| Jana Small Finance Bank Limited | ||||
| Rating downgraded to 'CRISIL BBB/Negative' ; CP reaffirmed | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has downgraded its long term rating on the bank loan facilities and non convertible debentures of Jana Small Finance Bank Limited (Jana SFB; Formerly known as Janalakshmi Financial Services Ltd) to 'CRISIL BBB/Negative' from 'CRISIL BBB+/Negative'; the commercial paper programme has been reaffirmed at 'CRISIL A2+'. |
| Key Rating Drivers & Detailed Description |
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Strengths * Expected structural benefits of operating as a small finance bank As a small finance bank, Jana SFB derives structural benefits of scalability, and will diversify its asset segments over the medium term by expanding its presence in inclusion adjacencies such as micro, small, and medium enterprise loans, gold loans and housing finance. Crucially, over the long run, the transformation also provides Jana SFB access to stable and granular public deposits. * Sizable presence in the microfinance industry Before transformation, Jana SFB was amongst the leading non-banking financial companies operating as a microfinance institution (NBFC-MFI) in India. It had a Gross loan portfolio of Rs 7653 crore and diversified presence across more than 200 districts and 19 states as on March 31, 2018. Small group loans contributed to 80.4%, and the balance portfolio comprised Nano & super-nano loans (individual loans given to seasoned microfinance borrowers - 6.7%), Jana Kisan loans (agriculture loans ' 5.9%), enterprise finance loans (to emerging micro and small enterprises ' 4.8%), and public finance (1.4%). The bank also has a small portfolio comprising housing loans, gold loans and education loans. The non-microfinance portfolio is expected to grow at a higher pace over the medium term and is expected to account for more than one-third of loan assets by fiscal 2020. * Demonstrated track record of capital infusion at regular intervals Jana SFB has raised equity capital at regular intervals to maintain adequate capitalisation. The bank has raised Rs 1636 crore of additional equity in fiscal 2018, from existing and new investors, to ensure capitalisation remains adequate despite a sharp decline in profitability on account of decline in pre-provisioning profits and high provisioning costs. The bank is also in the process of raising another ~ Rs 306 crore of equity capital, which has already been tied up and is expected to be infused by July -end. Additionally, the bank is in advanced stage of raising another Rs 120 crore of capital. While CRISIL has factored this capital infusion in its analysis, any change in quantum or timing will be a critical rating sensitivity factor. Fresh capital infusion has enabled Jana SFB maintain a comfortable cushion in its capital adequacy over regulatory stipulation. However, with net non-performing assets (NPAs) remaining elevated at Rs 1671 crore as on March 31, 2018, it is crucial for the bank to revive its operating performance rapidly and accelerate the pace of recovery from delinquent loans so as to prevent any potential stress on capital position. Ability to sustain absolute networth at significant levels also remains critical for the bank to avail higher inter-bank liabilities in the initial few years of operations as an SFB, until deposits reach a significant share of liabilities. * Liquidity position being managed well during these challenging times Jana SFB has managed it liquidity position well till date. As on May 31, 2018, the bank has over Rs 1000 crore of unencumbered liquidity (over and above regulatory statutory liquidity ratio and cash coverage ratio requirements). Jana SFB has also managed to raise deposits of Rs 372 crore as on date . They are also in final stages of availing refinance lines of Rs 1500 -1700 crore from National Bank for Agriculture and Rural Development (NABARD/Small Industries Development Bank of India (SIDBI) /MUDRA Moreover, after getting the scheduled bank status, they will have access to liquidity adjustment facility and marginal standing facility, and interbank markets. * Extensive experience of board and senior management The board of directors and senior management comprise experienced and reputed professionals from the financial services sector. Mr Ramesh Ramanathan, founder and chairman, has extensive experience in banking and finance. Mr Ajay Kanwal, the Managing Director and Chief Executive Officer, has extensive experience in banking and financial services space. The Bank has also inducted four eminent Independent Directors on the Board including Mr R. Gandhi, former Deputy Governor of RBI. The senior management are also experienced professionals from banks, non-banking financial companies (NBFCs), and the microfinance sector. The bank has also broad-based its senior management by hiring experienced professionals to manage additional banking functions such as liabilities, treasury, risk, compliance and marketing, and has also trained a large number of employees to take up middle management roles in a bank. Weaknesses * Sharp deterioration in earnings Pre-provisioning profitability for fiscal 2018 has been severely impacted because of substantial reduction in interest income largely due to shrinkage in performing loan book following slowdown in disbursements. The bank took a strategic decision to focus on strengthening credit policies and collection infrastructure and disbursed loans aggregating Rs - 2516 crore in fiscal 2018 as against Rs 9023 crore disbursed in the previous fiscal. As a result, the bank ended up