Detailed Rationale

CRISIL Ratings’ ratings on the long term bank facilities and debt instruments of Incred Financial Services Limited (Incred) continue to be on ‘Rating Watch with Positive Implications’.

 

The ratings on debt instruments of Incred were placed on Watch Positive after the company’s board approved the proposed corporate reorganization inter alia involving the demerger of the company’s retail lending portfolio into KKR India Financial Services Limited (KIFSL). The proposed reorganization is expected to come into effect by the first half of calendar year 2022 and, is subject to receipt of necessary approvals under applicable law, including approvals from the creditors, debenture holders, National Company Law Tribunal (NCLT), other relevant governmental/regulatory authorities and third parties. CRISIL Ratings understands that Incred had filed the composite scheme of arrangement between itself, Bee Finance Limited, KKR Capital Markets India Private Limited, KIFSL and their respective shareholders with NCLT Mumbai on September 27, 2021. Further, a joint application has been made by Incred and KIFSL to RBI for prior approval of change in control and no objection on the NCLT application and, RBI’s response to the same is awaited.  The Company has received an NCLT order dated November 10, 2021 pursuant to which a meeting of the Equity shareholders, Preference shareholders and secured creditors is being called on December 15, 2021.

 

The resultant entity (post the reorganization subject to necessary approvals) is expected to use the brand name ‘InCred Financial Services Ltd’ and will be spearheaded by the current leadership team of InCred. The company’s existing investors are expected to hold over 65% stake in the resultant entity and KKR Singapore – as a strategic investor in the resultant entity – will hold the single largest stake of ~35%.

 

The Watch with positive implications factors in the likely improvement in the merged entity’s financial risk profile after the reorganization. The resultant entity is expected to benefit from the significant increase in net worth to upwards of Rs 2,000 crore on consummation of the reorganization. InCred’s operating profitability and overall earnings profile are also expected to improve by the end of fiscal 2022. In addition, it is expected that there will be a steady improvement in Incred’s asset quality metrics with a reduction in the level of stressed assets.

 

CRISIL Ratings believes that there are many steps and developments, which may potentially need to be considered and approved by regulators before the reorganization comes into effect. The rating watch will be resolved and final rating action will be taken once there is adequate progress on receipt of requisite approvals for the reorganization and, after taking into consideration other developments pertaining to the amalgamation scheme and company’s performance.

 

The outstanding ratings continue to reflect InCred’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 September 30, 2021, the AUM stood at Rs 2,896 crore, which marks a 10% growth (un-annualized) from the AUM as on March 31, 2021 and, was primarily driven by traction in Q2 2022.

 

With gradual pick-up in business activity, monthly collection efficiency had revived in the second half of fiscal 2021 with the overall collection efficiency for the non – NPA portfolio improving to 100% in March 2021. However, in the aftermath of the pandemic’s second wave, the rate of collections declined marginally in Q1 2021 and has started to improve thereafter. For October 2021, the collection efficiency for the non-NPA portfolio was 97%. Monthly disbursements also exhibited a similar trend. After dropping to Rs 29 crore in April 2020, a gradual ramp up in business alongside increasing economic activity resulted in disbursements of Rs 279 crore in December 2020 and Rs 419 crore in March 2021. Thereafter, a temporary slowdown was observed in April 2021 due to the pandemic’s 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 and Rs 30.4 crore (including Rs 14.7 crore of write offs) in H1 2022. Asset quality has remained volatile amidst the on-going pandemic and lockdown, the 90+ days past due (dpd) stood at 3.9% as on September 30, 2021, compared with 3.4% 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 had a restructured portfolio of Rs 117.6 crore as on September 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 1,071 crore with low gearing of 2.1 times as on September 30, 2021. This marks a significant improvement from Rs 595 crore of networth 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), Moore Strategic Ventures, and Elevar Equity. CRISIL Ratings believes Incred’s capital position is strong with regards to its scale and nature of operations, supported by its demonstrated ability to raise capital from existing as well as new investors. After the proposed reorganization comes into effect, further accretion to networth is expected.

 

* Experienced promoters and senior management team

Incred was promoted in 2016, by Mr Bhupinder Singh, Managing Director and Chief Executive Officer. Having been associated with Deutsche Bank with 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 (CFO), 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 reports 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. Post reorganization, the existing management of Incred will continue to lead the resultant entity.

