Strength * Strong market position in the Indian microfinance industry further supported by initial diversification into other asset classes Satin Creditcare is one of the leading non-banking financial companies operating as a microfinance institution (NBFC-MFIs) with loan assets under management (AUM) of Rs 7,139 crore as on June 30, 2019. The company has a large distribution network comprising 1228 branches spread across 350 districts in 22 states and has more than tripled its loan AUM over the last few years to establish its position as one of the largest NBFC-MFIs in the country. Sizable presence in underpenetrated regions along with business correspondent arrangement with IndusInd Bank Limited and Capital First Limited, will provide Satin Creditcare ample headroom for growth and sustain its strong market position in the microfinance business.
With regional diversification being its key focus area, the company continues to diversify geographically by both - venturing into newer states and reducing its existing large exposures. As a result, it has been able to reduce exposure to Uttar Pradesh to 21.6% at the end of March 31, 2019 from 43% four years ago. Focused effort of the management to expand Satin Creditcare's presence in east and south will result in further improvement of geographic diversity over the near to medium term.
The management is also focusing on improving product diversity by expanding its presence in housing finance and micro, small and medium enterprise (MSME) financing segments. In order to achieve this objective, the company has established two wholly owned subsidiaries - Satin Housing Finance Ltd (SHFL) and Satin Finserv Ltd (SFL) which are at a very nascent stage of operations as yet. However, microfinance loans being the company's core competence, its contribution to the overall growth will remain sizable over the medium term.
* Improving asset quality in the JLG portfolio supported by strengthened systems and processes, asset quality performance in the non - microfinance book is yet to be tested Delinquencies (reflected in 30 and 90 dpd), after peaking at 26.6% and 14.4% as on March 31, 2017 in the aftermath of demonetisation, have restored to pre-demon levels to a large extent. Apart from gradual improvement in the ground level situation, the company also undertook various measures like extending emergency and top up loans to selective customers, deploying more human resources and increasing frequency of customer interaction by switching to fortnightly collections from monthly, for improving collections performance in stressed geographies. As of June 30, 2019, the delinquencies (30 and 90 dpd - for SCNL) stood at 3.4% and 2.8%. Over the last 3 fiscals, the company has cumulatively provided and written off about Rs 380 crore, adjusted for these - delinquencies are further lower at <2%.
This improvement in asset quality has also been supported by the strong risk management systems SCNL has developed in-house, over the years. This software system enables real-time tracking of portfolio performance at a granular level and allows the senior management to take prompt corrective action in case of any ground level issue. This new system is also expected to result in improvement in operating efficiency through automation of processes. As an upgradation to this RMS, the company has now introduced psychometric testing into its borrower assessment process. With the earlier underwriting process remaining intact, the psychometric testing acts as an additional filter and ever since it has been pilot tested, the rejection rate has increased. Portfolio monitoring and internal audit mechanisms which were strengthened post demonetisation, remain adequate.
For the non-microfinance portfolio which is just beginning to build up, the asset quality performance is yet to be tested across business cycles however, in terms of systems and practices, a strong synergy is expected with SCNL.
In the medium term, considering the targeted pace of growth and gradual expansion of business into newer geographies and product lines, portfolio quality and monitoring and internal audit team needs continuous strengthening to keep asset quality under control.
* Adequate capitalisation Reflected in a consolidated networth of Rs 1064 crore (adjusted for deferred tax asset) as of March 31, 2019, SCNL's capital position is adequate in relation to its scale of operations. The company has raised Rs 434 crore of equity share capital over the two fiscals and a quarter through June 2019. Additionally, Rs 130 crore were raised as preference shares and warrants, over the same period which have now been converted to equity.
Tier I and overall capital adequacy ratios were comfortable at 30.5% and 23.3%, respectively, at the end of fiscal 2019. Adjusted gearing at a consolidated level (including managed portfolio as business correspondent and securitised portfolio in external debt) also improved to 6.2 times at the end of fiscal 2019 from 7.7 times a year ago. As a prudent measure, Satin Creditcare is expected to maintain overall capital adequacy at over 20% over the medium term. This will be aided by its demonstrated ability to raise capital at regular intervals and presence of renowned investors as shareholders. The capital position of the subsidiaries at their respective standalone level is also expected to remain adequate supported by timely capital infusion by the holding entity.
* Diversified funding profile and comfortable liquidity Satin Creditcare has a fairly diversified funding profile not only in terms of lender mix but also, debt facility type. Of the total borrowing at consolidated level, 56% constituted of borrowing from banks and financial institutions, 18% was raised from capital market and balance 25% was securitisation.
The company has cumulatively raised Rs 5,322 crore (including securitisation) over fiscal 2019 - distributed almost equally across quarters. However, while incremental funding during the first half of the year was driven by term loans from banks and NBFCs, for the second half - the more significant portion was raised as securitisation. The resources are channelized from a large lender base comprising over 70 active lenders which include most large public and private sector banks. However, despite having such a diverse lender base, 64% of the total debt outstanding as of June 2019 was concentrated among top 10 lenders thereby leaving scope for further diversification in resource profile.
