Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable’ rating on the bank loan facilities and debt instruments of Svatantra Micro Housing Finance Corporation Limited (SMHFC). 

 

CRISIL Ratings has also withdrawn its rating on the Rs 40 crore non-convertible debentures (see the 'Annexure - Details of Rating Withdrawn' for details) on receipt of independent confirmation that these instruments are fully redeemed, in line with its withdrawal policy.

 

The ratings factor in SMHFC’s linkage to, and expectation of continued support from its promoters– the Birla family and shareholders– investment companies of the Aditya Birla Group, the company’s adequate capitalisation and low operating costs due to its unique branchless business model. However, these strengths are partially offset by its moderate scale of operations and geographical concentration of portfolio, moderate asset quality and susceptibility to the underlying risk profile of borrowers.

 

Acquired by Ms Ananyashree Birla in September 2018, SMHFC is entirely held by promoters and investment companies of the group. Owing to strong linkage and strategic importance to the promoters, the company derives a high degree of financial and managerial support from the group.

 

The overall rating, nevertheless, has been constrained by small scale of operations with high geographic concentration and asset quality position being moderate. SMHFC’s overall portfolio despite growing by 35% Y-o-Y, remained small at Rs 1525 crore as on March 31, 2023. Further, 77% of the portfolio has been concentrated in the top three states, namely Gujarat, Maharashtra, and Rajasthan. As far as asset quality is concerned, it remains prone to susceptibility to the underlying risk profile of borrowers. In terms of 90+ dpd, it has increased to 2.02% as of March 31, 2023 from 1.62% as of March 31, 2022. On 2-year lagged basis, the 90+ dpd stood at 4.1% as on March 31, 2023 as against 2.6% as on March 31, 2022. CRISIL Ratings, overall believes, ability of the company to manage and improve on its asset quality while growing the portfolio will remain key monitorable.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has assessed the standalone business, financial, and management risk profiles of SMHFC. The ratings further factor in support from the stakeholders, that is, promoters and an investment company of the Aditya Birla group which hold 100% stake - directly or indirectly, in SMHFC as of March 31, 2023. Preference shares in Svatantra Holdings Pvt Ltd (Svatantra Holdings) – held by the investment companies of Aditya Birla Group, have been treated as equity as these will be retained in the company for the following 10 years

Key Rating Drivers & Detailed Description

Strengths:

* Expectation of continued support from the promoters and Aditya Birla Group companies

SMHFC is entirely held by the promoters and holding/investment companies of the Aditya Birla Group, through Svatantra Holdings Ltd. It was acquired in September 2018. In fiscal 2023, Rs 75 crore equity has been infused into the company and Rs 30 crore was infused in fiscal 2022. The group has committed further capital infusion of over Rs 100 crore to support SMHFC’s slated growth plan in fiscal 2024. SMHFC is a part of Ms Birla’s aim to cater to the economically weaker sections and lower income groups in India. Given the promoters’ focus on financial inclusion and SMHFC being acquired for the accomplishment of this goal, the company should remain strategically important to the promoters. CRISIL Ratings believes that the promoters will continue to provide timely financial support to SMHFC to meet any incremental capital requirement in case of exigency. Reduction in ownership below majority holding by the group or any change in CRISIL Rating's’ view on the group or opinion on SMHFC’s strategic importance to the group will be rating sensitivity factors.

 

* Adequate capitalisation

SMHFC is comfortably capitalised with networth of Rs 289 crore as on March 31, 2023 (Rs 195 crore as on March 31, 2022), driven by the expectation of strong support from the promoters and Aditya Birla group. After capital infusions in fiscals 2022 and 2023, the group has committed further support to SMHFC’s slated growth plan in fiscal 2024. The company has maintained a healthy CAR throughout its years of operations with overall CAR at 38% and Tier I capital at 34% as on March 31, 2023. Gearing, at 5 times as on March 31, 2023, is expected to be maintained at the same level for fiscal 2024 as well.

 

* Low operating costs due to the unique branchless business model

SMHFC follows a branchless model as its on-field employees sit at the selected project sites. This business model entails a lower operating cost of 3% for the fiscal 2023 compared to peers. Other than the head office, the company has a back office each in Jaipur (Rajasthan), Ahmedabad (Gujarat), Pune (Maharashtra) and Chennai (Tamil Nadu). Additionally, as the company plans to further diversify into rural housing, it intends to use Svatantra branches. As a result, the operating costs are not expected to increase substantially, even as the portfolio ramps up over the medium term.

 

Weaknesses

* Moderate asset quality

The company has steady asset quality with the 90+ dpd between 1.0-2.0% and 2-year lagged gross non-performing assets (GNPAs) between 2-4% on account of robust internal processes and effective use of technology for credit underwriting. The company has a decentralised underwriting and collections team to make use of the employees’ local expertise. Project identification and credit committee approvals are centralised. The company has robust internal processes and uses an app for end-to-end processing of the loan, from sourcing to disbursal to collections. The company has a two-step process for credit underwriting, which includes approval of a project through builder, technical, and legal checks, post which the borrower profile is verified to check the ability and willingness to pay.

