Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL BBB/Stable’ rating to the long-term bank facilities and non-convertible debentures of Light Microfinance Private Limited (Light). The rating is driven by the company’s adequate capitalisation backed by fund infusion, adequate risk management systems and processes supported by digital initiatives undertaken by the company, and extensive experience of the promoter and senior management in microfinance and financial services sector. These strengths are partially offset by geographically concentrated portfolio, average, though improving, profitability – constrained by high operating expenses and moderate finance costs, and susceptibility to local socio - political issues inherent to microfinance industry and modest credit risk profile of the borrowers.

 

Light has raised Rs 83 crore of equity capital between December 2019 and July 2021 from financial investors such as Triple Jump, NMI Fund, Incofin and WAAO Partners, despite the Covid-19 pandemic. As a result, Light’s adjusted networth and adjusted gearing (including off-book) as on date is estimated at Rs 117 crore and at 4.5 times, respectively compared with Rs 55.1 crore and 6.6 times as on March 31, 2020. The company plans to raise additional equity capital of around Rs 100 crore in the third quarter of fiscal 2022 which has been centrally factored in the current rating. The company’s ability to significantly ramp-up internal accretion to sustain its capital position and keep adjusted gearing within the targeted cap of 6 times is a key monitorable.

 

As on March 31, 2021, Light’s assets under management (AUM) stood at Rs 624 crore, registering a three-year compound annual growth rate (CAGR) of 68%. However, owing to the second wave of covid 19, with disbursements taking a backseat due to lockdown to arrest Covid-19 pandemic, AUM stood at Rs 590 crore as of June 30, 2021. Despite dealing with borrowers in microfinance sector, the company has strong focus on risk management and has an independent credit team at every branch to keep a tap on asset quality. As a result, unlike most other players, the company has been able to manage its asset quality all through fiscal 2021 despite the pandemic, as reflected in 30+ and 90+ days past due (dpd) including write-off at 1.5% and 0.8%, respectively as on March 31, 2021. In the first quarter of fiscal 2022, 90+ dpd stood at 2.0% impacted by the severity of the second wave of covid 19, however, stands better compared to the industry average.

 

In fiscal 2021, the company’s collection efficiency (including over-dues but excluding prepayments) revived to 100% in December 2020 and remained high till March 2021 backed by higher overdue collections. With the sharp spike in number of cases due to the second wave of Covid-19 and various forms of lockdown being imposed by states to curb its spread, collections fell to 95.1% in April but then started improving from June onwards and stood at 101.4% in August 2021 backed by higher overdue collection. Further, under the RBI Resolution framework 1.0, Light had undertaken restructuring worth Rs 10.55 crore i.e. 1.7% of AUM as of March 2021. The company expects to do some restructuring in the rest of fiscal 2022. The company started disbursing from July 2020, with overall disbursements at Rs 453 crore in fiscal 2021. In addition to disbursing loans to fresh borrowers, the company also pre-closed the loans of existing borrowers and disbursed fresh loan to provide them with additional liquidity to revive their businesses, resulting in higher prepayments in third quarter of fiscal 2021. The disbursement momentum slowed down in the first quarter of fiscal 2022 as an aftermath of wave-II, nevertheless, has picked up from July onwards. Sustainability of collections for the incremental disbursements will be a key monitorable.

 

The company was founded by Mr Deepak Amin, Mr Rakesh Kumar and Mr Aviral Saini, who have rich experience in microfinance, financial services, social transformation, advisory services and technology. The company also benefits from experienced board that has a good mix of independent directors comprises of Mr. Chandan Sinha (ex-executive director at RBI) and other eminent independent directors.

 

Under the Covid-19 Regulatory Package announced by the Reserve Bank of India (RBI), lenders were allowed to grant moratorium on loans. CRISIL Ratings understands that Light availed moratorium from its lenders during April-May 2020. However, it didn’t avail moratorium in phase-II from June to August 2020. Furthermore, it continued to make scheduled repayments wherever moratorium was not granted.

Analytical Approach

CRISIL Ratings has evaluated the standalone business and financial risk profile of Light Microfinance.

Key Rating Drivers & Detailed Description

Strengths:

* Adequate capitalisation supported by regular equity infusion

Light’s capital position is adequate in relation to scale of operations, backed by regular capital infusion despite the challenging economic environment during pandemic which is demonstrative of the constant support from its investors. The Company is backed by three European impact investors – NMI Fund Triple Jump, and Incofin and have received $10 million in total of which $ 3.5 million was received in January 2020 and $ 6.5 million was infused in June and July 2021. These three investors are keen to infuse additional equity in the current fiscal. The company plans to raise total additional equity capital of around Rs 100 crore in the third quarter of fiscal 2022 to fund future growth which has been centrally factored in the current rating.

