Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL BBB-/Stable’ rating to the Lower Tier II Bonds (under Base II) of North East Small Finance Bank Ltd (NESFB). The rating reflects the bank’s established position in north-eastern India supported by the extensive experience of the management, and its moderate deposit profile. The strengths are partially offset by deterioration in asset quality due to challenges in core operating territories, moderation in capitalisation, weak earnings and heightened susceptibility to local socio-political issues.

 

NESFB, headquartered in Guwahati, Assam, is managed by Ms Rupali Kalita (managing director and chief executive officer) who has experience of 33 years in the banking and financial services sector. The bank has a strong track record and firm foothold in north-eastern belt. The bank traces its roots to Rashtriya Gramin Vikas Nidhi – a society started back in 1995. In 2008, a new company RGVN (North East) Microfinance Limited was incorporated and obtained NBFC licence in August 2010. In 2015, the NBFC got in-principle approval from the Reserve Bank of India (RBI) to setup a Small Finance bank. NESFB, a 100% subsidiary of RGVN (North East) Microfinance Limited, started its banking operations in October 2017.

 

NESFB’s advances rose 27% to Rs 1,731 crore as on March 31, 2022, from Rs 1,358 crore a year earlier. However, the business momentum that had picked up from September 2020 post the first wave of Covid-19, was curbed in the first quarter of fiscal 2022 on account of political uncertainty and ground level challenges in Assam and the second wave of the pandemic. Consequently, advances were flat at Rs 1,774 crore as of December 31, 2021. The bank had presence in nine states in the north-east region with 87% of the portfolio concentrated in Assam as of December 31, 2021.

 

The bank’s asset quality weakened following the political uncertainty in Assam and second Covid wave with gross non-performing assets (GNPAs) increasing to 11.07% and 12.30% as on March 31, 2021 and December 31, 2021 respectively, from 1.94% as of March 2020. The bank restructured Rs 877 crore of the book in the first half of fiscal 2022 of which Rs 844 crore is covered under the Assam Micro Finance Incentive and Relief Scheme (AMFIRS), wherein borrowers will receive incentive cheques from the state government. The Bank expects to receive bulk of the funds from the borrowers which will help them clear the overdues and recover from NPA accounts. The billing for the restructured book started from February 2022 and its total collection efficiency (including pre-payments) stood at 85%. Collection efficiency for the overall book was 100% in February 2022. Ability to recover from the restructured book and timely disbursement of funds by the state government under AMFIRS will be key monitorables.

 

The Bank’s capitalisation profile was adequate in fiscal 2021 at a networth of Rs 372 crore with overall capital adequacy ratio (CAR) of 21.22% as compared to Rs 365 crore networth and 24.98% in fiscal 2020. However, owing to the High provisioning on the restructured book, the bank reported losses in 9M of fiscal 2022 which led to reduction in the networth to the tune of Rs 114 crore and overall networth fell to Rs 258 crore. The capital adequacy ratio (CAR) declined to 15.4%. However, bank has received capital infusion of Rs 34 crore in March 2022, primarily by existing investors and is likely to raise Rs 220 crore over the next 3-4 months from new investors. This will help improve the capital position, supporting the growth plan.

Analytical Approach

CRISIL Ratings has assessed the standalone business and financial risk profile of NESFB.

Key Rating Drivers & Detailed Description

Strengths:

* Established position in the north-eastern region supported by the extensive experience of the management

NESFB has a strong track record and firm foothold in the north eastern region. Before starting operations as a bank in October 2017, NESFB operated as a non-banking financial company-microfinance institution (NBFC-MFI) named RGVN (North East) Microfinance Ltd since 2008. As on February 28, 2022, the bank has spread across 62 districts in 9 states, with a network of 216 branches.

 

Ms Rupali Kalita, the managing director and chief executive officer, has 33 years of experience in the banking and financial sector and has been with the organisation for over 17 years. The bank also benefits from the experienced board and senior management comprising experienced and renowned professionals from the financial services sector, strongly oriented towards establishing high-quality and scalable systems and processes. The bank also has support from marquee investors such as Small Industries Development Bank of India (SIDBI), Dia Vikas Capital Pvt Ltd, Nordic Microfin, RNT Associates, Oiko Credit, which held 77.6% stake as on December 31, 2021.