 

However, the 90+ dpd has decreased from to 2.6% as on December 31, 2020, to 2.02% as on March 31, 2023. Additionally, company had undertaken restructuring of 5.5-6.0% of the customers in terms of the AUM, which has now become negligible as on March 31, 2023. Hence, 90+ dpd is expected to decline in next fiscal. About 63% of its portfolio caters to borrowers with a household income of below Rs 40,000 per month. Hence, the ability of the company to sustain asset quality at pre-Covid levels – remain key monitorable.

 

* Moderate scale of operations with geographical concentration of portfolio

As on March 31, 2023, SMHFC remains a moderate sized entity with a portfolio of Rs 1525 crore. Additionally, even as the company has presence in 9 states and 1 union territory, 77% of the portfolio is concentrated in the top three states, namely Gujarat, Maharashtra, and Rajasthan. Additionally, the top 5 districts account for 40.5% of the total portfolio. However, it must be noted that the state-wise concentration has reduced from top 3 states forming 91% of the total portfolio and top 5 districts forming 72% in fiscal 2016. The company is planning to expand to Chhattisgarh and Odisha along with deepening its presence in existing states. In fiscal 2023, the company has strengthened its manpower, which will further aid in increasing the portfolio.

 

* Susceptibility to the underlying risk profile of borrowers

The company mainly caters to customers new to credit, with no previous banking history. Over 63% of the portfolio constitutes borrowers with a household income of less than Rs 40,000 per month. Most of the customers are in the informal sector, and their cash flow could be volatile and highly sensitive to minor business disruptions. Invariably, it has been observed that such borrowers do not have significant financial flexibility to repay more than one or two instalments at a time. Thus, if one or two instalments are missed, the borrower would continue with the default for a few months compared to formal sector borrowers before they are repaid. Therefore, asset quality is exposed to risks related to borrowers with weak credit risk profiles. SMHFC’s ability to maintain repayment discipline among its customers will be monitorable.

Liquidity: Strong

As per the company’s asset-liability maturity profile on March 31, 2023, it had no negative cumulative mismatch across all buckets. On a standalone basis, SMHFC had liquidity of around Rs 184 crore (excluding term loans and securitisation lines) as on March 31, 2023. It has liquidity cover of 1.3 times for debt obligation over the three months till June 2023 assuming nil collection. Additionally, it had a pipeline of Rs 225 crore term loan as on March 31, 2023. CRISIL Ratings believes SMHFC will receive need-based timely financial support from the promoters.

Outlook: Stable

SMHFL will continue to benefit from its linkage to, and expectation of continued support from, its promoters - the Birla family and shareholders - investment companies of the Aditya Birla group. On a steady state basis, the promoters and investment companies of Aditya Birla Group will continue to extend support to SMHFL – either through direct investment or through Svatantra Holdings – of which they are the ultimate beneficiaries. The company’s capitalization, backed by the promoters’ strong commitment and high degree of financial flexibility to raise equity, should remain adequate

Rating Sensitivity Factors

Upward Factors

• Upward revision in CRISIL Ratings’ credit view on the investment companies of Aditya Birla group
• Significant scale up in operations while maintaining RoMA at above 2%.

 

Downward Factors

• Dilution in stake by the promoter family/investment companies of Aditya Birla group or a downward revision in CRISIL Ratings’ credit view on the investment companies of Aditya Birla group.
• Deterioration in asset quality with GNPAs remaining over 3%
• Weakening in capital position resulting in adjusted gearing of more than 6 times

About the Company

MHFC was incorporated in 2008 as a Housing Finance Company (HFC) by Mr Madhusudhan Menon, Mr Rajnish Dhall and Mr Nachiket Shelgikar. The company was taken over by Svatantra Holdings Private Limited (owned by Aditya Birla Investment companies) in September 2018. The company’s target segment is first time home buyers in economically weaker sections (EWS) and lower income group (LIG). The company has a unique branchless business model wherein it has tie ups with various projects for providing micro loans. For the housing portfolio the company has ~82% of its portfolio with a ticket size of below Rs 15 lakhs and ~63% of its portfolio with customers having a household income of less than Rs 40000 per month. The company also has a small non-housing portfolio which constitutes top up loans for existing borrowers, Loan against property and the builder and corporate loans. As on March 31, 2023, the housing portfolio stood at Rs 1348 crore (88% of the AUM) in which the builder loans stood at Rs 29.5 crore, the Non housing portfolio stood at Rs 175 crore.

 

The company currently operates in 9 states and 1 union territory through 128 districts. As on March 31, 2023, the company had an average ticket size of Rs 11 lakh with an average yield of 12.8% for housing loans. The average household income of their customers is about Rs 50,000 for housing loans.

Any other information: Not applicable