| Svatantra Microfin Private Limited | ||||||||||||||||||||||||
| 'CRISIL A+/Stable' assigned to Subordinated Debt; rated amount enhanced for Bank Debt | ||||||||||||||||||||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||||||||||||||||||||
| 1 crore = 10 million | ||||||||||||||||||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL A+/Stable’ rating to Rs 50 crore subordinated debt instrument of Svatantra Microfin Private Limited (Svatantra). Ratings on outstanding debt facilities have been reaffirmed at ‘CRISIL A+/Stable/CRISIL A1+’.
The ratings remain centrally driven by the company’s linkage to, and expectation of continued support from, Svatantra’s promoters - the Birla family and other shareholders - investment companies of the Aditya Birla group.
The ratings also factor in the company’s adequate capitalisation, backed by the promoters’ strong commitment and high degree of financial flexibility to raise equity, its sound risk management systems, and experienced senior management team. These strengths are partially offset by modest, albeit improving, profitability constrained by high operating expense, limited vintage of the loan book, the inherently modest credit risk profile of borrowers, and exposure to potential risks arising from local socio-political issues inherent in the microfinance sector.
The company’s assets under management (AUM) grew at 37% over fiscal 2021, to reach Rs 3,564 crore as on March 31, 2021. However, following the second pandemic wave, AUM growth remained restricted on account of sporadic lockdowns and restricted field movement. And thereafter, pent up demand catalyzed a strong revival in disbursments in the second half of the fiscal. Resultantly, AUM as on March 31, 2022 grew to Rs 5,447 crore marking a year-on-year increase of 52.8%. The company also offered to pre-close the loans of existing borrowers and disbursed fresh loans to provide them with additional liquidity to revive their businesses, resulting in significantly higher prepayments in the second half of both fiscals 2021 and 2022. Monthly collection efficiency has been stabilizing at a gradual pace. The uptrend in collection efficiency in the second half of fiscal 2021 following the first wave, was disrupted by the pandemic second wave. From 97.1% in March 2021, monthly collection efficiency declined to 80.6% in May 2021. Thereafter, as lockdown restrictions were relaxed, collection efficiency has been reviving and stood at 103% in March 2022 and 95.3% in April 2022. A similar trend was observed in monthly disbursements which – after declining to nil in May 2020, revived strongly in the subsequent months till March 2021 and thereafter, dipped to almost half of the company’s average monthly run rate till June 2021, post which the disbursement levels have also picked up.
Total restructured portfolio as on March 31, 2022 stood at Rs 168 crore. Delinquencies, depicted as 30+ and 90+ dpd, have started to reside gradually and stood at 5.43% and 3.81% on March 31, 2022, respectively as compared to 7.87% (6.78% excluding off book) and 5.11% (4.13% excluding off book), respectively, on December 31, 2021. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has assessed the standalone business, financial, and management risk profiles of Svatantra. 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 Svatantra as of March 31, 2022. 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:
Svatantra, as of March 31, 2022, 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 past eight years, the group has infused Rs 252 crore as equity and another Rs 505 crore as Compulsory Convertible Preference shares (Tier –I Capital) into Svatantra to support its business growth of which, Rs 175 crore has come in fiscal 2021 and Rs 250 crore has come in fiscal 2022. The group has committed further capital infusion of around Rs. 75-100 crore through fiscal 2023. This would support Svatantra’s slated expansion plan over the medium term and maintain capitalization metrics at adequate levels. Promoted by Ms Ananyashree Birla, Svatantra 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 Svatantra being the group’s first venture towards accomplishment of this goal, the company will remain strategically important to the promoters. CRISIL Ratings believes the promoters will continue to provide timely financial support to Svatantra to meet any incremental capital requirement 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 Svatantra’s strategic importance to the group, will be a rating sensitivity factor.
Svatantra’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 Rs 682 crore of capital from the shareholders. These infusions have been made though 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 869 crore ( including compulsorily convertible preference shares) as of March 31, 2022, which is adequate for the scale of operations. Overall and Tier I Capital adequacy ratio as on this date stood at 25.7% and 16.7%, respectively. Further buffer will be added when capital commitment is fulfilled for 2023. Adjusted gearing (including off book portfolio), having remained below 5 times till fiscal 2018, has remained above 6 times over the last fiscal. However, after the capital infusion in fiscal 2022, adjusted gearing declined marginally to 5.7 times as on March 31, 2022. 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 over the next 6-9 months. The financial flexibility to raise equity will not only aid Svatantra’s business growth and expansion in the medium term, but can also be banked upon for absorbing any unforeseen shocks in asset quality.
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 Svatantra 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 almost a decade now, the company has gradually scaled up operations, attaining assets under management (AUM) of Rs 5,447 crore as on March 31, 2022. This growth has been supported by geographical diversification to 20 states through a network of 692 branches, with maximum exposure of 18.1% to a single state and exposure of 67% 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 and limited loan cycle vintage, Svatantra’s ability to sustain its asset quality remains a key monitorable.