 

* Moderate deposit profile

Within ~4.5 years of banking operations, NESFB garnered deposits of Rs 1,366 crore as on December 31, 2021. which constituted 69% of the total borrowings as against 54% as on March 31, 2020, and 20% as on March 31, 2019. Moreover, the deposit mix has been evolving, with focus on retail deposits. The share of current account and savings account (CASA) deposits increased to 32.7% as a proportion of total deposits and 22.6% as a proportion of total borrowing as on December 31, 2021, from 22% and 4.3%, respectively, as of March 2019. The aggregate share of retail deposits (savings and retail term deposits of less than Rs 2 crore) in the total deposit base has increased consistently and stood at 60.2% as on December 31, 2021, as against 52.8% as on March 31, 2020.

 

In terms of tenure wise breakup, 87% of the term deposits are stable with tenure of more than a year. The bank has bulk deposits from government-linked institutions based in north-east India and has strong relationships with them. With rise in deposit base, the cost of funds improved to 6.5% (annualised) as on December 31, 2022, from 7.9% as of March 2021 and 9.1% as of March 2020, supporting the operating profit of the bank.

 

Weakness:

* Deterioration in asset quality due to challenges in core operational territories

NESFB had stable GNPAs of 1.9% in March 2020 and 1% in March 2019. However, the asset quality started weakening initially owing to political uncertainty in Assam with political parties making various promises of loan waivers to woo voters, and subsequently due to the pandemic. GNPAs rose to 11% as on March 31, 2021, and remained high at 11.75% as on December 31, 2021.

 

In light of the above challenges, NESFB restructured Rs 877 crore of its book in the first half of fiscal 2022, of which Rs 844 crore is covered under AMFIRS, wherein borrowers will receive incentive cheques from the Assam government. The bank expects to receive bulk of the funds from borrowers which will help them clear overdues and recover from NPA accounts. Moreover, The bank has already collected around Rs 100 crore from the restructured book as of February 28, 2022, indicating the resiliency of the restructured book. Ability to recover from the restructured book and timely disbursement of funds by the government under AMFIRS is critical to improve asset quality and profitability.

 

* Moderation in capitalisation

NESFB was adequately capitalised in fiscal 2021 with networth of Rs 372 crore and overall CAR of 21.22% as on March 31, 2021, compared with Rs 365 crore and 24.98%, respectively, a year earlier. However, higher provisioning for the restructured book resulted in loss in the first nine months of fiscal 2022, eroding the networth by Rs 114 crore to Rs 258 crore as on December 31, 2021, pulling the CAR down to 15.4%. However, NESFB has received capital infusion of Rs 34 crore, primarily from existing investors Dia Vikas Capital Pvt Ltd, NE Development Fin Corp, NMI Fund and Matternhorn in March 2022. Furthermore, NESFB is likely to raise Rs 220 crore over the next 3-4 months from new investors (currently undertaking legal due diligence). With this quantum of infusion, the bank’s capital position is expected to improve, supporting its growth plan. Nevertheless, the capitalisation could be impacted by incremental provisioning requirement on slippages from the restructured book. The bank’s ability to recover from the restructured book and receive funds from borrowers linked to disbursal by the Assam government under AMFIRS remains a key monitorable.

 

* Weak earnings owing to higher credit cost

Profitability was impacted in fiscals 2020 and 2021 due to high provisioning cost. Return on assets (RoA) stood at 0.7% in fiscal 2020 (2.2% in fiscal 2019) and declined to 0.3% in fiscal 2021 owing to higher provisioning of Rs 43 crore and Rs 44 crore in fiscals 2020 and 2021, respectively. Post the second wave of Covid-19, the bank incurred a loss of Rs 114 crore owing to higher provisioning requirement of Rs 164 crore (9.2% of the assets under management [AUM] as of December 2021) in the first nine months of fiscal 2022. The bank has made provisions covering 10% of the restructured book in line with the Reserve Bank of India (RBI) requirement. Due to the steady recovery from the restructured book, reversal of 50% of these provisions is estimated in the last quarter of fiscal 2022 and full 100% reversal is expected by the first half of fiscal 2023. Nevertheless, any incremental slippages from the restructured book will attract higher provisions. Consequently, the earnings remain sensitive to the recovery expected from the Assam government and increasing collection from the restructured book.