 

While adjusted gearing (including off-book) was high at 6.6 times at the end of March 2020, it has reduced to around 4.5 times as on date with the recent equity infusion. With the expected equity infusion, it is expected to remain at current level in the near term. The company’s ability to ramp up internal accretion so that it can sustain its capital position and, thereby, keep adjusted gearing within the targeted cap of 6 times remains a key monitorable. Nevertheless, the company is expected to raise the required equity capital at regular interval in future as well and ensure overall capital position remains adequate. This will also substantiate maintenance of adjusted gearing at around 6 times and an overall capital adequacy ratio of over 20% and will be a rating sensitivity factor.

 

* Extensive experience of the promoter, board, and senior management team

The company is promoted by Mr Deepak Amin (MD) who founded Light microfinance to leverage his experience and expertise in the field of technology to provide affordable loans to the lower strata of the society.  Mr Rakesh Kumar who is the cofounder and CEO of Light brings rich experience of microfinance business and scaling up the same in new geographies. Mr Aviral Saini, cofounder, and CFO of the company, brings strong experience on the technology, fund raising and resource planning to fund future growth. Light benefits substantially from the presence of experienced professional with average experience of over a decade in the fields of microfinance, audit, operations, financial advisory, accounting and information technology (IT).

 

The board comprises eminent persons from financial and allied sectors. They have rich domain expertise and extensive experience in the fields of microfinance, audit and accounts, technology, and strategy.

 

* Adequate risk management systems and processes, supported by innovative digital initiatives undertaken by the company

Over its operational history, Light has been able to acclimatise its systems and processes according to its nature of business while keeping technology in the forefront. Light is very particular about effective deployment and efficient utilization of technology with an aim to enable seamless collaboration among teams and encourage a culture of data and analysis driven objective decision making.  Accordingly, Light has utilized it expertise and tech-savviness in appropriating cloud-based solutions, since inception. Light uses a cloud-based software FinFlux, for managing its loan portfolio. Light has also invested in MobiLight an indigenous, customized Android based modular mobile application and supplementary web applications, streamlining field operations to bring efficiency and control. Light also uses web dashboard software that automates operations and brings customized control measures along with process efficiency. These efforts have enabled smooth scaling-up of the operationally intensive microfinance business lately, especially during pandemic. Light has also initiated a key risk management project of digitising and archiving physical documents of all branches after disbursement.

 

Weakness:

* Geographical concentration of portfolio

As of July 2021, Gujarat and Rajasthan accounts for 92% of the overall portfolio. Company has focused on a set of customers predominant in western region of India. Light has over 60% of the customers engaged in dairy farming as their primary occupations. In terms of district wise concentration, the top five districts accounted for 24.8% of the overall AUM as of July 2021 with only one district at 9.3% of the AUM and the rest below 5% of the AUM. The top three districts AUM account for 90% of the overall networth of the company. The geographic concentration increases company’s susceptibility to local socio-political risks, inherent in the microfinance business. Nevertheless, strong risk management practices would help the company to mitigate these risks.

 

In addition, the company has expanded to states other than Gujarat and Rajasthan, namely Madhya Pradesh and Haryana, to drive incremental growth and reduce state wise concentration. Amidst fast growth in the portfolio, sustainability of the asset quality at the current level of growth and across newer territories will be a key monitorable

 

* Average profitability, constrained by high opex and moderate finance cost

In fiscal 2021, Light reported net profit of Rs 12.7 crore translating to RoMA of 2.0%. In fiscal 2021, Light’s operating expense as a percentage of managed assets stood at 7.3% (8.6% in March 2020) which is higher than other CRISIL rated MFI peers. The company’s high operating cost is attributable to its strong focus on risk management and hence has an independent credit manager at every branch. Additionally, the company is currently in growth phase with several branches opened in fiscals 2020 and 2021 to cater to new territories. The overall AUM per branch stood at around Rs 4.5 crore as on June 2021. As these branches achieve operating efficiency, the company’s profitability from core business, is expected to further improve, albeit gradually. As of June 2021, opex ratio stood at 8.8% (annualised).

 

Light’s average cost of borrowing stood at 12.1% in fiscal 2021, improving from 13.3% average in the previous fiscal. As the resource profile further diversifies with the share of bank funding increasing in the coming period, the cost of borrowing may see further reduction. Profitability also depends on the overall credit costs. However, with the separate credit team and better risk management practices, the company has been able to maintain its credit cost at less than 1% even during the pandemic. In fiscal 2021, company reported the credit cost of Rs 4.7 crore (0.7% as a percentage of managed assets). In the first quarter of fiscal 2022, company reported the credit cost of Rs 12 lacs. Nevertheless, Light’s ability to keep credit costs at current level while expanding its operations would be a key rating sensitivity factor.

