Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A/CRISIL PPMLD Ar/Stable/CRISIL A1' ratings on the long term bank loan facilities, non-convertible debenture, long term principal protected market linked debentures and commercial paper of Incred Financial Services Limited (Incred).

 

The ratings reflect the company’s experienced leadership team, strong capitalisation with healthy gearing, backed by a high pedigree investor base and diversified loan portfolio. These strengths are partially offset by the moderate scale of operations and profitability, constrained by a one-time special provision/expense and moderate asset quality.

 

Having commenced operations in February 2017, Incred has built a diversified portfolio with assets under management (AUM) of Rs 2,634 crore as on March 31, 2021. The company provides a wide range of loan products that include personal loans, small and medium enterprise (SME) business loans, education loans, school financing loans and loans to financial institutions (FIs). As on June 30, 2021, the AUM stood at Rs 2,553 crore, which marks a marginal decline of 3% from the AUM as on March 31, 2021 driven by the slowdown after second wave.

 

With gradual pick-up in business activity, monthly collection efficiency revived over the second half of fiscal 2021. From 89% for September 2020, the overall collection efficiency for the non – NPA portfolio improved to 100% by March 2021. However, in the aftermath of the second wave, the rate of collections declined marginally to 98% for June 2021. Monthly disbursements also exhibited a similar trend over the period. After dropping to Rs 29 crore in April 2020, a gradual ramp up in business alongside economic activity resulted in disbursements of Rs 279 crore in December 2020 and Rs 419 crore in March 2021. Thereafter, a momentary slowdown was observed in April 2021 due to the second wave followed by gradual revival over rest of the quarter. In the near to medium term, the company’s ability to improve collections to pre-Covid levels on a steady-state basis remains a key monitorable.

 

Considering the gap between current and pre-Covid collection levels, there is a risk of increase in credit losses. Early bucket delinquencies (0-60 days) may remain elevated over the coming months. The company made provisions and write offs of Rs 88.6 crore (including Rs 42.4 crore of write offs) in fiscal 2021. Asset quality has remained volatile amidst the on-going pandemic and lockdown, the 90+ days past due (dpd) stood at 3.95% as on June 30, 2021, compared with 3.43% as on March 31, 2021. Further, as part of the one-time restructuring scheme related to Covid-19 announced by the Reserve Bank of India (RBI), the company has a restructured portfolio of Rs 108 crore as on June 30, 2021. Over the medium term, InCred’s ability to manage asset quality and maintain healthy collections amidst evolving Covid-19 scenario, remains a key monitorable.

Analytical Approach

For arriving at the rating, CRISIL Ratings has evaluated the standalone business, financial, and management risk profile of Incred.

Key Rating Drivers & Detailed Description

Strengths:

* Strong capitalisation position supported by high pedigree of investor base

Incred is well-capitalised, with networth of Rs 1,046 crore with low gearing of 1.6 times as on March 31, 2021. This marks a significant improvement from Rs 595 crore of networth as on March 31, 2019 and a peak gearing of 2.1 times. The company commenced its operations with a networth of around Rs 500 crore, mainly contributed by the founder’s company – Bee Finance Ltd (Mauritius). In fiscal 2019, Incred raised optionally convertible debentures (OCDs) in fiscal 2017, and converted them to equity in fiscal 2019 (April 2018) to the tune of Rs 116 crore from Investcorp (IDFC Private Equity) and Paragon Partners. Furthermore, during April and May 2019, Incred raised compulsorily convertible preference shares (CCPS) of Rs 427 crore from institutional investors such as FMO (the Netherlands Development Finance Company), OAKS Asset Management (Formerly known as Alpha Capital) and, Moore Strategic Ventures, and Elevar Equity. CRISIL Ratings believes Incred’s capital position is strong with regard to its scale and nature of operations, supported by its demonstrated ability to raise capital from existing as well as new investors.

 

* Experienced promoters and senior management team

Incred is promoted in 2016, by Mr Bhupinder Singh, Managing Director and Chief Executive Officer. Having been associated with Deutsche Bank during his last stint as head of the Corporate Finance division and the co-head of the Fixed Income, Equities and Investment Banking divisions for the Asia Pacific region, Mr Singh has a rich professional experience of over two decades. Over its operating history, the company’s senior management team has gained strength, and now comprises renowned professionals from various industry sections. Mr Vivek Bansal, Incred’s Chief Financial Officer, has experience of two decades, which include leadership stints in Fidelity Investments (London) and Standard Chartered (Mumbai). Prior to Incred, Mr Bansal served as deputy CFO of YES Bank and Group Head of Finance. Mr Rahul Bhargava, who is the Chief Product and Technology Officer, had been associated with companies such as Amazon, PayPal and Amex over the past two decades. He has been instrumental in laying the foundation of Incred’s digital operating framework and interface. The business side is headed by Mr Saurabh Jhalaria who has over 18 years of work experience and was earlier Managing Director – Singapore operations at Deutsche Bank. Mr Prithvi Chandrasekhar (Chief Risk Officer), has held various positions across several companies, including Capital One and McKinsey over a professional stint of 25 years. This team of senior executives report to a board comprising veterans from the financial services industry. These include independent directors, nominee directors from investor bodies and a few representatives from the senior management team of Incred Financial.