 

* Regional concentration and exposure to socio-political risks inherent in the micro loan business

A significant portion (64% as on February 28, 2022) of the portfolio comprises micro loans to clients with below-average credit risk profiles and lack of access to formal credit. These customers belong to the semi-skilled self-employed category and have volatile incomes that depend on the local economy. Slowdown in economic activity has put pressure on such borrowers' cash flows, thereby restricting their repayment capability. This segment of borrowers continues to be subjected to idiosyncratic risks on account of socio-political factors. As economic growth picks up, ability of the bank to reinstate repayment discipline among customers will be a key monitorable. As far as the non-microfinance segment is concerned (accounts for 36% of the AUM), the bank’s track record is limited, with low vintage. Additionally, its portfolio remains concentrated in Assam with 86.3% of the book concentrated in the state. As the bank intends to increase share of the non-microfinance segments, ability to diversify geographically and maintain sound asset quality while managing growth and profitability across economic cycles will be a key monitorable.

Liquidity: Adequate

Liquidity coverage ratio was adequate at 162% as on December 31, 2021. The management has maintained high liquidity, with excess statutory liquidity ratio of 3.3% as of September 2021. The bank also has access to refinancing lines from National Bank for Agriculture and Rural Development (NABARD) and SIDBI.

Outlook Stable

NESFB is likely to benefit from its established position in the north-eastern region and from the extensive experience of the management and board of directors. CRISIL Ratings believes the bank will raise equity capital in a timely manner to ensure adequate capitalisation.

Rating Sensitivity factors

Upward factors

• Restoration of asset quality and profitability to pre-Covid levels or better, on a steady state basis.
• CAR improving above 20% on a steady state basis with improvement in profitability

 

Downward Factors

• Deterioration in profitability resulting in CAR falling below 15%
• Delay in receipt of funds from the Assam government under AMFIRS impacting profitability and asset quality

About the Bank

NESFB started as a society, Rashtriya Gramin Vikas Nidhi, with an initial corpus contribution from IDBI and IFCI and later from NABARD and Dorabji Tata Trust which forayed into microfinance activities with the help of SIDBI in 1995. In 2008, a new company RGVN (North East) Microfinance Ltd was incorporated. It obtained the NBFC licence in August 2010 and the NBFC-MFI certification from RBI in 2014, and in principle approval from RBI to set up small finance bank in 2015. NESFB was incorporated in July 2016 as a 100% subsidiary of RGVN (North East) Microfinance Ltd. Headquartered in Guwahati, it started operations in October 2017 and got fresh equity infusion from Dia Vikas Capital Pvt Ltd; NMI Fund III KS, Norway; OikoCredit Ecumenical Development Co-operative Society UA, Netherlands; and through conversion of OCPS by SIDBI. In 2019, the bank secured scheduled commercial bank status from RBI.

 

As on March 31, 2021, NESFB had operations in nine states with portfolio concentration in Assam at 87%. It caters to over 5.7 lakh customers through 214 branches. Its AUM stood at Rs 1,731 crore as on March 31, 2021. The bank also had outstanding deposits aggregating Rs 1,277 crore as on December 31, 2021. Bank AUM stood Rs 1,774 crore as of December 31, 2021.

Key Financial Indicators

Particulars for the period-ended	Unit	9M2022	Mar-21	Mar-20	Mar-19	Mar-18
Total assets	Rs crore	2,368	2,258	2,067	1,770	1,551
Total income	Rs crore	251	332	325	287	104
PAT	Rs crore	(114)	7	13	37	22
Gross NPA	%	12.3%	11.1%	1.9%	1.0%	0.9%
Overall CAR	%	15.44%	21.22%	24.98%	22.82%	21.75%
Tier-I capital	%	13.50%	20.18%	23.26%	22.27%	21.45%
Return on assets @	%	(6.6%)	0.3%	0.7%	2.2%	2.7%

@Annualised for 9MFY22

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	Lower Tier-II Bonds (under Basel II)^	NA	NA	NA	50	Complex	CRISIL BBB-/Stable

^Yet to be issued