Rating Rationale

Detailed Rationale

CRISIL Ratings has downgraded its rating on the long-term bank facility of Pioneer Finance Company Pvt Ltd (Pioneer Finance) to ‘CRISIL BB-/Stable’ from 'CRISIL BB/Stable’.

The rating action is primarily driven by deterioration in asset quality metrics and the impact on earnings. Gross non-performing assets (GNPAs; 180+ dpd [days past due]) increased to 19.1% as on December 31, 2020, from 12.2% as on March 31, 2020, and 6.8% as on March 31, 2019. Asset quality metrics deteriorated sharply in the current fiscal primarily due to the Covid-19 pandemic and the lockdown imposed to contain it. The company’s portfolio is mainly concentrated in Mumbai and Thane (99% of the total book) and these regions were under severe lockdown for a prolonged period. Due to the lack of physical movement, the company was not able to get adequate level of collections, resulting in higher delinquencies. Nevertheless, the management has initiated stringent steps to improve collections and reduce gross NPAs. With the relaxation of lockdown restrictions since October 2020, the company has increased its follow-ups on overdue customers. A majority of the internal staff has been deployed in collections (both for overdue and current bucket). Additionally, the company has hired a legal agency (a solicitors firm) to hasten the process of arbitration in harder bucket cases. It is also trying to reach out to delinquent customer’s in-person. Following these steps, there have been early signs of recovery; the average monthly collections in October-December 2020 have improved to Rs 2.24 crore from around Rs 1.8 crore in July-September 2020. The company expects substantial improvement in asset quality and recovery of overdue accounts in the next two quarters. CRISIL Ratings understands that the company is likely to reduce its scale of incremental disbursements (not exceeding Rs 1.5 crore per month) and focus mainly on improving collections. Nevertheless, asset quality metrics and collection efficiency will be closely monitored over the medium term. The ability to improve collections and reduce delinquencies will remain key rating sensitivity factors.

In terms of earnings profile, Pioneer finance has struggled for the last 1-1.5 years primarily due to higher credit losses. Company reported loss of Rs 2.7 crore in fiscal 2020 as compared to loss of Rs. 0.4 crore in the fiscal 2019. The company wrote-off loans worth Rs 1.2 crore during fiscal 2020; this impacted the bottom line. During the first half of fiscal 2021, the company reported marginal profit of Rs 0.02 crore (based on unaudited financials). The company has taken stringent steps to reduce operating costs during the fiscal. Employee costs have been reduced through salary cuts, and linking of the pay structure for a majority of the employees to their performance. Nevertheless, given the elevated delinquencies experienced till December 2020, the company is expected to have credit losses in last quarter of fiscal 2021, and hence profitability will remain subdued.

The rating continue to reflect the extensive experience of the promoters in the two-wheeler finance business. Promoter Mr Rabindu Shah has been running the operations for many years and is personally involved in all the key activities. Additionally, Mr Shah also has fair knowledge about the area/locations wherein the company is operating. All the key processes such as underwriting and credit are designed by Mr Shah. Apart from the current challenges (due to Covid scenario), the company in past 4-5 years has not faced any major asset quality issues.

Capital position of Pioneer Finance has been moderate with networth of Rs 10.9 crore (including loans from promoter/shareholders of Rs 3.8 crore) and a gearing of 2.7 times as on September 30, 2020 (Rs 11.2 crore and 3.2 times as on March 31, 2020). The capital position has been affected due to nil or negative accretions during last 2 years. Nevertheless, the promoter is committed in infusing additional funds; apart from equity capital, the promoter (along-with other shareholders) have infused funds in form of loans in the past (Rs 3.8 crore as of September 30, 2020). Further, CRISIL Ratings understands that promoter will infuse Rs 1.5 crore in due course before the end of current fiscal.

As far as liquidity position is concerned, Pioneer Finance has just about sufficient liquidity to cover total debt obligation and operating expenses from January to March 2021. The company has cash balance of Rs 2.3 crore (Rs 0.82 crore of cash and cash equivalents and Rs 1.45 crore of unutilized CC/WCDL) as on January 01, 2021. It had total outflows of around Rs 2.2 crore between January 01, 2021 and March 31, 2021. After factoring collections (net of disbursements) the liquidity buffer would be just about sufficient to cover the debt repayments. During the lockdown period, the company made all its repayments well in advance and had not availed moratorium from any of its lenders. The promoter constantly monitors the liquidity position and plans to infuse equity of around Rs 1.5 crore before end of March 2021.