 

* Diversified loan portfolio

InCred had a diversified loan portfolio of Rs 2,634 crore as on March 31, 2021 which has further increased to Rs 2,896 crore as of September 30, 2021. The AUM mix consists of personal loans (33%), secured school financing (19%), student loans (14%), lending to NBFCs (17%) and anchor-backed business lines (13%). The company’s portfolio also comprises non anchor backed business loans (2%) and two-wheeler Loans (2%) 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, 49% of AUM is composed of retail loans and the balance consists of loans to SMEs and NBFCs. Also, given low correlation between these segments, CRISIL Ratings believes that the diversified loan portfolio supports 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 optimizing 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. For H1 2022, the company reported an annualized RoMA of 0.5% corresponding to a net profit of Rs 7 crore. After adjusting for non-cash ESOP expenses, the annualized RoMA for the period was about 1.2%.

 

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% by December 31, 2020 amidst tepid economic environment. However, following the recovery in Q4 2021, GNPAs reduced to 3.4% as of March 31, 2021 which – after the pandemic’s second wave, again elevated marginally to 3.9% as on September 30, 2021. As on September 30, 2021, the company had a restructured portfolio of Rs 117.6 crore and almost 80% of it was current (0 dpd) and 9.3% was in the 90+ dpd bucket.

In terms of collections, when calculated after giving benefit of over-dues, collections improved to 100% in March 2021, from 89% in September 2020. However, impacted by the pandemic’s second wave and the sporadic lockdown that followed, monthly collection efficiency for the non – NPA portfolio, over Q1 2022 has ranged between 96-98%. For October 2021, it was 97%. 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 key rating sensitivity factors. 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 2077 crore, a year ago - registering a growth of 27% 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 pandemic’s second wave, the AUM dipped marginally to Rs 2,553 crore as at the close of Q1 of fiscal 2022 however, has revived to Rs. 2,896 crore as on September 30, 2021. 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

As on September 30, 2021, the company had liquidity balance of Rs 374.09 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 1.1 times. Considering the undrawn CC/WCDL lines, the liquidity coverage increases to 2.2 times. Incrementally, the company has raised external funds of about Rs 1400 crore in fiscal 2021 and Rs 1340 crore in the first half of fiscal 2022.

Rating Sensitivity Factors

Upward factors:

