| Lendingkart Finance Limited | ||
| Rating outlook revised to 'Positive'; Rating Reaffirmed | ||
| Rating Action | ||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||
| 1 crore = 10 million | ||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its outlook on the long-term Principal Protected Market Linked Debentures (PPMLD) of Lendingkart Finance Limited (LFL) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL PPMLD BBB+’.
The revision in outlook reflects the improvement in the asset quality metrics of the company with adjusted 90+ dpd ratio (including write-offs) improving to 2.3% as on September 30, 2023 (3.3% as on March 31, 2023) from 15.0% as on March 31, 2022. This is primarily stemming from tightened credit underwriting model, strengthened collection mechanism and better-quality originations post pandemic resulting in improved credit costs. Furthermore, with pickup in disbursals and focus of the group on growth via co-lending arrangements, the overall assets under management (AUM) grew by ~52% in fiscal 2023 and thereafter 25% YTD to Rs 6,247 crore as on September 30, 2023. Consequently, the group turned profitable in fiscal 2023 with consolidated net profit of Rs 119 crore as compared to the loss of Rs 203 crore in fiscal 2022. For the first half of fiscal 2024 (H1FY24), LFL reported consolidated net profit of Rs 57 crore and annualized return on managed asset (RoMA) of 1.6%. However, sustenance of the healthy asset quality metrics and profitability remains a key monitorable.
Moreover, CRISIL Ratings’ rating continues to reflect the group's (Lendingkart Finance Ltd (LFL) and its parent, Lendingkart Technologies Pvt Ltd (LTPL)) comfortable capitalisation metrics and scalable business model. The rating also factors in benefits derived from strong linkages with Fullerton Financial holdings Pte Ltd (FFH). These strengths are being constrained by the modest track record of operations and the inherent vulnerability of asset quality of the unsecured SME loan segment.
CRISIL Ratings has also taken note of the recent measures by Reserve Bank of India (RBI) covering the Banking and NBFC sector. Firstly, on the asset side for NBFCs, there is an increase in risk weights for unsecured consumer loans (including credit card receivables), by 25 percentage points to 125% from 100% earlier. This regulation applies to all retail loans except housing loans, vehicle loans, educational loans, loans against gold and microfinance/SHG loans. The increase in risk-weighted assets will lead to a decrease in the capital adequacy ratios of NBFCs (wherever applicable) but is not likely to materially impact the ratios. However, based on discussion with LFL’s management, since it offers business loans and not consumer loans, the capital adequacy ratios of LFL will not be impacted.
Secondly, there is an increase in risk weights for Bank’s exposure to NBFCs by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs is below 100%. Herein, loans to HFCs, and loans to NBFCs which are eligible for classification as priority sector are excluded. This development may potentially lead to an increase in cost of bank borrowings for NBFC sector. This could lead to diversification in the borrowings mix with higher share of capital market instruments and securitisation, amongst others. Ability of NBFCs to pass on the potentially higher borrowing costs will be monitored. However, since the risk weight as per LFL’s existing rating is already 100%, this too will not impact LFL. |
Analytical Approach CRISIL Ratings has evaluated the credit risk profile of the Lendingkart group. CRISIL Ratings has also factored in the benefits derived from the linkages with FFH, which is a step-down subsidiary of Temasek Holdings Private Limited (Temasek; rated ‘AAA/Stable’ by S&P Global). FFH continues to be the single largest shareholder in the Lendingkart group. |
Key Rating Drivers & Detailed Description Strengths:
The capital position of the group remains comfortable with LTPL’s consolidated net worth increasing to Rs 858 crore and LFL’s standalone net worth of Rs 788 crore as on September 30, 2023. The overall capital adequacy ratio of LFL stood at 33.5% as on September 30, 2023. LTPL’s on-book gearing and adjusted gearing[1] at the consolidated level was comfortable at 2.7 times and 3.7 times[1] respectively as on September 30, 2023.
Capitalisation metrics have been supported by regular capital infusion in the past with LTPL having raised around Rs 1,082 crores since inception of which Rs 717 crores has been infused in LFL. Capitalisation is expected to remain comfortable over the medium term, supported by regular capital raising and accretion to reserves with on-book gearing expected to remain under 4 times on a steady state basis.
