Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL BBB+/Stable’ rating to Rs.50 crore Subordinated Debt of Satya Microcapital Limited (Satya). The rating on the bank facilities and non convertible debentures has been reaffirmed at ‘CRISIL BBB+/Stable’. 

 

CRISIL Ratings has withdrawn its rating on Non Convertible Debentures of Rs 30 crore (See Annexure 'Details of rating withdrawn' for details) in line with its withdrawal policy. CRISIL Ratings has received independent confirmation that these instruments are fully redeemed.

 

The rating continues to reflect substantial improvement in the capital position that continues to strengthen its overall credit profile, improving asset quality and continued improvement in earnings profile. The capital position has been supported by continuous equity raise; during last 3 years company has raised equity of around Rs 565 crore and maintained gearing in range of 4.0 to  5.0times during same period. Going forward, company proposes to raise another Rs 300 crore during current fiscal to support growth and would operate at similar gearing levels. The capital position is also supported by accretions as reflected in its improving earnings profile. With the revised regulatory framework (de-regulation of net interest margin), the company has raised their interest yields by about 200 to 300 bps on the incremental disbursements done during Q2 and Q3 of fiscal 2023. With the revision in the interest rates, resultant increase in net interest margin and controlled credit costs, the return on managed assets (RoMA) is expected to be higher than 2.5% in fiscal 2024.

 

On the asset quality front, the collection efficiency has remained strong with low delinquencies for loans originated in the last 12-18 months. As a result, the delinquency level has improved with 90+ dpd being at 1.2% as of March 31, 2023 as against 4.3% as of September 30, 2022. CRISIL Ratings notes that the company sold around Rs 210 crore worth of NPAs to asset reconstruction company (ARC) during fiscal 2023. If we include security receipts, the 90+ dpd would be around 3.9% as of March 31, 2023. As of September 2023, 90+ stood at 1.4%. Nevertheless, with the recent loan originations performing well, the delinquency position is expected to remain low over the medium term. CRISIL Ratings, overall believes considering the pace at which Satya has been growing its portfolio, their ability to maintain portfolio quality will remain key rating sensitivity factor.

 

The above strengths are partially offset by average, though improving asset quality and susceptibility of the microfinance sector to regulatory and legislative risks.

Analytical Approach

CRISIL Ratings has evaluated the standalone business and financial risk profile of Satya.

Key Rating Drivers & Detailed Description

Strengths:

Adequate capitalisation supported by regular equity infusion

Satya's capital position, reflected in networth of Rs 914 crore as of September 2023 as compared to Rs 837 crore on standalone basis as on March 31, 2023 supported by regular capital infusion. The company has witnessed continuous capital infusion in the past 6 years and have raised Rs 740 crores since January 2017 from investors post change in management from TFC Finvest Limited to Satya. Of the total capital infusion, Satya has raised about Rs 627 crore infused by the financial investor Gojo & Company Inc. of which Rs 201 crore was infused in fiscal 2023 itself. With this infusion, Gojo & Company Inc. holds the largest equity shareholding in the company with 62.9% as of March 31, 2023. As of September 2023, gearing stood at 5.1 times as compared to 4.1 times in March 2022. Besides, the company plans to raise additional equity capital of around Rs 300 crore by the fiscal 2024 to fund future growth and maintain adequate capitalisation.

 

Extensive experience of the promoter in the microfinance industry further supported by experienced board and senior management

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.

 

Geographically diversified portfolio

In fiscal 2023, disbursements were impacted in Q1 2023 owing to revision in regulatory framework. However, it picked up from Q2 2023 onwards and stood at Rs 4,191 crore in fiscal 2023 with Rs 1,182 crore of disbursement done in March 2023 itself. With sharp rise in disbursements, company reported an AUM of Rs 4,684 crore as of March 2023 registering Y-o-Y growth of 62%. As of H1 2024, company has disbursed Rs 1,858 crore and reported an AUM of Rs 4,836 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 September 30, 2023, Satya was present in 25 states, against 7 states as on March 31, 2018. The company has opened over 100 new branches over the last one year. As on September 30, 2023, the company had 586 branches. In terms of state-wise concentration, the highest exposure to a single state (Uttar Pradesh) was 24% and to top five states was 62.5% - Uttar Pradesh (24%), Bihar (19.4%), Punjab (6.9%), Rajasthan (5.0%), and Karnataka (7.0%). Moreover, the top five districts accounted for 7.5% of AUM as on September 30, 2023. 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.