 

* Diversified loan portfolio

InCred had a diversified loan portfolio of Rs 2,634 crore as on March 31, 2021 which, in the aftermath of the second wave, reduced marginally to 2,553 crore as of June 30, 2021. The AUM mix consists of personal loans (32%), secured school financing (22%), student loans (13%), lending to FIs and escrow backed lending (19%), anchor-backed business lines (11%). The company’s portfolio also comprises non anchor backed business loans (2%) and two-wheeler Loans (1%) which are now discontinued by the company. 

 

In the initial phase, growth in the loan portfolio was driven by higher focus on wholesale segments such as supply chain financing and lending to financial institutions and escrow-backed lending which, cumulatively formed 76% of the total loan book as on June 30, 2017. These two segments were followed by unsecured business loans, which formed another 18% of the loan portfolio with slightly higher degree of granularity. However, eventual growth corresponded with diversification across asset segments with more focus on retail or consumer loans. Thereafter, the company ventured into segments such as personal loans and two-wheeler loans, and also tapped the niche segment of education loans via student loans and secured school funding. Over the quarters, concentration around wholesale segments has reduced and the loan book has diversified across retail segments. Presently, 48% of AUM is composed of retail loans and the balance consists of SME loan segment. Also, given low correlation between these segments, CRISIL Ratings believes that the diversified loan portfolio support the overall business profile, especially in case of pressure in any one segment.

 

Weakness:

* Moderate earnings profile

Owing to the nascent scale of operations, operating expenses of Incred, though correcting, have remained high attributed to head office costs, especially employee and technology-linked expenses. Furthermore, on-boarding of senior management to lead respective asset segments has also contributed to the high employee expenses. In fiscal 2020, the company focused on optimising cost and overall operating expenses increased by only 19%. However, the business growth was less than what was budgeted, as AUM grew at 17% over the year on account of cautious origination in some segments and overall challenging macroeconomic environment for most part of the year. Disbursements in the last quarter of fiscal 2020 were also impacted because of the lockdown. Resultantly, the operating expense ratio for the year remained high at 6.9%. During this period, the company’s strategic exit from its housing finance subsidiary led to recognition of Rs 6.2 crore as impairment which also contributed to the high operating expenses. Additionally, write-offs of Rs 35 crore primarily in the personal loans and non-anchor supply chain segments and dedicated Covid-19 linked provisioning of Rs 5 crore further constrained the profitability. This translated to a low RoMA of 0.2% for fiscal 2020 (0.2% for fiscal 2019). However, upon adjusting for one-time impairment loss and Covid-19 provisioning, RoMA stood at 1.1% for fiscal 2020.

 

For fiscal 2021, Incred has reported a net profit of Rs 10 crore, after factoring in higher provisioning and write offs of Rs 89 crore and non-cash ESOP expenses of Rs 9.4 crore. Consequently, the RoMA for fiscal 2021 was 0.4%, and after adjusting for this one-time/ non-cash expenses, annualised RoMA is estimated at ~1.6%. Credit cost rose to 3.7% in fiscal 2021, compared with 2.6% in fiscal 2020. Given the provisioning policy, coupled with sustained focus on tightening costs and operating expenses, CRISIL Ratings expects Incred’s profitability to improve from the third quarter of fiscal 2022 in the normal course of business. However, as a result of the pandemic and weak economic activity, AUM growth may be challenging. In this milieu, Incred’s ability to scale up the portfolio, enhance recoveries and improve profitability while keeping credit costs low, will be a key rating sensitivity factor.

 

* Asset quality remains a monitorable

Given the short track record of operations and low seasoning in the loan portfolio, asset quality of the book remains untested. While a small section of the portfolio has completed one cycle, a sizable chunk still lacks seasoning. As on March 31, 2020, GNPA stood at 2.8%, as compared to 1.8% as on March 31, 2018. Elevation in non-performing assets stemmed from challenges faced within personal loans and non-anchor business loan segments wherein the company also took write-offs of Rs 35 crore. During fiscal 2021, GNPAs rose to 4.5% as of December 31, 2021 amidst tepid economic environment. However, following the recovery in Q4 2021, GNPAs reduced to 3.4% as of March 31, 2021 which – after the second wave, have again elevated marginally to 3.95% as on June 30, 2021. The company restructured a portfolio of Rs.105 crore in fiscal 2021 and another Rs 3 crore (secured school financing segment) has been restructured in Q1 2022. As on June 30, 2021, 87% of the total restructured portfolio (Rs 108 crore) was current (0 dpd) and 11.1% was in the 90+ dpd bucket.

