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 16.2% of the group’s assets under management (AUM) as on June 30, 2023. 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 940 crore post-acquisition, with the latest infusion of Rs 200 crore in February 2023 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 1340 crore as on June 30, 2023. Adjusted gearing has been historically on the higher side and stood at 6.7 times as on June 30, 2023. The capital position is supported by regular infusions by the parent IIFL Finance as is evidenced by the latest Rs 200 cr infusion done in February 2023. Capital adequacy ratio (CAR) stood at 20% as on June 30, 2023, in comparison to 16.91% three years ago. On account of the parent’s ability and willingness to infuse capital when required, Samasta’s capitalization will remain adequate over the medium term in the normal course of business.

Above-average earnings, albeit moderation on account of higher credit costs

After reporting healthy profits of Rs 53 crore and Rs 107 crore during fiscal 2019 and fiscal 2020 respectively with return on managed assets (RoMA) of 3.2% and 3.4% respectively, fiscal 2021 saw the company reporting a net profit of only Rs 67 crore. The lower profitability was 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. The company continued with aggressive provisioning in fiscal 2022 as well and created total provisioning of Rs 230.6 (including write-off of Rs 131.8 crore) which resulted in the company reporting a net profit of only Rs 51 crore and RoMA of 0.8%. During fiscal 2023, despite the company continuing with higher provisioning (including writeoff) of Rs 455.3 crore, reported a PAT of Rs 128.2 crore with RoMA of 1.4%. At pre provisioning level, the profit stood at Rs 613.8 crore as of March 31, 2023. Credit cost rose to 4.9% during fiscal 2023, compared with 1.6% in fiscal 2022. As on June 30, 2023, the reported PAT stands at Rs 91.7 crores and annualized ROMA at 3.1 times, with the credit cost being 2.9%. Nevertheless, along with the growth in its portfolio, the company has maintained healthy net interest margin (NIMs) in the past three fiscals. Operating cost has also benefited from the operating leverage attained with high growth in portfolio. Given the aggressive write-offs 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 9% of the external liabilities were from capital market instruments as on June 30, 2023, and bank loans and loans from non-banking financial company (NBFCs) accounted for around 71%. In terms of cost of borrowing, it remained at around 9.46% during fiscal 2023 and 10.45% during Q1 fiscal 2024. Post increase in the interest rates in market, the cost of borrowing has seen some elevation during past 3-4 quarters. Nevertheless, with removal of margin cap (from April 1, 2022, in-line with RBI regulations), the company has been able to increase its yields and accordingly impact of elevation in cost of borrowing has been low on the net level profitability.

Weakness:

Geographic concentration in operations

Though diversifying gradually, the loan portfolio of Samasta is still highly concentrated with 60% of its own portfolio as on June 30, 2023, 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 20.8% as on March 31, 2023. 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

The company’s 90+ days past due (dpd) improved to 2.2% in June 2023 as compared to 2.7% as on June 2022) on the back of improved collection efficiency as well as higher write-offs and the sale to ARC done in the second half of fiscal 2023. Additionally, the company has total outstanding restructured portfolio of Rs 69.7 crores (0.63% of the loan book) which has reduced from Rs 259 crore (4.3% of the loan book) as of September 2022. During fiscal 2023 as well, the company made provisions of Rs 4.4 crore and wrote off its portfolio to the tune of Rs 450.9 crore. As far as collection efficiency is concerned, (including overdues but excluding prepayments) it remained in the range of 96-97% during June 2022 till June 2023. Additionally, the incremental originations done post June 2022, the collection efficiency has remained high at around 99%. Nevertheless, considering the pace of growth, the company’s ability to sustain on collection efficiency and eventually reach pre-pandemic levels of over 99% on a steady-state basis will remain 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.