Satya Microcapital Limited 'CRISIL BBB/Stable' assigned to Bank Debt; NCD Reaffirmed
Rating Action
1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned the ‘CRISIL BBB/Stable’ rating to the bank facilities of Satya Microcapital Limited (Satya) and reaffirmed its ‘CRISIL BBB/Stable’ rating on the existing NCDs.
The rating is driven by the company’s adequate capitalisation backed by recent fund infusion, extensive experience of the promoter in the microfinance business, geographically diversified portfolio, and diversified resource profile. These strengths are partially offset by average, though improving, profitability – constrained by high operating expenses and borrowing costs, limited loan cycle vintage in the portfolio with asset quality remaining a monitorable, and susceptibility to local socio - political issues inherent to microfinance industry and modest credit risk profile of the borrowers.
After registering a 2 year CAGR of 115% till fiscal 2020, Satya’s growth momentum moderated by the outbreak of Covid-19 at the onset of fiscal 2021. Nevertheless, with disbursements picking up from Q2 2021, the company’s AUM stood at Rs 1,476 crore registering an on-year growth of 46% in fiscal 2021. In the aftermath of the second pandemic wave, growth momentum moderated resulting in AUM of Rs 1592 crore as of September 30, 2021.
The company’s collection efficiency (including over-dues but excluding prepayments) that improved to over 100% in March 2021 because of high overdue payments, got impacted with the sharp spike in number of cases due to the second wave of the pandemic and various forms of lockdown being imposed by states to curb the spread of Covid-19 – it dropped to 87% in May 2021. However, collection efficiency improved from June 2021 onwards and stood at 93% in November 2021. Even the disbursement pace that slowed down in the first quarter of fiscal 2022, revived during the second quarter with an average disbursement of over Rs 150 core per month. The company’s, 90+ days past due (dpd) (including writeoff) moderated to 1.8% and 1.4% as on September and March 2021, respectively compared with 0.8% a year earlier. Additionally, the company has total outstanding restructured portfolio (under RBI Resolution framework 1.0 and 2.0) of Rs 223 crore (14% of the AUM) as of September 2021. 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 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 Satya |
Key Rating Drivers & Detailed Description Strengths:
Satya's capital position, reflected in adjusted networth of Rs 414 crore as on September 30, 2021, is adequate. Satya raised about Rs 221.5 crore in the fiscal 2021 from financial investor Gojo & Company Inc. and which significantly improved its capital position. With Rs 271 crore infused by Gojo & Company Inc, it is now the largest shareholder in the company. As a result, adjusted gearing (including off-book) improved to 3.1 times as on March 31, 2021 from 5.9 times at the end of March 2020. As of September 30, 2021, adjusted gearing stood at 3.8 times. Besides, the company plans to raise additional equity capital of around Rs 75 crore by the Q4 2022/Q1 2023 to fund future growth and maintain adequate capitalisation with capital adequacy ratio at over 20%.
On account of the gap between current and pre-Covid collection levels, there is a risk of increase in credit losses and its potential impact on capitalisation metrics. The company’s ability to ramp-up internal accretion so that it can sustain its capital position and keep adjusted gearing within the targeted cap while sustaining the growth shall remain a key monitorable.
Satya is promoted by Mr Vivek Tiwari, who has over 20 years of experience in the microfinance industry before he started Satya in 2016. Besides the promoter’s robust understanding of financial product requirements for the customers in the microfinance space, the company also benefits from the experienced board which has a mix of independent directors
The leadership team comprises professionals with average experience of over a decade in the fields of microfinance, audit, operations, banking people management, and information technology (IT). Given its focus on digital integration of operations, processes are carried out through an e-platform. Besides online generation of granular credit quality report for the entire portfolio, the company has distinct portals for business (Br.Net) and collections (Trucell) for better functional boundaries. While 100% disbursements are done cashless, the management is focused on attaining 100% cashless collections.
Portfolio stood at Rs 1,476 crore as on March 31, 2021, up 46% from Rs 1,008 crore a year earlier. The company had a CAGR of 54% over the past two years. In fiscal 2022, due to the second wave of Covid19, disbursements were low in Q1 2022. However, it picked up from July 2021 onwards and stood at Rs 149 crore per month with AUM at Rs 1,592 crore.
Portfolio growth has come with focus on maintaining overall geographic diversity to mitigate the impact of localised issues in any particular region. As on November 30, 2021, Satya was present in 21 states, against 7 states as on March 31, 2018. The company has opened over 100 new branches over the last one year. As on November 30, 2021, the company had 271 branches. In terms of state-wise concentration, the highest exposure to a single state (Uttar Pradesh) was 21.3% and to top five states was 66% - Uttar Pradesh (21.3%), Bihar (14.4%), Punjab (10.5%), Haryana (8.8%), and Rajasthan (7.5%). Moreover, the top five districts accounted for 10.4% of AUM as on November30, 2021. Along with geographical diversification, the robust growth is supported by adequate monitoring of operational parameters, such as calibrated AUM exposure per branch, per district, amongst others.
While the company continues to further reduce geographical concentration, the ability to diversify while maintaining stable systems and processes to avoid any pressure on asset quality will remain critical.
Weaknesses:
As per IndAS, in fiscal 2021, Satya reported net profit of Rs 10.2 crore translating in RoMA of 0.7%. Besides high opex and borrowing costs, high provisioning made in the fourth quarter of fiscal 2021 acted as a constraint.
In fiscal 2021, Satya’s opex ratio stood at 6.8% and the average cost of borrowing was 12.5% (as percent of average managed assets). Average cost of borrowing, however, is high at 12.5% in the current fiscal despite a diversified resource profile comprising banks, small finance banks, NBFCs, and financial institutions. For H1 2022, Satya reported net profit of Rs 8.9 crore and RoMA of 0.95% (annualised) after factoring in Rs 1.4 crore of provisions. Average cost of borrowing also improved to 10.44% in H1 2022.