LFL has adopted a branchless business model with most of the operations from sourcing to evaluation happening online. LFL uses a proprietary algorithm which provides the score for each application filed which is used to evaluate credit decisions. This supports the entity’s ability to scale up its portfolio with limited incremental investment, as well as be present across locations in the country. Given the branchless mode of operations, LFL has achieved presence in over 12,000 Pincodes, 4100+ towns and cities across 34 states/UTs as on September 30, 2023.
Lendingkart’s AUM has grown at a fast pace registering a 4-year CAGR of 38% from fiscal 2019 to fiscal 2023. The growth was impacted in fiscal 2021 by curtailed disbursements owing to the pandemic impact. The disbursal run rate has picked up subsequently. Gross disbursements for FY23 increased by 44% Y-o-Y to Rs 3,959 crore and the AUM grew by 51.6% Y-o-Y to Rs 4,978 crore as on March 31, 2023. The AUM thereafter grew to Rs 6,247 crore as on September 30, 2023, with YTD growth of 25%. More than 65% of the AUM is contributed by the partners’ book under co-lending model, as the group has been focusing on growth via co-lending arrangements since November 2021 with 21 partners (including banks) as on September 30, 2023. Going forward, the co-lending book is likely to account for 65-70% of the overall book as the company brings in more partners. The co-lending model has not only provided an opportunity to scale at the faster pace but has also helped in improving the overall profitability.
Post its investment in LTPL in September 2018 and subsequent capital infusion in August 2019 and May 2020, FFH is the single largest shareholder in the Lendingkart group, holding 38.2% in LTPL as on September 30, 2023. LTPL in turn, holds 100% in LFL. FFH has invested around Rs 722 crore in LTPL since September 2018. Lendingkart’s philosophy of focusing on the relatively unaddressed micro, small and medium enterprise segment is directly aligned with the global strategy of FFH. FFH has three seats on LTPL’s and LFL’s board and is actively involved in strengthening the processes and governance structures of the group. For instance, it has been instrumental in strengthening multiple internal committees such as the ALCO and the risk management committee. FFH has also participated in senior level hiring decisions. CRISIL Ratings believes that LFL would continue to benefit from FFH’s experience as it further strengthens its systems and processes to manage the planned rapid scale-up of the business, and also in diversifying the funding profile.
Weaknesses:
The Lendingkart Group commenced operations from fiscal 2015 onwards, however, the portfolio has reached material scale only over the last three years. Hence, seasoning is limited and asset quality performance would need to be monitored over a longer period. Further, the business model of the company is based on a digital platform with a proprietary model for evaluating the credit profile of the potential borrowers. The model is refined continuously based on the performance of the portfolio and feedback from the collections and credit teams. However, such a technology-based lending model is still at a nascent stage in India. While Lendingkart is one of the earliest entrants in this space, the ability to significantly scale up the portfolio amidst increasing competition, as well as manage credit costs and operating expenses needs to be seen.
Asset quality remains vulnerable given the credit profile of underlying borrower segment. As on September 30, 2023, assets under management (AUM) stood at Rs 6,247 crore composed of unsecured loans towards SME segment- primarily small traders, small shop owners, vendors supplying products to ecommerce players etc. These segments are vulnerable to cash flow cyclicality, which could result in potential slippages, and given the unsecured nature of the loans, recovery could also be limited.
For instance, amidst the pandemic’s impact on the overall economic environment and the SME segment, the company had written off loans of Rs 477 crore in fiscal 2022 (including Rs 331 crore of restructured book). The 90+ DPD (adjusted for 12 months write-offs) had shot up to 15.0% as on March 31, 2022 from 5.2% as on March 31, 2021.
