfolio. Furthermore, with gradual incretions in profits over the period of time will improve the networth over a period of time. However, as and when the company starts scaling up its on book, the ability of the company to raise capital will remain monitorable factor.

 

Moderation in asset quality, albeit improving and backed by risk-free business model

Hindusthan Microfinance acts as BC for 5 co-operative credit societies and manages portfolio of around Rs 253 crore as of March 31,2022. The company has been having unique arrangement with co-operative societies wherein there is no FLDG (First Los Default Guarantee) or any other upfront commitment provided in event of credit losses. As per the terms and conditions of BC arrangement, Hindusthan Microfinance carries out entire operational process i.e. from origination to collections for microfinance book. However, in the event of default from borrowers (normal cause), the ultimate responsibility of credit loss will lie upto the respective co-operative societies. Nevertheless, Hindusthan Microfinance will be liable to face credit losses only in case of 2 instances i.e. in case of death of borrower (which is anyways covered by credit insurance) or loss occurring due to fraud committed by the employee. Nevertheless, the business model of Hindusthan Microfinance is linked with interest-sharing that is done by co-operative societies. Therefore, while the chances of credit losses are limited or nil, the revenue generating capability is linked with collection efficiency.

 

The asset quality in terms of gross NPA i.e., 90+ dpd deteriorated to 9.8% as on March 31, 2022, against 2.6% as of March 2021 on account of decline in collection efficiency in Q4 of fiscal 2022. The decline in collection efficiency was led by closure of accounts at the time of its maturity, wherein the borrower requested for closing their loan outstanding balance against their Recurring Deposit account maintained with respective cooperative credit society. The management had taken relevant measures regarding the same and the 90+ dpd substantially improved which stood at 4.7% as on April 31,2022 on account of revival in collection efficiency from previous levels. As part of one-time restructuring, the company has not restructured any of its loan accounts till date. This improvement in collection efficiency on a sustained basis is expected to benefit with 90+ dpd potentially reducing to below 5% over near term. CRISIL Ratings notes the company has displayed strong ability to sustain its collection efficiency with gradual unlocking of economic activities. Nevertheless, ability of the company to bring its 90+ dpd steadily back to previous levels will remain key monitorable.

 

Weakness:

Moderate scale of operations within on-book portfolio

Hindusthan Microfinance’s on-book portfolio that has been de-growing over the past years has witnessed growth in fiscal 2021 and fiscal 2022. The on-book size of the company has increased to Rs 30 crore as compared to Rs 13 crore in fiscal 2019. The growth has been achieved on account of raising adequate resources to fund its portfolio. The management is expected to gradually increase its on book portfolio to ~Rs 40 crore by fiscal 2023, however the primary focus of the company would be on building its business correspondence portfolio which is expected to cross Rs 300 crore by end of Fiscal 2023 resulting in overall AUM of Rs 340 crore. The company has faced limitations in raising adequate resources to fund its on-book portfolio. This has in-turn resulted in having higher dependence on BC business both in terms of market position and profitability. Nevertheless, this focus on off-book portfolio has been resulting in generating higher revenues in comparison to revenues that otherwise would have generated from on-book portfolio. CRISIL Ratings, however believes that ability of the company to raise funds in order to achieve its projected on-book portfolio. Furthermore, the growth of on book portfolio will be critical to provide stability to its overall credit profile.

 

Susceptibility to potential risk from socio-political issues in the microfinance sector and inherently modest credit profile of the borrowers

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 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. The sector witnessed high levels of delinquencies post demonetisation and subsequent socio-political events. Hindusthan Microfinance faced challenges during demonetization period. The company had overall AUM of around Rs 145 crore as of March 31, 2017, which ran-down to around Rs 37 crore as of March 31, 2019. This was primarily because post application of demonetization collections in BC portfolio were affected significantly. As a result, the respective co-operative society (on behalf which Hindusthan Microfinance was doing BC) decided to take-over collections and closed the BC arrangement.

 

The MFI Bill, 2020 passed recently by the Assam Assembly may increase asset-quality challenges for MFIs. Additionally, any loan waivers announced will make matters worse due to their impact on repayment discipline. In addition, the sector remains susceptible to issues such as local 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 legislation. Additionally, a significant portion of the portfolio comprises loans given to individuals under the JLG mechanism. Customers generally have below-average credit risk profiles with lack of access to formal credit and high seasonality in income. The income flow of this segment of customers is volatile and dependent on the local economy. With slowdown in economic activity after the pandemic, there may be pressure on the borrowers’ cash flows, thereby affecting their repayment capability. However, the company's ability to reinstate repayment discipline among customers (such that pre-Covid levels of periodic collections are achieved) will be a monitorable.

Liquidity: Adequate

Hindusthan Microfinance’s liquidity has been adequate primarily because of lower debt that the company has been having on its books. As on April 30, 2022, the company had liquidity of Rs 4.0 crore. Against this, total debt obligation (including operating expense) is around Rs 5.1 crore upto June 30, 2021. This represents liquidity cover (assuming 70% collections) of 1.1 time.

Outlook: Stable

CRISIL Ratings believes Hindusthan Microfinance will continue to benefit from the extensive experience of its management team

Rating Sensitivity Factors

Upward factors

• Significant scale-up of on-book portfolio while maintaining operational cost
• Sustainable improvement in asset quality in both on-book and BC book with 90+ dpd improving to below 2%
• Improvement in capital position with increase in networth and gearing maintained below 3 times
• Sustained relationship with co-operative societies in order ensure growth of BC portfolio

 

Downward factors

• Closure of relationship with any of co-operative society leading substantial fall in BC portfolio and its consequent impact on overall credit profile
• Deterioration in asset quality, with 90+ dpd at AUM level (including BC) increasing to above 6%
• Earnings profile remaining average with RoMA of less than 0.5%

About the Company

Hindusthan Microfinance Private Limited (HMPL) is a registered NBFC-MFI with RBI. The company was established in year 2008, however majority of its operations started since 2015. HMPL provides income-generating loan to enterprising low-income clients. The prime business of the company involves acting as banking correspondent (BC) wherein the counterparties are mainly co-operative credit societies. Mr Jadhav established Hindusthan Microfinance (NBFC-MFI) and started microfinance operations (on-book as well as BC) through this company. Presently, Hindusthan Microfinance acts as BC for 5 co-operative credit societies and manages portfolio of around Rs 253 crore as of March 31,2022 (Rs 163 crore as of March 2020). The overall AUM is diversified across 7 states Maharashtra, Karnataka, Gujarat, Rajasthan, Madhya Pradesh, Telangana & Andhra Pradesh.

Key Financial Indicators

As on for the period ended,	Unit	Mar-22^	Mar-21
Total managed assets	Rs crore	296.9	241.9
Total income	Rs crore	27.2	18.4
PAT	Rs crore	0.6	0.2
Return on managed assets	%	0.2	0.2
90+dpd - On Book	%	0.01	1.6
90+dpd - Off Book	%	11.0	2.7
Gearing	Times	1.8	0.6

^Provisional

Status of noncooperation with previous CRA

Hindusthan Microfinance has not cooperated with Brickwork Ratings India Private Limited and Acuite Ratings and Research Limited which has marked it non-cooperative via RR dated 24-Sep-2020 and 17-Dec-2020 respectively. The reason provided by Brickwork and Acuite is non-furnishing of information by Hindusthan Microfinance.

Any other information: Not applicable