• Improvement in earnings profile with ROMA reaching to 2% by fiscal 2022 and thereafter settling at closer to 2.5% 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) seeing material deterioration over the medium term
• Earnings profile remaining sub-optimal with inability to achieve a sustained RoMA level of >1.5% 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 February 2017, Incred has built a diversified portfolio with AUM of Rs 2,896 crore as on September 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/Watch Positive
INE945W07134	Non Convertible Debenture	22-Jun-20	9.75	22-Jun-23	50	Simple	CRISIL A/Watch Positive
INE945W07142	Non Convertible Debenture	23-Jun-20	9.50	20-Dec-21	100	Simple	CRISIL A/Watch Positive
INE945W07159	Non Convertible Debenture	26-Jun-20	9.75	26-Jun-23	100	Simple	CRISIL A/Watch Positive
INE945W07167	Non Convertible Debenture	31-Jul-20	9.50	28-Jan-22	25	Simple	CRISIL A/Watch Positive
INE945W07167	Non Convertible Debenture	31-Jul-20	9.50	28-Jan-22	25	Simple	CRISIL A/Watch Positive
INE945W07175	Non Convertible Debenture	10-Aug-20	9.40	10-Feb-22	50	Simple	CRISIL A/Watch Positive
INE945W07191	Non Convertible Debenture	11-Sep-20	9.40	14-Mar-22	50	Simple	CRISIL A/Watch Positive
INE945W07191	Non Convertible Debenture	11-Sep-20	9.40	14-Mar-22	25	Simple	CRISIL A/Watch Positive
INE945W07225	Non Convertible Debenture	04-Dec-20	9.10	04-Jun-22	25	Simple	CRISIL A/Watch Positive
INE945W07316	Non-Convertible Debenture	27-Jul-21	10.95	27-Jul-27	115	Simple	CRISIL A/Watch Positive
NA	Long Term Principal Protected Market Linked Debentures^	NA	NA	NA	170	Highly Complex	CRISIL PPMLD A r/Watch Positive
INE945W07308	Long Term Principal Protected Market Linked Debentures	20-Jul-21	NIFTY 50 LINK	26-Apr-24	30	Highly Complex	CRISIL PPMLD A r/Watch Positive
NA	Long Term Principal Protected Market Linked Debentures^	NA	NA	NA	3.5	Highly Complex	CRISIL PPMLD A r/Watch Positive
INE945W07290	Long Term Principal Protected Market Linked Debentures	02-Jul-21	NIFTY 50 LINK	02-Jul-26	75	Highly Complex	CRISIL PPMLD A r/Watch Positive
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/Watch Positive
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/Watch Positive
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/Watch Positive
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/Watch Positive
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/Watch Positive
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/Watch Positive
NA	Commercial Paper	NA	NA	7 to 365 Days	100	Simple	CRISIL A1/Watch Positive
NA	Term Loan	17-Feb-21	NA	15-Feb-24	40	NA	CRISIL A/Watch Positive
NA	Term Loan	29-Sep-18	NA	30-Sep-22	150	NA	CRISIL A/Watch Positive
NA	Term Loan	12-Jul-19	NA	12-Jul-22	150	NA	CRISIL A/Watch Positive
NA	Term Loan	13-Feb-20	NA	30-Nov-24	50	NA	CRISIL A/Watch Positive
NA	Term Loan	27-Jan-20	NA	27-Jan-24	20	NA	CRISIL A/Watch Positive
NA	Term Loan	04-Dec-20	NA	15-Sep-25	50	NA	CRISIL A/Watch Positive
NA	Term Loan	30-Apr-20	NA	30-Apr-23	50	NA	CRISIL A/Watch Positive
NA	Term Loan	22-Nov-18	NA	22-Nov-21	40	NA	CRISIL A/Watch Positive
NA	Term Loan	28-May-19	NA	27-May-23	100	NA	CRISIL A/Watch Positive
NA	Term Loan	22-Feb-21	NA	15-Feb-26	50	NA	CRISIL A/Watch Positive
NA	Term Loan	15-Dec-20	NA	31-Dec-23	25	NA	CRISIL A/Watch Positive
NA	Term Loan	06-Mar-20	NA	30-Jun-23	20	NA	CRISIL A/Watch Positive
NA	Term Loan	29-Feb-20	NA	28-Feb-25	75	NA	CRISIL A/Watch Positive
NA	Term Loan	30-Aug-19	NA	15-Aug-22	40	NA	CRISIL A/Watch Positive
NA	Term Loan	03-Dec-20	NA	15-Dec-23	24.5	NA	CRISIL A/Watch Positive
NA	Term Loan	17-Jun-20	NA	30-Jun-25	100	NA	CRISIL A/Watch Positive
NA	Term Loan	14-Jun-21	NA	11-Mar-24	35	NA	CRISIL A/Watch Positive
NA	Term Loan	31-Mar-21	NA	28-Mar-26	50	NA	CRISIL A/Watch Positive
NA	Term Loan	19-Mar-21	NA	19-Mar-24	35	NA	CRISIL A/Watch Positive
NA	Term Loan	17-Jun-21	NA	17-Jun-23	20	NA	CRISIL A/Watch Positive
NA	Term Loan	22-Jul-21	NA	Jun-22	125	NA	CRISIL A/Watch Positive
NA	Term Loan	23-Jul-21	NA	Aug-24	25	NA	CRISIL A/Watch Positive
NA	Term Loan	14-Aug-21	NA	Aug-23	20	NA	CRISIL A/Watch Positive
NA	Term Loan	24-Aug-21	NA	Aug-25	200	NA	CRISIL A/Watch Positive
NA	Term Loan	18-Aug-21	NA	Feb-25	45	NA	CRISIL A/Watch Positive
NA	Term Loan	30-Sep-21	NA	Sep-24	150	NA	CRISIL A/Watch Positive
NA	Term Loan	09-Sep-21	NA	Sep-25	100	NA	CRISIL A/Watch Positive
NA	Term Loan	22-Sep-21	NA	Sep-24	30	NA	CRISIL A/Watch Positive
NA	Cash Credit & Working Capital Demand Loan	NA	NA	NA	105	NA	CRISIL A/Watch Positive
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	325.5	NA	CRISIL A/Watch Positive

^Yet to be issued