Rating Rationale
June 22, 2020 | Mumbai
Shri Ram Finance Corporation Private Limited
'CRISIL BBB/Stable' assigned to NCD
 
Rating Action
Total Bank Loan Facilities Rated Rs.60 Crore
Long Term Rating CRISIL BBB/Stable (Reaffirmed)
 
Rs.25 Crore Non Convertible Debentures CRISIL BBB/Stable (Assigned)
Rs.20 Crore Subordinated Debt CRISIL BBB/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL BBB/Stable' rating to Rs 25 crore of non-convertible debentures of Shri Ram Finance Corporation Private Limited (SRFC) and reaffirmed its rating on outstanding debt instruments and bank loan facilities at 'CRISIL BBB/Stable'.
 
The rating reflects the experience of the promoters in the two-wheeler financing business, the company's adequate capitalisation, and sound asset quality. These strengths are partially offset by challenges associated with rapid growth and concentration of portfolio, average but improving profitability; and diversified resource profile with relatively high cost of borrowing.
 
With the public lockdown being in its fifth phase, the restrictions are being lifted only in a phased manner and the degree of relaxations vary across regions depending upon the severity of covid-19 pandemic. Consequently, resumption in business operations has been calibrated for many companies. CRISIL will continue to monitor the collection efficiency metrics and it remains a key rating sensitivity factor.
 
The nationwide lockdown declared by the Government of India to contain the spread of the Covid-19 pandemic, will have near-term impact on disbursements and collections of companies. Though restrictions have been eased partially, based on classification of zones. CRISIL believes that eventual lifting of restrictions will continue to be in a phased manner. Any delay in return to normalcy will exert further pressure on collections and asset quality metrics of non-banking financial companies (NBFCs). Additionally, any change in the behaviour of borrowers on payment discipline can affect delinquency levels.
 
As far as liquidity position is concerned, CRISIL believes that SRFC has adequate liquidity to manage during this period wherein asset-side collections will be negligible while liability-side outflows continue as per schedule. SRFC had liquidity of around Rs 34.07 crore (including unutilised bank lines of Rs 31.46 crore) as on May 31, 2020, against total debt obligation and operating expenses of around Rs 20.26 crore for June and July 2020. Thus, SRFC liquidity buffer was close to 1.7 times.
 
On the liability side, the Reserve Bank of India (RBI) announced regulatory measures under the Covid-19 Regulatory Package, whereby lenders were permitted to grant moratorium (originally till May 31, 2020) on bank loans which is now further extended till August 31, 2020. SRFC has requested its lenders for seeking moratorium extension till August 31, 2020. However, CRISIL understands that the approval of moratorium request by lenders is still under process. On the asset side, the company has offered moratorium to its borrowers as per their requirements.

Analytical Approach

For arriving at the rating, CRISIL has evaluated the standalone business and financial risk profiles of SRFC.

Key Rating Drivers & Detailed Description
Strengths
* Extensive experience of the promoters
The promoters, Mr Gaurav Bhattar and Mr Ganesh Bhattar, have been in the two-wheeler financing business for about two decades, and have developed good understanding of the lending business and operating geography, and expanded operations to Chhattisgarh, Madhya Pradesh, and Odisha. In fiscal 2020, the company entered Jharkhand. It has over 112 branches, 49 service centres, above 800 dealers, and 146,025 clients.
 
* Adequate capital position
Networth and gearing were Rs 87 crore and 4.4 times, respectively, as on March 31, 2020, supported by regular capital infusion by the promoters and steady accretion to reserve. Capital adequacy ratio was comfortable at 26% as on December 31, 2019. Networth coverage for net non-performing assets (NPAs) moderated to 7.4 times as on December 31, 2019, from 12 times as on March 31, 2019. Adjusted gearing1 improved to 4.6 times as on December 31, 2019, from 5.6 times as on March 31, 2019. SRFC should raise equity in the foreseeable future and maintain gearing at 5-6 times over the medium term.
 
* Sound asset quality performance
Asset quality performance remained stable over the past 3 fiscals supported by adequate risk management system and low loan-to-value ratio. Gross NPAs, which indicate portfolio delinquencies, stood at 2.7% as on December 31, 2019. Portfolio at risk (PAR) greater than 90 day with 6 months lag improved to 3.0% as on December 31, 2019, from 3.5% in fiscal 2019. On static basis, incremental disbursements since September 2017 have reported cumulative collection efficiency of over 90%. As SRFC focuses on small and medium enterprise (SME) business, which constitutes 24% of assets under management (AUM), the company has maintained healthy asset quality in this segment with 90+ dpd of 2.6% so far. However, considering the rapid growth in AUM and significant expansion in new geographies with diversified product segment, asset quality remains a key monitorable. Nevertheless, the impact of the nationwide lockdown because of Covid-19 on collection and delinquency remains to be seen, and CRISIL will closely monitor the same.
 
Weakness
* Challenges associated with high growth and concentration of portfolio
SRFC's operations have grown significantly in the past 3 years and will continue to grow at a similar pace in the next 2 fiscals. It has expanded AUM at a 3-year compound annual growth rate of above 69% to Rs 460 crore as on December 31, 2019. Disbursements in fiscal 2019 were Rs 393 crore, over 2 times the disbursement in the previous fiscal. However, during the first 9 months of fiscal 2020, disbursement was at Rs 315 crore, muted by lower demand. Though the company has established good credit underwriting norms including low loan-to-value ratio, adequate collateral in the small business loan segment along with diversified product portfolio, it largely operates in rural area and the borrower's credit profile is generally modest. The cash flow is vulnerable to any economic downturn in the region. Therefore, despite sound asset quality with 1-year lagged 90+ dpd at 3.4% as on December 31, 2019, the ability to maintain low delinquency while significantly scaling up operations will remain a key rating sensitivity factor over the medium term. 
 