Post the pandemic, by refining the underwriting algorithms, the group has endeavored to source better customers and enhance the overall portfolio quality. For instance, almost 90% of the portfolio as on September 30, 2023 is composed of customers with CIBIL score of more than 700 (as compared to 64% as on March 31, 2020). The 90+ DPD (adjusted for write-offs) also improved to 2.3% as on September 30, 2023 (3.3% as on March 31, 2023) as compared to prior years. Furthermore, the group has also been able to improve retention ratio of its existing creditworthy customers. Monthly collection efficiency[2] averaged to 96% for last 12 months ended September 2023. While the entity has put in place a strong feedback loop from the collections team and the credit team which results in a continuous refinement of the model, the portfolio has limited seasoning.
To mitigate the inherent risk, the group has in addition to the steps taken for onboarding of right customer segment and strengthening of collection infrastructure, has registered the portfolio under sovereign guarantee schemes. The CGTMSE[3] and CGFMU[4] coverage of the portfolio (~80% of the AUM as on September 30, 2023) is likely to support recovery and reduce ultimate credit loss.
Given the business model of the entity where yields are high and technology-led underwriting should result in operational efficiencies as the book grows, the earnings profile of the entity hinges upon the ability to manage credit costs. Although the credit costs had increased in fiscal 2022 owing to accelerated provisioning and write-offs (aggravated by the pandemic) resulting in losses of Rs 203 crore at the parent level (consolidated), the credit costs have rationalized thereafter, resulting in the group turning profitable in fiscal 2023 with net profit of Rs 119 crore and RoMA of 2.3%. For H1 FY24, it reported consolidated net profit of Rs 57 crore translating to RoMA of 1.6%. The profitability was well supported by lower credit costs (as a proportion of average managed assets) of 2.6% as well as portfolio growth on the back of increased co-lending. The operational expense to AUM ratio has however increased to 11.2% for H1 FY24 (9.5% for fiscal 2023).
Thus, the ability of the company to control credit costs with asset quality metrics as well as earnings profile on a steady state remains key monitorable. [1] Adjusted Gearing = Total Debt/ (Reported Networth - FLDG - Corporate guarantee on the co-lent book) [2]Collection Efficiency = Total Collections including Overdues (excluding Prepayments) / Scheduled Billing for the month [3] CGTMSE: Credit Guarantee fund Trust for Micro and Small Enterprises [4] CGFMU: Credit Guarantee Fund for Micro Units |
Liquidity: Adequate The ALM profile is comfortable with positive cumulative mismatches across all buckets as on September 30, 2023. As on September 30, 2023, the liquidity position is comfortable with the company having cash and cash equivalents (including liquid investments) of Rs 266 crore and unutilized CC/WCDL lines of Rs 36 crore. Against this, the company has total debt obligations (including PTC/ DA payouts and interest expense) of Rs 331 crore over next two months ending November 2023. Liquidity is additionally supported by collections. |
Outlook: Positive Outlook reflects the improving asset quality metrics as well as profitability of the company. LFL's capitalisation metrics is also expected to remain comfortable over the medium term supported by improving profitability and expectation of adequate equity infusion (as and when required) as the portfolio scales up. |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Company LFL commenced operations from fiscal 2015 and is registered as a non-deposit accepting NBFC. The lending principle for the company is based on credit evaluation using a proprietary scoring model with minimum human interface and therefore, with a significantly faster turnaround time. LFL is targeting the niche SME segment segment of low ticket size (64% portfolio with ticket size upto Rs 10 lacs), shorter tenure (upto 3 years) unsecured business loans.
LFL is a 100% subsidiary of LTPL. Promoters hold around 12.29% in LTPL while other investors hold around 87.44% with FFH being the single largest shareholder as on September 30, 2023.
LFL (standalone) reported net profit after tax of Rs 116 crore on total income of Rs 824 crore in fiscal 2023 as compared to net loss of Rs 141 crore on total income of Rs 639 in fiscal 2022. On a consolidated basis, LTPL reported net profit after tax of Rs 119 crore on total income of Rs 858 crore for fiscal 2023 as compared to net loss of Rs 203 crore on total income of Rs 643 crore in fiscal 2022. |
Key Financial Indicators (Lendingkart Technologies Pvt Ltd: Consolidated)
On-book loan portfolio includes PTC; Managed book comprises DA book and Co-lending book Average managed assets for RoMA calculation includes total reported assets + managed book *based on provisional financials |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
^Not yet issued |
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Criteria Details
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