The company’s board comprises, Ms Ananyashree Birla - founder and promoter of Svatantra, along with promoters of the group - Mr Kumar Mangalam Birla and Ms Neerja Birla. Mr Vineet Chattree from the senior management team of Aditya Birla Group, are 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.
Weaknesses:
At the time of demonetization, as 74% exposure was in affected regions, Svatantra’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. 30+ and 90+ dpd, which spiked to 21.3% and 13.9%, respectively, in March 2017, declined to 1.0% and 0.9% by the end of March 2020, respectively, which include some demonetization-related over-dues remaining to be written off. Net non-performing assets (Net NPA) as on this date were sub 1%. 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 operating expenses remaining moderately high at 6.0% as the company entered its expansion and growth phase. Since 2019, the company has opened over 355 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 for the last 2 - 4 quarters.
For fiscal 2021, operating expenses reduced to 4.4% from 5.9% for the previous fiscal, whereas credit costs remained elevated at 2.6% and 2.1% for fiscal 2020 and 2021 – largely due to Covid related provisioning. Overall return on managed assets (RoMA) for fiscal 2021 was 0.7% as compared to 1.2% for the previous fiscal. For fiscal 2022, however, the company reported a profit of Rs 47 crore which translates to a RoMA of 0.9%.
Given 80% of the AUM at the time of demonetization was housed in impacted pockets of Madhya Pradesh and Maharashtra, Svatantra’s asset quality weakened over fiscal 2018 leading to increased provisioning requirement, and thus, muted profitability for the fiscal. Svatantra wrote off Rs 19.6 crore over fiscal 2018 and 2019, which is nearly 8.8% of the AUM at the time of demonetization. However, the delinquencies (reflected in 30+ and 90+ dpd) improved considerably to 3.9% and 3.7% as on March 31, 2018, from 23.1% and 13.8%, respectively, a year prior. While portfolio delinquencies restored eventually, the company’s loan portfolio has grown significantly over the past four years, leading to limited vintage in the loan cycle. The loan portfolio has grown at a high three-year compound annual growth rate (CAGR) of 84% which indicates that a majority of the portfolio has limited seasoning. While this growth has been supported by a commensurate expansion in operational base, like addition of over 355 branches and over 150 districts to the company’s network over the two years through March 31, 2022, sustainability of the asset quality at the current level of growth and across newer territories will be a key monitorable.
As on March 31, 2022 – the company reported a GNPA of 3.8% whereas 30+ dpd, though improved from September 2021 levels, remained elevated at 5.4% on account of a large group of customers making part payments or repaying with a lag. In the near to medium term, the pace and magnitude of recoveries and company’s ability to curtail further slippages will be a key monitorable.
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.
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 Svatantra 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. |
Liquidity: Strong The company's liquidity position is strong with cash and equivalents balance of Rs 590 crore as on March 31, 2022 (excluding undrawn portion of existing term loans, securitisation lines). Liquidity cover for debt obligations scheduled over the succeeding 2 months, without factoring in any roll over and incremental collections, was at around 1.4 times. Additionally, the company was able to raise Rs 4,276 crore over fiscal 2022 through various avenues. Further, capital infused by the promoters in fiscal 2021 and 2022, and that which has been committed for next fiscal, is also a supporting factor. |
Outlook: Stable Svatantra 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 Svatantra – 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
Downward Factors
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About the Company Promoted by Ms Ananyashree Birla and incorporated in 2012, Svatantra started its microfinance operations in the Wada region of Maharashtra in March 2013. Headquartered in Mumbai, Svatantra was the first recipient of the NBFC-MFI license in the country.
It provides financial services to poor women and predominantly follows the joint liability group (JLG) model, wherein each group has 5-25 members. New group formation involves an observation period of 2-3 months, when the group members are informed about the importance of savings, are trained to maintain their own accounts, and are inculcated with the habit of regular savings. The loans are given mainly for agricultural and allied activities, business activities, and establishment and expansion of micro enterprises. With an AUM of Rs 5,447 crore as on March 31, 2022, the company operates in 20 states covering almost 303 districts.
The company, as on March 31, 2019, was entirely held by five investment companies of the Aditya Birla group, of which the highest share of 25% is held by Birla Holdings Pvt Ltd, followed by TGS Investment and Trade Pvt Ltd. Subsequently, in July 2019, this shareholding was restructured leading to 98.02% of the total stake being passed on to the promoter – Ms Ananyashree Birla and remaining being held by other family members and investment companies of Aditya Birla Group. Now, after the recent rounds of infusion during the last fiscals, 15.9% of the stake is held by Svatantra Holdings. Commensurately, the direct shareholding of the promoters and investment companies of Aditya Birla Group in Svatantra, has been revised to 82.5% after allotment of shares.
However, either through direct investment or via Svatantra Holdings, the promoters and investment companies of the group will continue to hold majority stake in, and extend on-going support to, Svatantra. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Yet to be issued |
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 10-Jun-22 in line with the lender-wise facility details as on 02-Aug-21 received from the rated entity.
Criteria Details
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