 

* Susceptibility to potential risk from socio-political issues in the microfinance sector and inherently modest credit profile of the borrowers

The microfinance sector witnessed two major disruptive events in the past decade. The first was the crisis promulgated by the ordinance passed by the government of Andhra Pradesh in 2010 and the second was demonetisation in 2016. Promulgation of the ordinance on MFIs by the government of Andhra Pradesh in 2010 demonstrated their vulnerability to regulatory and legislative risks. The ordinance triggered a chain of events that adversely affected the business models of MFIs by impairing their growth, asset quality, profitability, and solvency. The sector witnessed high levels of delinquencies post demonetisation and subsequent socio-political events. Additionally, any loan waivers – similar to MFI Bill, 2020 passed by the Assam Assembly – announced will make matters worse owing to their impact on repayment discipline. In addition, the sector remains susceptible to issues such as local elections, natural calamities, and borrower protests among others, which may result in momentary spurt in delinquencies. This indicates the fragility of the business model to external risks. As the business involves lending to the poor and downtrodden sections of society, MFIs will remain vulnerable to socially sensitive factors, including high interest rates, tighter regulations, and legislation.

 

Light started operation in 2009, just around the time when the Andhra crisis happened. The company had a small portfolio then and resultantly its growth got impacted during the initial years. As the operations started scaling from fiscal 2018, deomonetisation didn’t have any major impact. While the pandemic has impacted the microfinance industry at large, so far Light has been able to manage its portfolio better compared to the industry. Microfinance customers generally have below-average credit risk profiles with lack of access to formal credit and high seasonality in income. The income flow of this segment of customers is volatile and dependent on the local economy. With slowdown in economic activity after the pandemic, there may be pressure on the borrowers’ cash flows, thereby affecting their repayment capability.

Liquidity: Adequate

The asset-liability management (ALM) profile was comfortable, with cumulative positive mismatches across all buckets up to one year as on June 30, 2021. The company had cash and bank balance of Rs 89.5 crore as on August 31, 2021 against debt obligation and opex due for servicing over the two months through October 2021 aggregating to Rs 88.2 crore. The company’s liquidity cover for two months was adequate at over 1 time even after assuming nil collection. Liquidity is also supported by steady collections over the past 2-3 months, standing at over Rs 40 crore. Further, the company has strong funding pipeline of over Rs 850 crore over and above additional equity capital to take care of disbursements planned for the current fiscal. Besides, the company also enjoys need based timely support from parent and investors that further add to the comfort on liquidity position.

Outlook: Stable

Light will continue to benefit from adequate risk management systems and processes and the extensive experience of the promoter and management team.

Rating Sensitivity Factors

Upward factors

• Increase in earnings leading to improvement in return on assets over 3% on a sustainable basis
• Significant increase in scale of operations along with geographical diversification leading to steady reduction in state level concentration while maintaining sound asset quality metrics
• Significant improvement in capitalisation profile

 

Downward factors

• Weakening in asset quality or earnings profile, resulting in stressed profitability and capital position
• Inability to maintain adjusted gearing below 6 times and capital adequacy above 20% on a steady-state basis

About the Company

Light Microfinance is a private limited company registered as a non-banking finance company – microfinance institution (NBFC – MFI) with the Reserve Bank of India. Headquartered in Ahmedabad, Gujarat, the company provides micro finance products and services and poverty-focused programs, targeting rural and semi-urban population, with a specific focus on women borrowers. It started operations in 2009 after acquiring a non-operational Jaipur based NBFC registered as KK Finbuild (registered in 1994). The company started with focus on Gujarat and slowly expanded to other states. Currently, it operates in Gujarat, Rajasthan and Madhya Pradesh and Haryana. It has presence across 71 districts with 131 branches as of July 31, 2021.

Key Financial Indicators

	Unit	June 2021*	Mar 2021	March 2020	March 2019
Total managed assets	Rs crore	705.2	694.4	557.2	289.8
Total income	Rs crore	30.5	115.0	76.8	43.8
PAT	Rs crore	0.0	12.7	4.0	1.9
Return on managed assets	%	0.0%	2.0%	0.9%	0.9%
GNPA (90+ dpd)^	%	2.0%	0.8%	0.5%	0.9%
Adjusted gearing (including off-book)	Times	5.0	6.6	6.6	6.3

Note: *annualized,

^including writeoff

Any other information: Not applicable