reporting a pre-provisioning loss of Rs 1022 crore for fiscal 2018 as against a pre-provisioning profit of Rs 560 crore for the previous fiscal. Moreover, prolonged weakness in collection performance resulted in a significantly high provisioning cost of Rs 1372 crore for fiscal 2018 as against Rs 299 crore for the previous fiscal. The bank therefore reported a net loss of Rs 2504 crore for fiscal 2018 as against a net profit of Rs 170 crore for the previous fiscal. Over the last three months, disbursements have increased steadily to Rs ~439 crore. Operating profitability is expected to improve gradually with further ramp up in disbursements. The measures undertaken to reduce operating expenses are also likely to materialize over the next few quarters. Revival in pre-provisioning profits through ramp up in disbursements and ability to accelerate the pace of recovery to limit the incremental provisioning costs nevertheless are critical and remain key rating sensitivity factors. * Weak asset quality Continued weakness in collection performance has resulted in portfolio delinquencies remaining at elevated levels: gross NPAs and net NPAs were at Rs 3183 crore and Rs 1671 crore, respectively, as on March 31, 2018. Asset quality parameters though have started showing early signs of stability and incremental slippages since June 2017 have reduced. An uptick in recovery from deeper delinquency buckets is also observed based on the ground level measures taken by Jana SFB. Ability to accelerate the pace of recovery from loans overdue by more than 90 days nevertheless remains critical. Ability to maintain sound asset quality performance in non-microfinance loans while scaling up the operations also remains a key rating monitorable. * Near-term challenges in garnering retail deposits as a small finance bank Funds from banks and financial institutions (including securitisation and assignment transactions) remained high, at 50%, as on March 31, 2018. As a small finance bank, Jana SFB will have limited access to bank debt, as inter-bank liabilities raised from now on will be capped at 2-3 times of networth, depending on capital adequacy. The bank debt therefore has to be gradually replaced with deposits. Jana SFB has managed to raise deposits of Rs 372 crores as on date. Ability to raise retail deposits will be an inherent challenge for all new banking licensees, given the intense competition. Jana SFB, however, intends to garner sizable retail deposits by opening large number of branches. Further, the funding challenge can be surmounted through certificates of deposits, securitisation /inter-bank participatory certificates; refinancing from National Bank for Agriculture and Rural Development (NABARD) and Micro Units Development & Refinance Agency Ltd (MUDRA); and attracting corporate deposits by offering higher interest rates. Moreover, regulatory ceiling on inter-bank liabilities will not be applicable for bank debt availed before transformation for a period of up to three years. Borrowing cost should decline over the medium term, as the depositor base widens. |
| Outlook: Negative |
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Slower than expected ramp up in disbursements has resulted in a shrinkage in performing loan book thereby, leading to significant decline in interest income. As a result, the bank's operating performance has deteriorated materially, reflected in a pre-provisioning loss of Rs 1022 crore for fiscal 2018. There is some relief from the capital infusion of Rs 1636 crore, along with additional capital infusion of Rs 306 crore expected by July , 2018 and another Rs 120 crore of capital which the bank is expected to tie up soon. However, it is instrumental for Jana SFB to ramp up its disbursements and revive its operating performance in fiscal 2019. The ratings may be downgraded further if the bank is unable to ramp up its disbursements leading to continued pressure on its operating profitability. The ratings may also be downgraded if Jana SFB is not able to accelerate the pace of recovery from the delinquent loans resulting in higher than anticipated credit losses, leading to a stress on capital position. The outlook will be revised to 'Stable' in case of substantial and sustained improvement operating profitability and overall asset quality while maintaining adequate capitalisation. |
| About the Bank |
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Jana SFB, based in Bengaluru, started as a microfinance institution in April 2008, by taking over the portfolio of Janalakshmi Social Services (JSS), a not-for-profit firm promoted by Mr Ramesh Ramanathan. JSS had earlier acquired the urban microfinance programme of Sanghamithra Rural Financial Services and started its own microfinance programme in July 2006. It provides microfinance services to the urban poor. Jana SFB also offers other loan products such as enterprise, housing and individual loans. On March 28, 2018, the entity commenced its operations as a small finance bank after getting an approval from RBI. It changed its name to 'Jana Small Finance Bank' from 'Janalakshmi Financial Services Ltd' on January 29, 2018. |
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | |||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of various bank facilities | ||||||||||||||||||||||||
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| Links to related criteria |
| CRISILs Bank Loan Ratings - process, scale and default recognition |
| Rating Criteria for Banks and Financial Institutions |
| CRISILs Criteria for rating short term debt |
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