The company is currently in the growth phase with several branches opened in fiscals 2020 and 2021 to cater to new geographies. As these branches take time to achieve operating profitability, the company’s profitability from core business, despite marginal improvement, is expected to remain constrained. As the resource profile is diversified further with increasing share of bank funding, the cost of borrowing may decline in the coming period.
Profitability will also depend on the overall credit costs, which will be incurred on account of the pandemic-related lockdown. The company reported credit cost of Rs 25.6 crore (1.7% as of percentage of managed assets) in fiscal 2021, and Rs 1.4 crore for H1 2022 for the overdue loans. The credit cost might increase in the coming quarters if the stress owing to the second wave of Covid19 continues. The visibility around ultimate credit cost will likely come towards the end of fiscal 2022 and will be a key rating sensitivity factor.
Having started operations in November 2016, Satya has limited operational track record of around 4 years. The company has attained significant growth in operations from fiscal 2019 after the external investors were on-boarded. The loan portfolio has grown at 62% in fiscal 2020 indicating that a majority of the portfolio has limited seasoning. However, this growth momentum was arrested in the first quarter of fiscal 2021 as disbursements remained subdued during the early phase of the lockdown. With the onset of second quarter, disbursements revived at a good pace and contributed to a growth of 46% in AUM for fiscal 2021.
Although the company started operations just around demonetisation, it did not witness an impact on asset quality due to socio-political issues in north Uttar Pradesh and adjoining regions. Portfolio delinquencies for 30+ and 90+ dpd including writeoff has remained low at 4.2% and 1.4%, respectively as on March 2021 (1.5% and 0.8% as on March 31, 2020). However, the asset quality of industry at large and that of Satya has got impacted due to second wave of Covid-19. Satya’s 30+ and 90+ stood at 7.5% and 3.4% respectively as on November 30, 2021, comparable with other microfinance players. Although delinquencies were not high in the past, the loan portfolio has grown significantly over the past two years resulting in limited loan cycle vintage.
As the current economic challenges and Covid-19 affliction curve have not yet normalised, the company ability to further improve collections to pre-Covid levels of over 99% on a steady state basis will be important in the coming months. Furthermore, considering the rapid growth in loan portfolio, significant expansion into new geographies and limited loan cycle vintage, Satya’s ability to sustain its risk management processes and commensurate asset quality performance in newer geographies will be a key monitorable. Post first wave of covid 19, Satya started disbursing from July 2020 onwards, with overall disbursements at Rs 1,225 crore in fiscal 2021 with Rs 758 crore of disbursement in Q4 2021 itself. 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 Q3 and Q4 of fiscal 2021. In fiscal 2022 (till November 2021) company has disbursed Rs 874 crore of loans. Sustainability of collections and impact of the pandemic on asset quality which have risen in the aftermath of Covid-19 outbreak will also be a key monitorable.
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. The MFI Bill, 2020 passed recently by the Assam Assembly may increase asset-quality challenges for MFIs. Additionally, any loan waivers announced will make matters worse due 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 exposed to socially sensitive factors, including high interest rates, tighter regulations and legislation.
The company started operation in November 2016, just around the time of demonetisation and hence did not get impacted. In the third quarter of fiscal 2020, hard bucket delinquencies increased due to the outbreak of protest against the new citizenship bill in Assam. Additionally, a significant portion of the portfolio comprises loans given to individuals under the JLG mechanism. 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. However, the company's ability to reinstate repayment discipline among customers (such that pre-Covid levels of periodic collections are achieved) will be a monitorable. |
Liquidity: Adequate The company’s business model provides an inherently positive asset-liability maturity profile, driven by the shorter tenure of advances over liabilities, thereby keeping liquidity adequate. As a philosophy for liquidity management post Covid-19, the company maintains around two months of liquidity cover on a steady state basis. As a result, liquidity (excluding sanctioned term loan and securitisation lines) stood at Rs 672 crore as on November 30, 2021, against debt obligation (including opex) of around Rs 244 crore for December 2021 to February 2022.
Satya’s resource profile is diversified across a lender base comprising banks, non-banking financial companies (NBFCs), and other financial institutions. Liquidity is also supported by steady collections of Rs ~59 crore on average reported in the past 2-3 months. Need-based and timely funding support from the parent and investors will aid liquidity |
Outlook: Stable Satya will continue benefit from its well diversified portfolio and the extensive experience of the promoter and management team. |
Rating Sensitivity factors Upward factors
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About the Company Satya MicroCapital Limited (formerly known as TFC Invest Limited) is a Delhi based, RBI-registered “NBFC - MFI”. It commenced microfinance operations in November 2016. Within a span of four years, the company has expanded its presence to 21 states and Union Territories, namely, Assam, Bihar, Chandigarh, Chhattisgarh, Delhi, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Jharkhand, Karnataka, Madhya Pradesh, Odisha, Puducherry, Punjab, Rajasthan, Tamil Nadu, Tripura, Uttar Pradesh, Uttarakhand, West Bengal, through a network of 20,660 villages in 195+ branches.
The company largely extends JLG up to Rs 50,000 and individual loans are up to ticket size of Rs 80,000. The company lends at interest rates of 23-24% for the JLG loans and 23% for individual loans. In September 2021, the company reported AUM of Rs. 1,592 crore and profit after tax (PAT) of Rs. 8.9 crore |
Key Financial Indicators
Note: *annualized, ^ including writeoff, #including off-books assets |
Any other information: Not applicable |
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Annexure - Details of Instrument(s)
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Criteria Details
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