Detailed Rationale

CRISIL has assigned its 'CRISIL A/Stable/CRISIL PPMLD Ar/Stable/CRISIL A1' ratings to 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) and has reaffirmed its ‘CRISIL A1’ rating to the proposed short-term bank loan facility.

 

The rating reflects 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 2,376 crore as on December 31, 2020 (Rs 2,069 crore as on March 31, 2020). 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).

 

Monthly collection efficiency revived towards the end of the first quarter of fiscal 2021. With gradual pick-up in business activity, current collection efficiency has improved and stood at 96% for January 2021 (84% in September 2020). However, the company’s ability to improve collections to pre-Covid levels on a steady-state basis remains a key monitorable. With steady improvement in collections and economic activity, disbursements have also started growing. Disbursements stood at Rs 29 crore (April), and with significant improvement in collections, rose to nearly Rs 285 crore in January 2021.

 

Given 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 of Rs 53 crore (Rs 25 crore against Covid-19) in the nine months ended fiscal 2021. In addition, the company also wrote off its portfolio to the tune of Rs 11 crore during the nine months ended fiscal 2021. Asset quality remained moderated on account of the pandemic, and the 90+ days past due (dpd) on proforma basis stood at 4.5% as on December 31, 2020, compared with 2.8% as on March 31, 2020. Further, as part of the one-time restructuring scheme related to Covid-19 announced by the Reserve Bank of India (RBI), the company has not restructured any material account till date and may not do so even in the fourth quarter of fiscal 2021. Incred’s ability to manage asset quality and maintain healthy collections remains a key monitorable.

 

Given the nascent stage of operations, earnings were constrained by high operating expenses and provisions / credit costs in fiscal 2020. Further, during the nine months ended December 2020, Incred has reported estimated net profit of Rs 4 crore after factoring in higher provisioning of Rs 25 crore and non-cash ESOP expenses of Rs 9.4 crore. Consequently, the annualised RoMA stood at 0.2% in the nine months ended fiscal 2021 (0.2% in fiscal 2020) and after adjusting for this non-cash expenses, annualised RoMA is estimated at 1.2%. Given the aggressive provisioning implemented by the company and sustained focus to further tighten cost and operating expenses, CRISIL Ratings expects Incred’s profitability to improve from the fourth quarter of fiscal 2021. 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, manage recoveries to pre-pandemic level and improve profitability, while keeping credit cost low, will be key rating sensitivity factor.

 

On the liability side, Incred had not availed any moratorium on its bank loans. Capitalisation metrics remain strong with networth of Rs 1,041 crore and gearing of 1.5 time as on December 31, 2020; gearing peaked to 2.1 times over the last 3 years. The group is backed by high pedigree investors such as Mr Ranjan Pai, FMO (the Netherland Development Finance Company), OAKS Asset Management (Formerly known as Alpha Capital) and Investcorp, amongst others. Since its inception in February 2016, Incred has raised over Rs 1000 crore as capital from diverse base of investors.

 

CRISIL Ratings believes Incred has comfortable liquidity. As on January 31, 2021, the company had liquidity balance of Rs 209 crore (comprising cash and investments in bonds of Rs 178 crore and unutilised cash credit/working capital demand loan limit of Rs 31 crore). This balance, without factoring in any further collections or accretions, covers the estimated outflow towards debt obligations and operating expenses by over 1 time. Incrementally, the company has raised Rs 1167 crore over the last 9 months. It has also an undrawn sanctioned term loan of Rs 110 crore as on January 31, 2021.

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 1,041 crore with low gearing of 1.5 times as on December 31, 2020. As on March 31, 2020, networth was Rs 1,027 crore, having improved significantly from Rs 595 crore as on March 31, 2019. 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. While gearing was low at 1.5 times as on December 31, 2020, it had peaked to 2.1 times over the last three years.

 

• 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, has 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. On the business side, the retail business segment is headed by Mr Prashant Bhonsle, who was a founding member and business head at HDFC Credila, and has held various leadership positions at ICICI Bank, Canon, and RPG Cellular over the past 20 years. 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. The SME business segment, is looked after by Mr Saurabh Jhalaria who has over 18 years of work experience and was earlier Managing Director – Singapore operations at Deutsche Bank. 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 has a diversified loan portfolio of Rs 2,376 crore as on December 31, 2020. The AUM mix consists of personal loans (27%), secured school financing (23%), student loans (14%), lending to FIs and escrow backed lending (18%), unsecured business loans (7%), supply chain financing (6%) and two-wheeler Loans (5%).

 

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, 46% 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.

 

Weaknesses:

• Moderate earnings profile

Owing to the nascent scale of operations, operating expenses of Incred, while coming down, have remained high largely attributable to head office costs, especially employee cost and technology-linked expenses. Furthermore, Incred had brought on board members of the senior management to lead respective asset segments. In fiscal 2020, the company focused on optimising cost and overall operating expenses increased by only 16%. However, it could not scale up the business in fiscal 2020, with loan book growing at 19% on account of a combination of cautious origination in some segments and overall challenging macroeconomic environment till December 2019. Disbursements in the last quarter of fiscal 2020 were also impacted because of the lockdown. The AUM grew by just 19% to Rs 2,069 crore in fiscal 2020 and the opex ratio remained high at 6.9%. The company had also made a strategic exit from its housing finance subsidiary, which led to recognition of an impairment loss of Rs 6.2 crore in fiscal 2020. The company also took write-offs of Rs 35 crore primarily in the personal loans and non-anchor supply chain segments and made additional Covid-19 linked provisioning of Rs 5 crore. Consequently, the reported ROMA was low at 0.2% for fiscal 2020 (0.2% for fiscal 2019). However, the RoMA after adjusting for one-time impairment loss and Covid-19 provisioning stood at 1.1% for fiscal 2020