 

Improving earnings profile

In fiscal 2023, Satya reported a profit after tax of Rs 53 crore translating in RoMA of 1.2% as compared to net profit of Rs 32 crore and RoMA of 1.2% in fiscal 2022. Besides high operating costs, high provisioning made in the fiscal 2022 and fiscal 2023 acted as a constraint. In fiscal 2023, Satya’s operating expense ratio stood at 6.4% (6.5% in March 2022). In terms of credit cost, company reported credit cost of Rs 72 crore (1.6% as a percentage of managed assets) as compared to Rs 17.1 crore (0.8% as a percentage of managed assets) in fiscal 2022. With the revised regulatory framework, company has increased its interest rate by 200 to 300 bps for select markets and customers in fiscal 2023. Company has shown improvement in profitability in H1 2024 with RoMA of 2.8% (annualized) owing to improvement in the average yield on the incremental disbursement, income from the off-book portfolio and controlled credit cost. With stabilizing collections and asset quality performance and, ability to implement risk-based pricing under the revised guidelines for MFIs, the company’s operating profitability is expected to strengthen further. Over the medium term, the company’s ability to maintain the quality of book created post pandemic will remain a crucial factor from an earnings perspective.

 

Weakness:

Average, though improving asset quality

Asset quality metrics weakened due the pandemic in fiscal 2021 and fiscal 2022. The 30+ dpd and 90+ dpd stood 3.8% and 1.0%, respectively, as of March 2021. Furthermore, the asset quality of the industry at large and that of Satya was impacted by the second wave. The 30+ and 90+ dpd of the company rose to 7.7% and 4.3% respectively in September 2022 as compared to 6.0% and 2.8%, respectively, as on March 31, 2022. The rise in slippages in primarily due to the restructured portfolio as majority of the restructured book saw billing cycle start from Q4 2022 which has resulted in the rise in 90+ dpd. However, company has sold Rs 210 crore (6.5% of the AUM as of September 2022) of the stressed book to ARC at a valuation of 71%. This has led to improvement in the overall asset quality of the company. 30+ and 90+ dpd improved to 1.7% and 1.2% respectively in Q4 2023. If we include security receipts, the 90+ dpd would be around 3.9% as of March 31, 2023. Additionally, portfolio which was generated post second wave of covid is performing well with 90+ dpd stood at around 1.0%. As of September 2023, 90+ dpd stood at 1.4%. While the company’s asset quality performance continues to restore gradually, its ability to achieve and sustain its pre-pandemic level of asset quality position remains critical and in the course of it, portfolio created post Covid-19 remains a monitorable.

 

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. 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 1,538 crore as on October 31, 2023, against debt obligation (including operating expense) of around Rs 923 crore for the next two months.

 

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 over Rs 300 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

• Improvement in earnings with RoMA being maintained at over 2.5% on consistent basis
• Increase in scale of operations while maintaining asset quality
• Improvement in capital position

 

Downward factors

• Weakening in asset quality with 90+ dpd reaching over 5%, resulting in stressed profitability and capital position
• Inability to maintain adjusted gearing below 6 times on a steady-state basis

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 seven years, the company has expanded its presence to 25 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, Andhra Pradesh, Telangana and Goa, through a network of more than 49,000 villages in 523 branches as of September 30, 2023.

 

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 23-25% for the JLG loans and 23% for individual loans. In September 2023, the company reported AUM of Rs. 4,836 crore and profit after tax (PAT) of Rs. 76 crore.

Key Financial Indicators

	Unit	H1 2024	Mar 23	Mar 22	Mar-21	Mar-20
Total managed assets#	Rs crore	6,860	5,670	3,477	1,720	1,198
Total income	Rs crore	585	738	402	267	209
PAT	Rs crore	76	53	32.5	10.2	7.5
Return on managed assets	%	2.8	1.2	1.25	0.7	0.7
GNPA (90+ dpd)	%	1.4	1.2	2.8	1	0.7
On-book gearing	Times	5.1	4.4	4.1	2.8	3.7

Note: #including off-books assets

Any other information

CRISIL Ratings also notes that Satya has acquired Baid Housing finance company private Limited in fiscal 2023 and it has now become fully owned subsidiary of the company.