 

In terms of collections, when calculated after giving benefit of overdue, collections improved to 100% in March 2021, from 89% in September 2020. However, impacted by the second wave and the sporadic lockdown that followed, monthly collection efficiency for the non – NPA portfolio, over Q1 2022 has ranged between 96-98%. Going forward, the company’s ability to scale up operations, while maintaining asset quality and profitability at adequate levels amidst the current challenges, will be a key rating sensitivity factor. Nevertheless, CRISIL Ratings notes that Incred has adequate equity capital to absorb high credit cost, if any, in the next 2-3 quarters.

 

* Moderate scale of operations and market position with limited seasoning

As on March 31, 2021, Incred’s AUM stood at Rs 2,634 crore, as compared to Rs 2,043 crore, a year ago - registering a growth of 29% over this period. However, the AUM is spread across seven asset classes. While this gives Incred the benefit of diversity, scale of operations and market position remains moderate within each asset class. In the aftermath of the second wave, the AUM dipped marginally to Rs 2,553 crore as at the close of Q1 2022. Bulk of the loan portfolio has not yet seasoned and the company’s ability to profitably scale the portfolio across diverse segments remains to be demonstrated.

Liquidity: Adequate

CRISIL Ratings believes Incred has a comfortable liquidity position. As on July 27, 2021, the company had liquidity balance of Rs 312.6 crore (includes cash and equivalents, excludes cash credit lines and committed bank lines, excluding any upcoming collections). This balance covers the estimated outflow towards debt obligations and operating expenses scheduled for the succeeding 3 months, by over 1.4 times. Considering the undrawn CC/WCDL lines, the liquidity coverage increases to 1.9 times. Incrementally, the company has raised external funds of about Rs 1400 crore in fiscal 2021 and Rs 687 crore in the first 4 months of fiscal 2022.

Outlook: Stable

CRISIL Ratings believes Incred will benefit from its experienced management team and that its capital position will remain strong 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 company's expanding scale of operations and comfortable resource profile.

Rating Sensitivity Factors

Upward factors:

• Improvement in earnings profile with RoMA above 3.0% on steady state basis
• Sustenance in asset quality metrics with 90+ days past due (dpd) (including write-offs) remaining below 4% on steady-state basis over the medium term
• Increase in scale of operations while maintaining comfortable adjusted gearing

 

Downward factors:

• Steady-state adjusted gearing of over 4 times, or inability to raise capital to fund growth
• Any adverse movement in asset quality with 90+ dpd (including write-offs) remaining above 4% over the medium term
• Earnings profile remaining sub-optimal with inability to achieve a sustained RoMA level of >1.75% over the near to medium term.

About the Company

InCred is a non-deposit taking, non-banking financial company headquartered in Mumbai. Incorporated in January 1991 as Visu Leasing and Finance Pvt Ltd (VLFL), this company was acquired by Incred in 2016, after which, its name was changed to the current one. Incred is a new-age financial services platform that leverages technology and data science, throughout its lending chain, thereby reducing the turnaround time. Since operations began in March 2017, Incred has built a diversified portfolio with AUM of Rs 2,553 crore as on June 30, 2021

Key Financial Indicators

As on/for the year ended March 31	Unit	2021	2020^	2019
Total assets	Rs crore	2,791	2,204	1,874
Advances	Rs crore	2,634	2,077	1,745
Total income	Rs crore	392	332	291
Profit after tax (PAT)	Rs crore	10.2	2.7	4
Gross NPA	%	3.4	2.8	1.8
Gearing	Times	1.6	1.1	2.1
Return on assets	%	0.4	0.2	0.2

