Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Strong financial and managerial support from IIFL Finance

The parent will continue to provide support on an ongoing basis and in the event of distress, given its majority ownership and Samasta’s strategic importance to the group, and presence in the board of directors. The microfinance business is strategically important and helps diversify the financial product suite of the parent and expand its presence in the financial inclusion space. Also, the microfinance business is scalable, and expected to grow materially over the medium term. Samasta’s business is well established and is growing at a healthy pace and formed around 13.2% of the group’s assets under management (AUM) as on September 30, 2022. Regular financial support—through equity infusion—and strategic inputs from IIFL Finance have enabled the company to ramp-up operations. IIFL Finance and IIFL Home Finance have infused incremental capital of Rs 740 crore post acquisition, with the latest infusion of Rs 100 crore in March 2022 and is expected to provide further capital on a regular basis. It also has representatives on the board and senior management of Samasta and is actively involved in managing the treasury. Hence, CRISIL Ratings believes IIFL Finance has a strong moral obligation to continue supporting Samasta.

Adequate capitalisation

Networth was adequate at Rs 915.8 crore as on September 30, 2022 (adjusted for the FLDG component of the managed book). Adjusted gearing has been historically on the higher side. The capital infusion of Rs 300 crore received in fiscal 2022 had helped the adjusted gearing to correct to 5.6 times as on June 30, 2022 even as the company’s borrowings increased significantly in March 2022. Nevertheless, adjusted gearing stood at 6.2 times as on September 30, 2022. Capital adequacy ratio (CAR) stood at 19.28% as on September 30, 2022, in comparison to 16.91% three years ago. On account of the parent’s ability and willingness to infuse capital when required, Samasta’s capitalisation, despite the elevated credit costs due to Covid-19 related disruption, will remain adequate over the medium term in the normal course of business.

Above-average earnings, albeit moderation on account of higher provisioning to combat the pandemic

The company had reported healthy profits of Rs 53 crore and Rs 107 crore during fiscal 2019 and fiscal 2020 respectively. Consequently, return on managed assets (RoMA) stood at 3.1% and 3.4%, respectively. However, during fiscal 2021, the company reported net profit of Rs 67 crore, primarily due to Rs 141 crore provisioning (including write-off of Rs 42.8 crore) considering the potential challenges in recovering overdues amid the pandemic. Consequently, the RoMA dropped to 1.5% during fiscal 2021. Given the second wave of pandemic, the company continued with aggressive provisioning in fiscal 2022 also and created total provisioning of Rs 230.6 (including write-off of Rs 131.8 crore). Resultant, the company reported a net profit of Rs 51 crore and RoMA further dropped to 0.9% and credit cost rose to 3.8% during fiscal 2022, compared with 2.8% in fiscal 2021 and 1.9% in fiscal 2020. Nevertheless, along with the growth in portfolio, the company has maintained healthy net interest margin (NIMs) in the past three fiscals. Operating cost has also benefitted from the operating leverage attained with high growth in portfolio.

During the first half-year of fiscal 2023, the company continued with making provisions of Rs 11 crore and reported PAT of Rs 21 crore and RoMA of 0.6% (annualized).

Given the aggressive provisioning implemented by the company, profitability is expected to improve, albeit gradually in the coming quarters. Samasta’s ability to manage recoveries and sustain its earnings profile at pre-pandemic level would be a key rating sensitivity factor

Improving diversity in funding profile

Samasta has significantly improved the diversity in its resource profile since its acquisition by IIFL Finance. Nearly 14.35% of the external liabilities were from capital market instruments as on September 30, 2022, and bank loans and loans from non-banking financial company (NBFCs) accounted for 85.65%. The cost of funds on incremental borrowing has also improved considerably post acquisition.

Weakness:

Geographic concentration in operations

Though diversifying gradually, the loan portfolio of Samasta is still highly concentrated with 61% of its own portfolio as on September 30, 2022, housed in four states: Tamil Nadu, Bihar, Rajasthan and Karnataka. The top five districts accounted for 9.5% of the loan book. Post-acquisition by IIFL Finance, the company has operations in Bihar, Kerala, Rajasthan, Goa, Chhattisgarh and Gujarat. Of these, growth of disbursements in Bihar has been particularly rapid, reflected in the proportion of AUM in the state increasing from 1.1% as of March 2018 to 18% as on September 30, 2022. Post demonetisation, spurt in microfinance lending in states such as Odisha, Bihar, and West Bengal is showing early signs over heating in certain pockets and the ability of the company to manage portfolio quality in these regions is a key monitorable. CRISIL Ratings will continue to monitor the situation and its likely impact on credit losses as it evolves.

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 demonetization. Portfolio delinquencies-that is, 30+ dpd and 90+ dpd, were significantly impacted, and stood at 8.1% and 3.8%, respectively, as on March 31, 2017. However, the delinquencies considerably improved to 1.2% and 1.0%, respectively, as on March 31, 2018, due to focused efforts of the management to improve recovery. The ultimate credit loss for Samasta due to disruption after demonetisation was close to 14.3%.

However, in fiscal 2020, asset quality saw some moderation primarily on account of political unrest in Karnataka and natural calamities in Orissa which led to 90+ dpd of 1.5% as on March 31, 2020. This further weakened because of the pandemic, and the 90+ dpd deteriorated to 3.6% as on September 30, 2021 (2.6% as on March 31, 2021). However, with the company making write-offs of Rs 132 crore in March 2022, the 90+ dpd improved to 2.8% as on March 31, 2022. During the first half of fiscal 2023, the company made provisions of Rs 10.7 crore and wrote off its portfolio to the tune of Rs 195.4 crore. Consequently, the 90+ dpd stood at 2.9% as on September 30, 2022.

Samasta’s total disbursements in fiscal 2022 stood at Rs 5,710 crore, most of which was done in the second half of fiscal 2022. In addition to disbursing loans to fresh borrowers, the company also pre-closed the loans of existing borrowers and disbursed fresh loans to provide them with additional liquidity to revive their businesses, resulting in higher prepayments in the second half of fiscal 2022. Sustainability of collections and impact of the pandemic on asset quality which have risen in the aftermath of Covid-19 outbreak will also be a key monitorable.

Susceptibility to regulatory and legislative risks associated with the microfinance sector

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. In addition, the sector faced issues of varying intensity in several geographies. 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. Similarly, the sector witnessed high level of delinquencies post-demonetisation and subsequent socio-political events. For Samasta, the ultimate credit loss due to disruption after demonetisation was close to 14.3%, which was borne over two fiscals. 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.