| Svatantra Microfin Private Limited | ||||
| 'CRISIL A+/Stable/CRISIL A1+' assigned to bank debt and STD Issue | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has assigned its 'CRISIL A+/Stable/CRISIL A1+' ratings to the bank loan facilities and short term debt issue of Svatantra Microfin Private Limited (Svatantra). |
| Analytical Approach |
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For arriving at the ratings, CRISIL has assessed the standalone business, financial, and management risk profiles of Svatantra. The ratings factor in support from the promoters and shareholders, that is, investment companies of the Aditya Birla group which hold 100% stake in Svatantra as on March 31, 2019. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Expectation of continued support from the promoters and the Aditya Birla group companies Svatantra, as on March 31, 2019, is entirely held by holding/investment companies of the Aditya Birla group, which comprises Birla Group Holdings Pvt Ltd (25%), TGS Investment and Trade Pvt Ltd (24%), IGH Holdings Pvt Ltd (20%), Infocyber India Pvt Ltd (18%), and Umang Commercial Company Pvt Ltd (13%). Svatantra derives significant funding support from the Promoters. Over the past eight years, the group has infused Rs 212 crore equity into Svatantra to support its business growth. The group has committed further capital infusion of over Rs 450 crore through fiscal 2022 to support Svatantra's slated growth plan over the medium term. Promoted by Ms Ananyashree Birla, Svatantra is a part of her mission to cater to 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 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's view on the group or opinion on Svatantra's strategic importance to the group, will be a rating sensitivity factor. * Adequate capitalisation and high degree of financial flexibility to raise equity 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 212 crore of capital from the shareholders. This has enabled a gradual build up in networth, which, at Rs 166 crore as on March 31, 2019, is adequate for the scale of operations. Capital adequacy ratio of 19.9% on that date is also comfortable. The capitalisation should also be supported by Rs 270 crore of capital commitment for fiscal 2020, of which Rs 40 crore has already been infused. Over the medium term, the promoters have undertaken to infuse another Rs 200 crore as growth capital into the company. Adjusted gearing, having remained below 5 times till fiscal 2018, reached 6.3 times as of March 2019. However, 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 450 crore planned over the next 2-3 years. The financial flexibility to raise equity will not only aid Svatantra's business growth 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 Svatantra are in cashless mode, to facilitate which, the company has tied up with various platforms. The focus now aims 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. 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. * Experienced leadership team and board 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., along with Mr Vineet Chattree from the senior management team, are also on the board. In terms of leadership team, the company benefits from the extensive experience of its members in fields such as rural banking, operations, risk, and credit. Weaknesses: * Profitability, albeit improving, expected to remain constrained by high operating expense As 74% exposure was in regions affected by the demonetization, 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, have now declined to 2.6% and 2.3%, respectively, which include some demonetization-related overdues remaining to be written off. Net non-performing assets as on this date were around 0.5%. Overall profitability, with normalised credit cost now, has also improved, reflected in a RoMA of 1.7%. However, this is partly constrained by operating expenses remaining high at 7.2% as the company is in expansion phase and has been increasing its operational base across territories. In fiscal 2019 alone, the company opened about 145 branches which added to the operating expense for the fiscal. Over the next 12-18 months, the company plans to roll out over 200 branches in existing and new territories, which will result in operating expense remaining higher than average. However, with economies of scale being achieved, the steady state RoMA is expected at 2.0-2.5 % in the normal course of business. * Limited vintage of loan portfolio 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 has written off Rs 9.6 crore over the past two years, which is nearly 8.8% of the AUM at the time of demonetization. However, the delinquencies improved considerably to 3.7% and 3.9% as on March 31, 2018, from 13.8% and 23.1%, respectively, a year prior. While portfolio delinquencies have started to be restored, the company's loan portfolio has grown significantly over the past two years, leading to limited vintage in the loan cycle. The loan portfolio has grown at a high two-year compound annual growth rate (CAGR) of 120% 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 192 branches and 98 districts to the company's network over the two years through March 2019, sustainability of the asset quality at the current level of growth and across newer territories will be a key monitorable. * Inherently modest credit risk profile of the borrowers The portfolio largely comprises microfinance loans to clients with below-average credit risk profiles and lack of access to formal credit and based in regions with limited credit history. Typical borrowers are cattle owners, vegetable vendors, tailors, tea shops, provision stores, small fabrication units. The income flow of these households could be volatile and dependent on the local economy. Pressure on households' cash flow due to unforeseen circumstances may affect the repayment capability of these borrowers. * 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. 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 |
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Svatantra's business model provides it with an inherently positive asset-liability maturity profile, driven by the shorter tenor of its advances than that of its liabilities, thereby resulting in comfortable liquidity. As per the ALM statement dated March 31, 2019, assets maturing over six months (including committed, unutilised bank lines of Rs 239 crore) over liabilities maturing over the same period, on a cumulative basis, were comfortable at 2.6 times. On March 31, 2019, the company had cash and bank balance of Rs 103 crore. In the second half of fiscal 2019, the company raised Rs 520 crore of borrowing at an average rate of 10.8% which demonstrates its ability to raise external funds on an ongoing basis. |
| Outlook: Stable |
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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. The company's capitalization, backed by the promoters' strong commitment and high degree of financial flexibility to raise equity, should remain adequate. The ratings may be upgraded if the operations scale up significantly alongside sustainability in asset quality and profitability. On the contrary, ratings may be downgraded if there is material deterioration in asset quality and profitability. |
| About the Company |
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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. |
| Key Financial Indicators | ||||||||||||||||||||||||||||
*considers only on-book debt |
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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) | |||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||
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| Links to related criteria |
| CRISILs Bank Loan Ratings - process, scale and default recognition |
| Rating Criteria for Finance Companies |
| CRISILs Criteria for rating short term debt |
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