Cost of borrowing is also competitive and comparable with large-sized NBFC-MFIs. The company acts as a business correspondent to IndusInd Bank Limited and Capital First Limited for microfinance and non-microfinance business, respectively, which adds to the diversity of company's funding profile.
Liquidity is also comfortable. Satin Creditcare's business model provides it with an inherently positive asset-liability maturity profile, driven by the shorter tenor of its advances than that of its liabilities.
Weaknesses * Ability to sustain profitability at current levels is yet to be demonstrated After being constrained by heightened credit costs for fiscal 2018, profitability has revived as expected ' reflected in a healthy RoMA 2.5% (as per IndAS) for fiscal 2019 as against 1.2% (as per IndAS) for the preceding fiscal. In absolute terms, SCNL reported a consolidated profit of Rs 201 crore for fiscal 2019 which is significantly higher than a profit of Rs 75 crore for the previous fiscal (revised as per IndAS method of accounting, as per IGAAP method ' the company reported a loss of Rs 2.7 crore for fiscal 2018). Over fiscal 2019, the impact of increased cost of borrowing has been partially offset by marginal increase in fee income, whereas credit costs have remained stable. In terms of standalone profitability, SCNL reported a PAT of Rs 195 crore for fiscal 2019, TFSL reported a PAT of Rs 8 crore whereas the other two subsidiaries made losses. While SFL and SHFL are expected to take another year to break even, standalone profitability of SCNL is expected to offset the constraining impact of it on the overall earnings profile of the SCNL (consolidated). While the profitability has restored to healthy levels in fiscal 2019 and Q1 fiscal 2020, the company's ability to sustain it at these levels by controlling credit costs, operating expenses and shortening the gestation period of the newly established subsidiaries, remains a key monitorable.
* Limited seasoning in non-microfinance portfolio While the company has ventured into secured asset segments like housing loans and MSME, the track record of SCNL in these segments is very limited and the book size, small at Rs 417 crore (consolidated). As on June 30, 2019, of the total MSME portfolio of Rs 316 crore, 91% was housed in SCNL and balance, in the newly formed subsidiary - SFL. Housing loan portfolio on the same date stood at Rs 101 crore. As the non-microfinance book scales up, the company's ability to manage its asset quality at comfortable levels remains to be seen. While this remains a monitorable, the proportion of non-microfinance portfolio is not expected to grow drastically over the near to medium term.
* Significant increase in exposure to new borrowers with modest credit profile During fiscal 2019, the company has opened about 168 branches for its JLG portfolio in existing as well as new states. As a result of this, the number of active customers has increased drastically to 0.24 crore to 0.31 crore over fiscal 2019. Majority of these borrowers are new to Satin and have availed first cycle loans from the company, resulting in an increase in exposure to new borrowers with limited or no credit history.
This is an addition to existing client base which comprises borrowers with below-average credit risk profiles and lack of access to formal credit. Typical borrowers are cattle owners, vegetable vendors, tailors, tea shops, provision stores, small fabrication units etc. The income flow of these households could be volatile and dependent on the local economy. Pressure on households' cash flow due to unforeseen circumstances may affect the repayment capability of these borrowers.
* Potential risk from local socio-political issues in the microfinance sector The microfinance sector has 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 demonetization in 2016. In addition, the sector has faced issues of varying intensity in several geographies. 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. Similarly, the sector witnessed high level of delinquencies post-demonetization and the subsequent socio-political events. This indicates the fragility of the business model vis-a-vis external risks. As the business involves lending to the poor and downtrodden sections of the society, MFIs will remain exposed to socially sensitive factors, including charging of high interest rates, and consequently, to tighter regulations and legislation.
Liquidity: Adequate Satin Creditcare's business model provides it with an inherently positive asset-liability maturity profile, driven by the shorter tenor of its advances that of its liabilities, thereby resulting in comfortable liquidity. The liquidity profile is also backed by expectation of continued support from the company's diverse lender and investor base.As per the ALM statement dated June 30, 2019, assets maturing over the next six months (including committed, unutilised bank lines) over liabilities maturing over the same period, on a cumulative basis, were adequate at 2 times. In the second half of fiscal 2019, the company raised Rs 2,974 crore of borrowing at an average rate of 11.3% which demonstrates its ability to raise external funds on an ongoing basis. The company also maintains significant liquidity in the form of cash and bank balance, unutilised bank facilities, and refinance lines from financial institutions. Post September 2018, the company has started to maintain a liquidity cover of about 75-80 days, over and above the planned disbursements for that period.
Rating Sensitivity Factors Upward factors * Sustainability in profitability and asset quality reflected in a steady state RoMA of >2.5% and 30+ dpd of <2%, respectively. * Demonstrated ability to profitably scale up non-microfinance portfolio, alongside steady growth in seasoned microfinance portfolio
Downward factors * Inability to maintain steady state adjusted gearing and overall capital adequacy at <5 times and >20%, respectively. * Material deterioration in asset quality and profitability.
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