^includes the amalgamation impact of InCred Housing Finance Private Limited

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 Levels	Rating outstanding with outlook
NA	Non Convertible Debenture^	NA	NA	NA	260	Simple	CRISIL A/Stable
INE945W07134	Non Convertible Debenture	22-Jun-20	NA	22-Jun-23	50	Simple	CRISIL A/Stable
INE945W07142	Non Convertible Debenture	23-Jun-20	NA	20-Dec-21	100	Simple	CRISIL A/Stable
INE945W07159	Non Convertible Debenture	26-Jun-20	NA	26-Jun-23	100	Simple	CRISIL A/Stable
INE945W07167	Non Convertible Debenture	31-Jul-20	NA	28-Jan-22	25	Simple	CRISIL A/Stable
INE945W07167	Non Convertible Debenture	31-Jul-20	NA	28-Jan-22	25	Simple	CRISIL A/Stable
INE945W07175	Non Convertible Debenture	10-Aug-20	NA	10-Feb-22	50	Simple	CRISIL A/Stable
INE945W07191	Non Convertible Debenture	11-Sep-20	NA	14-Mar-22	50	Simple	CRISIL A/Stable
INE945W07191	Non Convertible Debenture	11-Sep-20	NA	14-Mar-22	25	Simple	CRISIL A/Stable
INE945W07225	Non Convertible Debenture	04-Dec-20	NA	04-Jun-22	25	Simple	CRISIL A/Stable
INE945W07316	Non-Convertible Debenture	27-Jul-21	NA	27-Jul-27	115	Simple	CRISIL A/Stable
NA	Long Term Principal Protected Market Linked Debentures^	NA	NA	NA	78.5	Highly Complex	CRISIL PPMLD A r /Stable
INE945W07258	Long Term Principal Protected Market Linked Debentures	23-Apr-21	NIFTY 50 LINK	20-Oct-22	37.2	Highly Complex	CRISIL PPMLD A r /Stable
INE945W07274	Long Term Principal Protected Market Linked Debentures	27-May-21	NIFTY 50 LINKED	26-May-23	15.4	Highly Complex	CRISIL PPMLD A r /Stable
INE945W07282	Long Term Principal Protected Market Linked Debentures	01-Jun-21	NIFTY 50 INDEX LINKED	04-Oct-24	13.9	Highly Complex	CRISIL PPMLD A r /Stable
INE945W07308	Long Term Principal Protected Market Linked Debentures	20-Jul-21	NIFTY 50 INDEX LINKED	26-Apr-24	15	Highly Complex	CRISIL PPMLD A r /Stable
INE945W07324	Long Term Principal Protected Market Linked Debentures	29-Jul-21	10Y G-SEC LINKED	29-Dec-22	20	Highly Complex	CRISIL PPMLD A r /Stable
INE945W07332	Long Term Principal Protected Market Linked Debentures	29-Jul-21	10Y G-SEC LINKED	29-Aug-23	20	Highly Complex	CRISIL PPMLD A r /Stable
NA	Commercial Paper	NA	NA	7 to 365 Days	100	Simple	CRISIL A1
NA	Term Loan	17-Feb-21	NA	15-Feb-24	40	NA	CRISIL A/Stable
NA	Term Loan	29-Sep-18	NA	30-Sep-22	150	NA	CRISIL A/Stable
NA	Term Loan	12-Jul-19	NA	12-Jul-22	150	NA	CRISIL A/Stable
NA	Term Loan	13-Feb-20	NA	30-Nov-24	50	NA	CRISIL A/Stable
NA	Term Loan	27-Jan-20	NA	27-Jan-24	20	NA	CRISIL A/Stable
NA	Term Loan	04-Dec-20	NA	15-Sep-25	50	NA	CRISIL A/Stable
NA	Term Loan	30-Apr-20	NA	30-Apr-23	50	NA	CRISIL A/Stable
NA	Term Loan	22-Nov-18	NA	22-Nov-21	40	NA	CRISIL A/Stable
NA	Term Loan	28-May-19	NA	27-May-23	100	NA	CRISIL A/Stable
NA	Term Loan	22-Feb-21	NA	15-Feb-26	50	NA	CRISIL A/Stable
NA	Term Loan	15-Dec-20	NA	31-Dec-23	25	NA	CRISIL A/Stable
NA	Term Loan	06-Mar-20	NA	30-Jun-23	20	NA	CRISIL A/Stable
NA	Term Loan	30-Mar-19	NA	05-Apr-22	15	NA	CRISIL A/Stable
NA	Term Loan	29-Feb-20	NA	28-Feb-25	75	NA	CRISIL A/Stable
NA	Term Loan	30-Aug-19	NA	15-Aug-22	40	NA	CRISIL A/Stable
NA	Term Loan	03-Dec-20	NA	15-Dec-23	24.5	NA	CRISIL A/Stable
NA	Term Loan	17-Jun-20	NA	30-Jun-25	100	NA	CRISIL A/Stable
NA	Term Loan	14-Jun-21	NA	11-Mar-24	35	NA	CRISIL A/Stable
NA	Term Loan	31-Mar-21	NA	28-Mar-26	50	NA	CRISIL A/Stable
NA	Term Loan	19-Mar-21	NA	19-Mar-24	35	NA	CRISIL A/Stable
NA	Term Loan	17-Jun-21	NA	17-Jun-23	20	NA	CRISIL A/Stable
NA	Term Loan	22-Jul-21	NA	Jun-22	125	NA	CRISIL A/Stable
NA	Term Loan	23-Jul-21	NA	Aug-24	25	NA	CRISIL A/Stable
NA	Cash Credit and Working Capital Demand Loan	NA	NA	NA	105	NA	CRISIL A/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	355.5	NA	CRISIL A/Stable

^Yet to be issued