Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL BBB/Stable’ rating to the Rs 47 crore non-convertible debentures of Light Microfinance Private Limited (Light) and reaffirmed its ratings on the bank facilities and other non convertible debentures at ‘CRISIL BBB/Stable/CRISIL A2’.

 

The rating primarily remains driven by company’s adequate capitalisation, adequate risk management systems and processes evidenced by low credit costs even during the pandemic, and extensive experience of management. 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.

 

In the aftermath of the second pandemic wave, growth momentum moderated during Q1 fiscal 2022. However, growth in disbursements picked-up from July 2021 onwards which in-turn resulted in company reporting assets under management (AUM) of Rs 1064 crore in March 2022 registering Y-o-Y growth of 71%. The AUM further increased to Rs 1120 crore as on June 30, 2022.

 

In terms of capital position, Light is under the process of raising ~Rs 196 crore through CCPS from existing investors and a new investor. CRISIL Ratings understand that out of ~Rs 196 crore, about ~Rs 63 crore has already been received till date and the balance is expected to be received by mid-September 2022. Post the entire infusion, Light’s networth will increase to over Rs 320 crore. Further, this infusion will also help the company to bring significant correction in its stretched gearing level; adjusted gearing (including off-book) estimated to fall to around 3.5-4.0 times from around 8.2 times as on June 2022. While gearing has touched all time high level of over 8 times, post this capital infusion, management proposes to maintain a steady state on-book gearing of 4.5-5 times and gearing (including off-book) at around 6.5 times. CRISIL Ratings overall believes that company’s ability to significantly ramp-up internal accretion to sustain its capital position and also keep raising capital at regular intervals will remain key in order to maintain gearing at desirable level while maintaining growth in AUM.

 

With reference to collection efficiency, it started showing improvement from June 2021 onwards (post reduction of impact of second wave) and stood at 95% in July 2022. Even the disbursement pace that slowed down in the first quarter of fiscal 2022, revived during the second quarter with an average disbursement of around Rs 90 crore per month till March 2022. From June 2022 onwards, the company increased the pace of fresh disbursements thereby reaching to monthly rate of over Rs 150 crore. Further, in addition to disbursing fresh loans, the company also increased focus on renewals of loans given to existing borrowers, backed by credit underwriting process, by pre-closing their current loans and disbursing higher quantum due to their higher eligibility. This also resulted in higher prepayments from their existing set of borrowers. Going forward, the company proposes to focus on growing both fresh as well as renewal loans in order to achieve profitable growth.

 

In terms of asset quality, the company has managed its portfolio well as compared to the industry. The 90+ days past due (dpd) (including write-offs) was at 2.5% as on March 2022 (2.0% in March 2021).  Additionally, the company has total outstanding restructured portfolio (under RBI Resolution framework 1.0 and 2.0) of Rs 19.8 crore (1.7% of the AUM). The overall asset quality metrics were better than the industry. The company did not undertake write-offs in fiscal 2022 and average credit costs (provisioning + write-offs) for the last two fiscals was low at just 0.7% and 0.5% respectively. However, the company has seen some moderation over the last quarter with 90+ dpd increasing to 4.0% as on June 2022. There has also been an increase in provisioning in the June quarter of fiscal 2023 as the company plans its transition to IndAs accounting and ECL provisioning and against potential stress from the restructured book. Overall, the performance of the restructured portfolio besides the company’s ability to sustain collections for incremental disbursements and eventually reach pre-pandemic levels of over 98-99% on a steady-state basis will remain a key monitorable.

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. Light is also in the process of raising ~Rs 196 crore of equity capital latest by mid-September, 2022 from existing financial investors and a new investor. Post the entire infusion, Light’s networth will increase to over Rs 320 crore by end of September 2022. Further, this infusion will also help the company to bring significant correction in its stretched gearing level; adjusted gearing (including off-book) estimated to fall to around 3.5-4.0 times from around 8.2 times as on June 2022. While gearing has touched all time high level of over 8 times, post this capital infusion, management proposes to maintain a steady state on-book gearing of 4.5-5 times and gearing (including off-book) at around 6.5-7.0 times. CRISIL Ratings overall believes that company’s ability to significantly ramp-up internal accretion to sustain its capital position and also keep raising capital at regular intervals will remain key in order to maintain gearing at desirable level of 5 times.

 

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

The company is promoted by Mr Deepak Amin (MD) who founded Light 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 Co-founder 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

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.

