Key Rating Drivers & Detailed Description
Strengths:
Expectation of continued support from the promoters and the Aditya Birla group companies
SMPL, as of March 31, 2023, was entirely held by the promoters – members of the Birla family and an investment company of Aditya Birla Group, and the company derives significant funding support from this association. Over the years, the group has infused Rs 252 crore as equity and another Rs 655 crore as Compulsory Convertible Preference shares into SMPL to support its business growth of which, Rs 250 crore has come in fiscal 2022 and Rs 150 crore has come in fiscal 2023. The group has committed further capital infusion of around Rs.100 crore through fiscal 2024. This would support SMPL’s slated expansion plan over the medium term and maintain capitalization metrics at adequate levels.
Promoted by Ms Ananyashree Birla, SMPL was established with the objective to serve the economically weaker sections and lower income groups in India. Given the promoters’ focus on financial inclusion and SMPL being the group’s first venture towards accomplishment of this goal, the company will remain strategically important to the promoters. Additionally, the company’s board comprises of promoters of the group - Ms Ananyashree Birla along with Ms Neerja Birla. Mr Vineet Chattree from the senior management team of Aditya Birla Group, is also on the board. In terms of leadership team, the company benefits from the extensive experience of its management in fields such as rural banking, operations, risk, and credit. CRISIL Ratings believes the promoters and investment companies of Aditya Birla group will continue to provide timely financial support to SMPL to meet any incremental capital requirement and/or for discharging its liabilities in full and on a timely basis to all the stakeholders including lenders and debt holders (present and future) and in compliance with all statutory requirements, as and when needed. Reduction in ownership by the Birla family / group below majority holding, or any change in CRISIL Ratings’ view on the group or opinion on SMPL’s strategic importance to the group, will be a rating sensitivity factor.
Adequate capitalisation and high degree of financial flexibility to raise equity
SMPL’s capital position is adequate in relation to its scale of operations, largely supported by regular capital infusion by the promoters since inception. So far, the company has cumulatively received over Rs 900 crore of capital from the shareholders. These infusions have been made through Svatantra Holdings which is majorly held by investment companies of Aditya Birla group, ultimate beneficiary being Ms Ananyashree Birla. This has enabled a gradual build up in networth to Rs. 1,150 crore (including compulsorily convertible preference shares) as of March 31, 2023, which is adequate for the scale of operations. Overall and Tier I Capital adequacy ratio as on this date stood at 22.3% and 16.1%, respectively. Further buffer will be added when capital commitment is fulfilled for 2024. Adjusted gearing (including off book portfolio), having remained below 5 times till fiscal 2018, has remained above 6 times over the last fiscal. On a steady state basis, the company intends to operate at a gearing of 5-6 times which will be supported by the cumulative equity infusion of ~Rs 100 crore planned in the current fiscal. The financial flexibility to raise equity will not only aid SMPL’s business growth and expansion in the medium term but can also be banked upon for absorbing any unforeseen shocks in asset quality.
Sound risk management systems and processes bolstered by increasing digitalisation in operations
Given its key focus on digital integration of operations, the company has merged many of its operational processes to its e-platform. The company operates on core banking solutions comprising both an accounting and operational model. Multiple processes within the operational flow, such as identification of area for business, assessment of the area, real time credit bureau score check, real time collection update, generation of credit quality report for the entire portfolio, can be executed online. There are also distinct portals for business (SAATHI) and collections (OMNI) for better functional boundaries. This helps access historical data readily and update the regulator on a frequent basis. At the ground level, there is a dedicated risk team in which one risk officer looks at a maximum of two branches. Bigger branches have a separate risk officer. More so, 100% of the disbursements made by SMPL are in cashless mode, to facilitate which, the company has tied up with various platforms. The focus, going forward, is to attain 100% cashless collection as well, which will mitigate the risk arising from cash handling and reduce the turnaround time of the entire process. Having been in operations for more than a decade now, the company has gradually scaled up operations, attaining assets under management (AUM) of Rs 7,499 crore as on March 31, 2023. This growth has been supported by geographical diversification to 19 states through a network of 804 branches, with maximum exposure of 20.1% to a single state and exposure of 69% to the top 5 states. Commensurate to robust growth, operational parameters such as increase in average ticket size per borrower and increase in AUM exposure per district/ branch, have changed gradually and are comparable to that of close peers. However, considering the rapid growth in loan portfolio, SMPL’s ability to sustain its asset quality remains a key monitorable.
Expected improvement in earnings profile
At the time of demonetization, as 74% exposure was in affected regions, SMPL’s asset quality weakened over fiscal 2018, leading to increased provisioning, and thus, muted profitability for the fiscal. However, with revival in the situation at the ground level and conscious efforts undertaken by the company to restore collection efficiency, asset quality has improved. Overall profitability, with normalised credit cost, improved in fiscal 2019 and 2020 - reflected in a RoMA of 1.7% (IGAAP) and 1.2% (IndAs). However, this was partly constrained by high operating expenses as the company entered its expansion and growth phase. Since 2019, the company has opened over 500 new branches, which has elevated the operating expenses. In the aftermath of covid-19, limited expansion and restricted operational activity led to a correction in operating expenses such that it has remained within 4-6% since then. However, this improvement was offset by heightened credit costs after the pandemic outbreak and lockdown, which has resulted in moderate earnings since the outbreak of pandemic.
In fiscal 2022, owing to higher provisioning company reported PAT of Rs 47 crore. However, pre provisioning profit improved in fiscal 2022 stood at Rs 207 crore as compared to Rs 116 crore previous fiscal. In fiscal 2023, company reported pre provisioning profit of Rs 530 crore as compared to Rs 207 crore in fiscal 2022 translating into return on PPOP at 7.1% as compared to 3.9% in March 2022. Resultantly, despite the credit cost of 4.8% in fiscal 2023 company reported a ROMA of 1.8% as compared to 0.9% in fiscal 2022. The operating cost of the company has been steady between 4.0-4.6% over the last three years indicating stability in operations in spite of high growth. With the improvement in the average yield on the incremental disbursement and controlled credit cost, profitability is expected to improve going forward with RoMA expected to be more than 3% in fiscal 2024.
Weakness:
Modest but improving asset quality
Over the last two years asset quality has weakened owing to the pandemic. The 30+ dpd and 90+ dpd stood 5.4% and 3.8%, respectively, as of March 2022. Furthermore, the asset quality of the industry at large and that of SMPL was impacted by the second wave. The 30+ and 90+ dpd of the company rose to 7.2% and 5.3% respectively in September 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, in Q4 2023, company sold Rs 50 crore of the stressed portfolio to an ARC at a haircut of 45%. This primarily constitute the restructured portfolio and 180+ dpd portfolio which has helped in reducing the 90+ dpd to around 5.3% in March 2023. However, company has provided for the delinquent book and NNPA stood at 1.9% as of March 2023. Additionally, portfolio which was generated from July 2021 onwards is performing well. 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.
Inherently modest credit risk profile of the borrowers
A significant portion of the portfolio comprises microfinance loans to clients 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. With the slowdown in economic activity since outbreak out of covid-19, there has been pressure on such borrowers’ cash flows at a household level thereby restricting their repayment capability. Even after the lock down is lifted pan India, the revival in collections has been phased and the company’s ability to reinstate repayment discipline among its customers will be a monitorable.
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. For SMPL as well, given its majority portfolio was housed in Maharashtra at that time, the losses were high.
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.