Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the long-term bank facilities and debt instruments of Svatantra Microfin Private Limited (SMPL) at ‘CRISIL AA-/Stable/CRISIL A1+’.

 

Earlier, CRISIL Ratings through its rationale published on August 16, 2023, took into consideration the announcement made by SMPL w.r.t acquisition of 100% stake in Chaitanya India Fin Credit Private Limited (CIFCPL). As per the announcement (made on August 8, 2023), SMPL’s board  approved the transaction involving acquisition of 100% equity share capital of CIFCPL from its existing shareholders (viz Navi Finserv Limited and Navi Technologies Limited) for a total consideration of Rs 1479 crore. The announcement further states that, post completion of acquisition, CIFCPL will become wholly-owned subsidiary of SMPL. The transaction, nevertheless, is subject to receipt of regulatory and other requisite approvals. 

 

The ratings on SMPL remains unaffected by this acquisition as the transaction is expected to be fully equity funded with no recourse to debt. The merged entity (SMPL+CIFPL) expected to be second largest NBFC-MFI with assets under management (AUM) of over Rs 12,874 crore as on June 30, 2023. The business risk profile of the merged entity will also benefit from geographical diversity, larger branch network, low overlap of customers and lower cost of funds. The merged entity is expected to have a network of over 1500 branches across 20 states with a borrower base of over 36 lakhs. 

 

CRISIL Ratings overall believes the current outstanding ratings on the bank facilities and debt instruments of Svatantra remain unaffected by this announcement. Nevertheless, CRISIL Ratings, will continue to track the progress on this transaction and engage with managements of both SMPL and CIFPL in order to understand some of the key aspects like IT/system integration, risk management processes, integration of human resources etc.

 

The rating takes into consideration scale up of operations along with improvement in the earnings profile that is expected to sustain supported by higher net interest margins and controlled credit costs. In line with revision in regulatory framework, the company has enhanced its risk-based pricing by increasing its yields by around 150 to 200 bps in fiscal 2023. The benefit of these higher yields is expected flow-in towards bottom line with return on managed assets (RoMA) expected to improve to over 3% by the end of fiscal 2024.

 

The ratings also factor in the expectation of continued support from the promoters - the Birla family and other shareholders - investment companies of the Aditya Birla group. The promoters intend to continue holding majority stake in SMPL and are committed to support SMPL in 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.

 

SMPL’s capital position has remained adequate due to backing of promoters’ strong commitment of providing capital as and when required. During last two years, the promoters has infused Rs 400 crore of capital. With this infusion along with internal accruals, company overall networth improved to Rs 1,150 crore in fiscal 2023 as compared to Rs 572 core in fiscal 2021. In Q1 2024, networth further improves to Rs 1230 crore. In the current fiscal, there is a plan to infuse another Rs 100 crore. This will enable the company to maintain its growth momentum over medium term. As far as asset quality is concerned, strong collection efficiency of over 99% has been maintained for originations done during last 3-4 quarters. This in-turn is expected to result in lower delinquencies and credit costs on incremental basis.

 

The ratings continue to factor in sound risk management systems and experienced senior management team. These strengths are partially offset by the inherently modest credit risk profile of borrowers, and exposure to potential risks arising from local socio-political issues inherent in the microfinance sector.

Analytical Approach

Till the CIFCPL transaction consummates, for arriving at the ratings, CRISIL Ratings has assessed the standalone business, financial, and management risk profiles of SMPL. 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 SMPL as of June 30, 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. Post consummation of the transaction, CRISIL Ratings will evaluate the consolidated credit profile of SMPL and CIFCPL

Key Rating Drivers & Detailed Description

Strengths:

Expectation of continued support from the promoters and the Aditya Birla group companies

SMPL, as of June 30, 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. 1,230 crore (including compulsorily convertible preference shares) as of June 30, 2023, which is adequate for the scale of operations. Overall and Tier I Capital adequacy ratio as on this date stood at 21.85% and 16.06%, 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. As of June 2023, adjusted gearing stood at 5.9 times. 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 7,694 crore as on June 30, 2023. This growth has been supported by geographical diversification to 19 states through a network of 954 branches, with maximum exposure of 20.6% 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. In Q1 2024, company reported a PAT of Rs 80 crore and ROMA of 3.8% (annualized). 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. Further, company has written of Rs 138 crore in Q1 2024 which has led to reduction in 90+ dpd to 4.1%. However, company has provided for the delinquent book and NNPA stood at 1.3% as of June 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.

Liquidity: Strong

The company's liquidity position is strong with cash and equivalents balance of Rs 883 crore as on August 31, 2023 (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 1.0 times. Additionally, the company was able to raise Rs 7,528 crore over fiscal 2023 through various avenues. Further, capital infused by the promoters in fiscal 2022 and 2023, and that which has been committed for next fiscal, is also a supporting factor.

Outlook: Stable

SMPL 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 SMPL – 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, and geographical diversification, in operations with RoMA improving to and remaining above 4% on a steady state basis.

 

Downward Factors

• Deterioration in asset quality causing potential stress on profitability with RoMA remaining below 1.5-2%
• Dilution in stake by the promoter family/investment companies of Aditya Birla Group or a downward revision in CRISIL’s credit view on the investment companies of Aditya Birla group

About the Company

Promoted by Ms Ananyashree Birla and incorporated in 2012, SMPL started its microfinance operations in the Wada region of Maharashtra in March 2013. It provides financial services to poor women and predominantly follows the joint liability group (JLG) model, wherein each group has 5-30 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 7,694 crore as on June 31, 2023, the company operates in 19 states covering almost 336 districts.

 

The company, till March 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 SMPL, 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, SMPL.

Key Financial Indicators

Particulars as on	Unit	Q1 2024	31-Mar-23	31-Mar-22	31-Mar-21	31-Mar-20
Assets under management^	Rs crore	7,694	7,499	5,447	3,564	2,602
Total income	Rs crore	414	1,396	831	560	392
Profit after tax (PAT)	Rs crore	80	130	47	27	29
Return on managed assets^	%	3.8	1.8	1.2	0.7	1.2
GNPA	%	3.5	5.0	3.8	1.9	0.9
Adjusted gearing^	Times	5.9	6.3	6.3	6.4	7.7

^including off book

Any other information: Not applicable