SRFC's operations are concentrated in three states, with Chhattisgarh accounting for 49% of loan portfolio as on December 31, 2019 (down from 55% as on December 31, 2018). In addition, the company has diversified its products into four-wheeler finance, small business loans, and microfinance loans, along with two wheeler finance.
 
* Average but improving profitability
Profitability remains average but has improved, with net profit margin of 5.3% for the 9 months ended December 31, 2019 from 1.6% as on March 31, 2018. SRFC is operating at high yield of 28-30%. However, borrowing cost remained at 14-14.5%, resulting in improved spreads by 0.5-1.0% for the 9 months through December 2019. The operating cost is higher than other CRISIL-rated peers at 9.5% and 9.6% for fiscal 2019 and the 9 months through December 2019, respectively, and will remain so because of technology upgradation plans, and expansion of branches over the medium term. Ltd asset delinquencies in the past enable the company to absorb asset quality shocks. Besides credit cost remained low at 1.3% for the 9 months through December 2019 and below 1% in the past 5 years. Also, considering the continuous high growth in AUM, the ability to limit credit cost will be critical for profitability.
 
* Diversified resource profile with relatively high cost of borrowing
Historically, the borrowing mix largely constituted bank loans and loans from financial institutions. Since fiscal 2019, the company has diversified its resource profile to include capital market borrowing such as sub debt and securitisation. Loans from banks and financial institutions stood at 35% and 46%, respectively, as on December 31, 2019, against 31% and 69%, respectively, as on September 30, 2018. The company has also raised funds quite comfortably even post liquidity tightening.
 
Though the company has raised funds at competitive rate of 11.3-13% in the recent past, the cost of borrowing remained high at 14% for the 9 months ended December 31, 2019. Besides, the company has done securitisation deals of Rs 44.6 crore since March 2019. However, with the growth in AUM and efforts to diversify its investor base, the recent improvement in cost of funds should continue and will be critical.
Liquidity Adequate

SRFC's liquidity position is adequate with cash and cash equivalent of Rs 2.61 crore as on May 30, 2020. Besides, it has cash credit facility of Rs 53.5 crore of which about 59% (Rs 31.5 crore) is unutilised. Against this, the total obligation for June and July 2020 is Rs 20.26 crore and Rs 10.43 crore is due in the June 2020. Thus, SRFC liquidity buffer was close to 1.7 times. Additionally, the company also has sanctioned loan of Rs 33 crore from 2 financial institutions.

Outlook: Stable

CRISIL believes SRFC will continue to benefit from the experience of the promoters and maintain adequate capital position.

Rating Sensitivity Factors
Upward Factors
* Maintenance of strong asset quality and increase in earnings as the portfolio scales up
* Capitalisation remaining strong with gearing remaining below 5.5 times

Downward Factors
* No material improvement in collections over the near term  
* Any adverse movement in asset quality with 90+dpd increasing beyond 5% and its impact on earnings
* Stress in capitalisation with significant jump in gearing while scaling up the portfolio.

About the Company

SFRC is a Raipur-based asset financing non-deposit-taking NBFC, promoted by Mr Ganesh Bhattar and Mr Gaurav Bhattar. The promoters have been in the two-wheeler financing business through proprietorship concerns since 2003. The company received the NBFC-AFC license from Reserve Bank of India in July 2008. Since fiscal 2010, it has diversified into four-wheeler finance, small business loans, and microfinance loans. It has presence in Chhattisgarh, Madhya Pradesh, Odisha, and Jharkhand, and had over 112 branches, 49 service centres, above 800 dealers, and 146,025 clients as on December 2019.

1Includes managed portfolio.

Key Financial Indicators
Particulars Unit Dec-19 2019 2018
Total managed assets Rs crore 460 391 226
Total income Rs crore 91 90 36
Profit after tax Rs crore 17.3 15.1 2.9
90+ dpd % 2.7 2.7 1.3
Adjusted gearing Times 4.6 5.6 5.3
Return on managed assets % 5.3 4.9 1.6

Status of non cooperation with previous CRA
SRFC has not cooperated with Credit Analysis & Research Ltd (CARE), which has marked it non-cooperative via rating rationale dated May 29, 2020. The reason provided by CARE is non-furnishing of information by SRFC.

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon
rate (%)		 Maturity date Issue size
(Rs.Crore)		 Rating assigned 
and outlook
NA Non-Convertible Debenture^ NA NA NA 25 CRISIL BBB/Stable
INE08E808017 Subordinated debt 20-Mar-19 14.37% 20-Apr-24 20 CRISIL BBB/Stable
NA Cash credit NA NA NA 58 CRISIL BBB/Stable
NA Term loan 16-Sep-17 11.75% 16-Sep-20 2 CRISIL BBB/Stable
^Yet to be issued
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Non Convertible Debentures  LT  25.00
22-06-20  		CRISIL BBB/Stable    --    --    --    --  -- 
Subordinated Debt  LT  20.00
22-06-20  		CRISIL BBB/Stable  31-03-20  CRISIL BBB/Stable  22-03-19  CRISIL BBB/Stable    --    --  -- 
Fund-based Bank Facilities  LT/ST  60.00  CRISIL BBB/Stable  31-03-20  CRISIL BBB/Stable  22-03-19  CRISIL BBB/Stable  29-11-18  CRISIL BBB/Stable      CRISIL BB-/Stable 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 58 CRISIL BBB/Stable Cash Credit 58 CRISIL BBB/Stable
Term Loan 2 CRISIL BBB/Stable Term Loan 2 CRISIL BBB/Stable
Total 60 -- Total 60 --
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Finance Companies

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