 

For the nine months ended December 31, 2020, Incred has reported estimated net profit of Rs 4 crore, after factoring in higher provisioning of Rs 25 crore and non-cash ESOP expenses of Rs 9.4 crore. Consequently, the annualised RoMA was at 0.2% in the nine months ended fiscal 2021, and after adjusting for this one-time/ non-cash expenses, annualised RoMA is estimated at 2.1%. Credit cost rose to 4.2% in the nine months ended fiscal 2021, compared with 2.6% in fiscal 2020, on account of the company's aggressive provisioning policy. Given the provisioning policy, coupled with sustained focus on tightening costs and operating expenses, CRISIL Ratings expects Incred’s profitability to improve from the fourth quarter of fiscal 2021. 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, manage recoveries to pre-pandemic level 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. Amidst the tepid economic environment, the company's asset quality metrics have witnessed deterioration in GNPA to 4.5% as on December 31, 2020, (2.8% as on March 31, 2020). However, a significant proportion of NPAs pertains to legacy accounts and barring these, GNPA stood at 2.4%. Furthermore, in terms of collections, when calculated after giving benefit of overdue, collections improved to 98% in Dec-20, from 63% in August-20; current collection efficiency trend has improved and has been in the range of 84-98% post the moratorium period i.e. between Sep and Dec 2020. The company has not restructured any material account under one-time restructuring or the micro, small and medium enterprise (MSME) scheme as of now and may not take any material action over the fourth quarter of fiscal 2021 as well. Going forward, in the current challenging environment, the plan to further scale up operations, while maintaining asset quality at adequate levels, 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 last quarter of fiscal 2021.

 

• Moderate scale of operations and market position with limited seasoning

As on March 31, 2020, Incred’s AUM stood at Rs 2,069 crore, as compared to Rs 1,745 crore as on March 31, 2019, registering a growth of 19% 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. Furthermore, bulk of the loan portfolio has not yet seasoned. Even for personal loans and anchor-backed business loan segment, where the original tenure is shorter, CRISIL Ratings believes underwriting will continue to be fine-tuned as the book scales up and hence, seasoning of the book overall remains to be seen.

Liquidity: Adequate

As on December 31, 2020, the asset-liability maturity profile was comfortable with positive cumulative gaps in the up to one-year bucket. During the third quarter of fiscal 2021, Incred raised Rs 165 crore via non-convertible debentures, term loans, market linked debentures and cash credit facility. Consequently, as on January 31, 2021, Incred has adequate liquidity balance of Rs 209 crore (comprising of cash and investments in bonds of Rs 178 crore and unutilized CC/WCDL limit of Rs 31 crore). This balance, without factoring in any further collections or accretions, covers the estimated outflow comprising debt obligations and operating expenses over 1 time. The company also has an undrawn sanctioned term loan of Rs 110 crore as on January 31, 2021.

Outlook: Stable

CRISIL Rating 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) exceeding 4% over the medium term
• Earnings profile remaining sub-optimal with RoMA being lower than 1.75%

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 2,376 crore as on December 31, 2020.

Key Financial Indicators

As on/for the year ended March 31	Unit	Dec-20	2020	2019
Total assets	Rs crore	2,713	2,250	1,874
Advances	Rs crore	2,376	2,069	1,745
Total income	Rs crore	273	329	291
Profit after tax (PAT)	Rs crore	4	4	4
Gross NPA	%	4.5	2.8	1.8
Gearing	Times	1.5	1.1	2.1
Return on assets	%	0.2	0.2	0.2

 

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 Convetible Debenture^	NA	NA	NA	375	Simple	CRISIL A/Stable
INE945W07134	Non Convetible Debenture	22-Jun-20	NA	22-Jun-23	50	Simple	CRISIL A/Stable
INE945W07142	Non Convetible Debenture	23-Jun-20	NA	20-Dec-21	100	Simple	CRISIL A/Stable
INE945W07159	Non Convetible Debenture	26-Jun-20	NA	26-Jun-23	100	Simple	CRISIL A/Stable
INE945W07167	Non Convetible Debenture	31-Jul-20	NA	28-Jan-22	25	Simple	CRISIL A/Stable
INE945W07167	Non Convetible Debenture	31-Jul-20	NA	28-Jan-22	25	Simple	CRISIL A/Stable
INE945W07175	Non Convetible Debenture	10-Aug-20	NA	10-Feb-22	50	Simple	CRISIL A/Stable
INE945W07191	Non Convetible Debenture	11-Sep-20	NA	14-Mar-22	50	Simple	CRISIL A/Stable
INE945W07191	Non Convetible Debenture	11-Sep-20	NA	14-Mar-22	25	Simple	CRISIL A/Stable
INE945W07225	Non Convetible Debenture	04-Dec-20	NA	04-Jun-22	25	Simple	CRISIL A/Stable
NA	Long Term Principal Protected Market Linked Debentures^	NA	NA	NA	200	Highly Complex	CRISIL PPMLD A r /Stable
NA	Commercial Paper	NA	NA	NA	100	Simple	CRISIL A1
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	350	NA	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	04-Jul-18	NA	18-Jul-21	100	NA	CRISIL A/Stable
NA	Cash Credit and Working Capital Demand Loan	NA	NA	NA	50	NA	CRISIL A/Stable
NA	Cash Credit	NA	NA	NA	30	NA	CRISIL A/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	220.5	NA	CRISIL A/Stable

^yet to be issued