 

The sound risk management practices have ensured that the overall asset quality metrics has remained better than the industry. The company did not undertake any write-offs in fiscal 2021 or fiscal 2022 and average credit costs (provisioning + write-offs) for these two fiscals was low at just 0.7% and 0.5% respectively. However, the company has seen some moderation over the last quarter with 90+ dpd increasing to 4.0% as on June 2022. There has also been an increase in provisioning in the June quarter of fiscal 2023 as the company plans its transition to IndAs accounting and ECL provisioning and against potential stress from the restructured book. CRISIL Ratings also understands that in addition to disbursing fresh loans, the company also increased focus on renewals of loans given to existing borrowers by pre-closing their current loans and disbursing higher quantum due to their higher eligibility. This also resulted in higher prepayments from their existing set of borrowers.

 

Weakness:

Geographical concentration of portfolio

As of July 2022, Gujarat and Rajasthan accounts for 81.5% 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 25.6% of the overall AUM as of July 2022 with only one district at 11.2% of the AUM and the rest below 5% of the AUM. 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.

 

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. While the company has presence only in 4 states, the operations are spread out across 125 branches in 68 districts. Nevertheless, 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 2022, Light reported net profit of Rs 5.4 crore translating to RoMA of 0.6%. In fiscal 2022, Light’s operating expense as a percentage of managed assets stood at 9.0% (7.3% in March 2021) which is higher than other CRISIL Ratings’ 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 had opened several branches in fiscal 2021 to cater to new territories but were unable to grow the portfolio due to the impact of the pandemic in first half of fiscal 2022. In addition, during fiscal 2021, operating expenses such as rent was deferred on account on of the pandemic situation then. Hence, these were additional expenses to be paid in fiscal 2022, which is the reason for the sharp increase in operating expense as a percentage of managed assets. As of June 2022, opex ratio stood at 7.6% (annualised). The overall AUM per branch stood at around Rs 9.6 crore as on July 2022. As these branches achieve operating efficiency, the company’s profitability from core business, is expected to further improve, albeit gradually.

 

Light’s incremental cost of borrowing stood at 12.3% in Q1 of fiscal 2023, improving from 12.5% average in fiscal 2022. 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. Nevertheless, the effect may get nullified with the recent RBI rate hikes. However, with the RBI directives allowing for the removal of the interest rate cap, Light has also increased their lending rates to 26% for fresh loans from the previous 21.8%. This will also support profitability in the current fiscal. Profitability is also influenced by 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 2022, company reported the credit cost of Rs 4.6 crore (0.5% as a percentage of managed assets). In the first quarter of fiscal 2023, company reported the credit cost of Rs 5.2 crores. There has also been an increase in provisioning in the June quarter of fiscal 2023 as the company plans its transition to IndAs accounting and ECL provisioning and against potential stress from the restructured book. 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, 2022. The company had cash and bank bank balance of Rs 105.03 crore as on August 31, 2022. As against this, debt obligation due for servicing over the next one month was Rs 94 crore. The company’s liquidity cover for one month stands adequate at 1.15 times even after assuming nil collection. Liquidity is also supported by steady collections over the past 2-3 months, standing at over Rs 65-70 crore.

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 2-2.5% 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 steady state capitalisation profile

 

Downward factors

• Weakening in asset quality or earnings profile, resulting in stressed profitability and capital position
• Adjusted gearing remaining above 6.5 times and capital adequacy below 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 68 districts with 124 branches as of July 31, 2022.

Key Financial Indicators

As on/for the period ended	Unit	Jun-22*	Mar-22	Mar-21	Mar-20
Total managed assets	Rs crore	1251.9	1231.1	694.4	557.2
Total income	Rs crore	53.8	166.5	115.0	76.8
PAT	Rs crore	1.6	5.4	12.7	4.0
Return on managed assets	%	0.5%	0.6%	2.0%	0.9%
GNPA (90+ dpd)^	%	4.0%	2.5%	0.8%	0.5%
Gearing (On-book)	Times	6.4	6.7	5.6	5.0
Adjusted gearing (including off-book)	Times	8.5	8.6	6.6	6.6

Note: *annualized,

^including write-offs

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 Level	Rating assigned with outlook
NA	Non-Convertible Debenture*	NA	NA	NA	47.00	Simple	CRISIL BBB/Stable
INE366T07030	Non-Convertible Debenture	11-Aug-2020	11.00%	21-Apr-2023	30.00	Simple	CRISIL BBB/Stable
INE366T08012	Non-Convertible Debenture	31-Mar-2021	16.00%	30-Jun-2026	10.00	Simple	CRISIL BBB/Stable
INE366T07063	Non-Convertible Debenture	06-May-2021	12.30%	06-May-2024	39.00	Simple	CRISIL BBB/Stable
INE366T07071	Non-Convertible Debenture	20-Aug-2021	12.30%	20-Aug-2024	22.00	Simple	CRISIL BBB/Stable
NA	Long Term Bank Facility	NA	NA	NA	384.13	NA	CRISIL BBB/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	12.87	NA	CRISIL BBB/Stable
NA	Overdraft Facility	NA	NA	NA	3	NA	CRISIL A2

*Yet to be issued