August 17, 2020

Svatantra Microfin Private Limited: Rating reaffirmed

Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Subordinated debt programme 75.00 75.00 [ICRA]A-(Stable); reaffirmed Long-term bank lines 1,000.00 1,000.00 [ICRA]A-(Stable); reaffirmed Total 1,075.00 1,075.00 *Instrument details are provided in Annexure-1

Rationale The rating factors in the strong capital support and financial flexibility, given Svatantra Microfin Private Limited’s (Svatantra) ownership, with the promoters and the holding/investment company of the Aditya Birla Group owning the entire stake in Svatantra as on March 31, 2020. The rating also factors in Svatantra’s experienced management team, prudent lending policies and robust systems and processes. ICRA also takes note of the improving geographical diversification of operations. Svatantra was operating in 14 states through a network of 449 branches spread across 224 districts, catering to more than 10 lakh borrowers with a managed loan portfolio of Rs. 2,602 crore as on March 31, 2020 (Rs. 2,581 crore as on May 31, 2020). The rating factors in the company’s strong financial flexibility and its fairly- diversified borrowing profile. Svatantra raised Rs. 2,433 crore of debt capital through term loans, debentures and the securitisation route from 25 different lenders in FY2020 and Rs. 489 crore from 13 different lenders in YTD FY2021. The rating also factors in the company’s adequate capitalisation profile, supported by regular capital infusions, which have helped scale up its operations. The promoters have been regularly infusing capital in the company with the most recent being ~Rs. 30 crore in March (~Rs. 160 crore in FY2020; ~Rs. 40 crore in FY2019). The adjusted gearing1 remained moderate at 5.97 times as on March 31, 2020 (6.35 times as on March 31, 2019). In ICRA’s opinion, Svatantra would continue requiring capital infusions to support its stated growth plans and ICRA expects the promoters to continue supporting the company.

Svatantra’s profitability profile is moderate compared to its peers with the company reporting a net profit of Rs. 36.32 crore in FY2020, translating into a return of 1.57% on average managed assets (AMA) and 13.32% on average net worth (Rs. 16.66 crore, 1.68% and 11.38%, respectively, in FY2019). Given the expected slippages in light of the Covid-19 pandemic, the credit costs are likely to increase in FY2021, affecting the profitability of the company. The microfinance industry is facing many challenges following the spread of Covid-19 throughout the country. These include the continuity of business operations on the field and the possible adverse impact on the asset quality as the cash flows of microfinance borrowers and economic activity have undergone a slowdown. Moreover, incremental business growth has been hindered with slowdown in disbursements in Q1 FY2021. The rating continues to factor in the risks associated with unsecured lending to marginal borrowers with limited ability to absorb income shocks and the rising borrower leverage levels owing to an increase in multiple lending in the areas of operations. While Svatantra’s overall asset quality indicators were comfortable with gross NPA of 1.29% and net NPA of 0.29% as on March 31, 2020, its ability to navigate through the adversity and manage the impact on business growth, client retention and asset quality while maintaining the profitability indicators would be important from a rating perspective.

1 Adjusted gearing = (Total debt + pass-through certificates)/ (Net worth)

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The Stable outlook on the [ICRA]A- rating reflects ICRA’s opinion that Svatantra will continue to benefit from capital support from the promoters, its experienced management team, robust systems and processes, strong financial flexibility and diversified borrowing profile.

Key rating drivers and their description

Credit strengths Strong capital support and commitment of promoters – The company is owned by the promoters i.e. the Birla family and the holding/investment company of the Aditya Birla Group. The rating factors in the support received from the promoters in the form of regular capital infusions and board supervision. The promoters have been regularly infusing capital in the company with the most recent being ~Rs. 30 crore in March (~Rs. 160 crore in FY2020; ~Rs. 40 crore in FY2019). ICRA believes Svatantra would continue to benefit from the capital support and financial flexibility on account of its promoters.

Experienced management team and robust systems and processes – Svatantra’s senior management team comprises professionals with considerable experience across the microfinance, rural lending and banking businesses. Svatantra uses a loan origination and management system, which integrates the core operations, accounting, human resources and learning and development modules. It has invested significantly in technology to ensure the real-time availability of data, e-verification of customer details, cashless disbursements and cashless collections. The company has a strong risk management team, which prepares the guidelines for credit risk, geographical concentration, cross-selling of financial services, assessment of various businesses and operating risks. Svatantra has also deployed risk officers at the field level for operational audit and to ensure adherence to its prudent lending policies. The company is following the code of responsible lending launched by the self-regulatory organisations of the microfinance industry.

Good scale of operations; scope for further improvement in geographical diversification of operations – Svatantra was operating in 14 states through a network of 449 branches spread across 224 districts, catering to more than 10 lakh borrowers with a managed loan portfolio of Rs. 2,602 crore as on March 31, 2020 (Rs. 2,581 crore as on May 31, 2020). ICRA takes note of the improvement in the geographical diversification of operations with the top three states comprising 53% of the portfolio outstanding as on March 31, 2020 (61% as on March 31, 2019; 75% as on March 31, 2018). Further, the top 10 districts comprised 20% of the portfolio outstanding (27% as on March 31, 2019; 40% as on March 31, 2018) and 143% of the net worth as on March 31, 2020 (187% as on March 31, 2019; 194% as on March 31, 2018).

Adequate capitalisation supported by regular equity infusions – The company’s capitalisation profile remains adequate with a capital to risk weighted assets (CRAR) ratio of 19.45% (Tier I: 16.97%) as on March 31, 2020. The capitalisation profile is supported by regular capital infusions by the promoters (~Rs. 160 crore in FY2020 and ~Rs. 40 crore in FY2019). The adjusted gearing2 remained moderate at 5.97 times as on March 31, 2020 (6.35 times as on March 31, 2019). ICRA takes note of the company’s plan to maintain the Tier I and CRAR above 15% over the medium term. In ICRA’s opinion, Svatantra would continue to require capital infusions to support its stated growth plans and ICRA expects the promoters to continue supporting the company.

2 Adjusted gearing = (Total debt + pass-through certificates)/ (Net worth)

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Strong financial flexibility, diversified borrowing profile and low cost of funds – The borrowing profile comprised loans from banks (60%), non-banking financial companies (NBFCs; 11%), debentures (3%) and securitisation (26%) as on March 31, 2020. The cost of average interest-bearing funds increased to 10.09% in FY2020 from 9.98% in FY2019 owing to the persisting liquidity concerns among NBFCs, though it remained relatively lower than peers. The funding profile is fairly diversified with borrowings from 33 different lenders comprising a good mix of private and public sector banks and NBFCs as on June 30, 2020. Svatantra has demonstrated strong financial flexibility and raised Rs. 2,433 crore of debt capital through term loans, debentures and the securitisation route from 25 different lenders in FY2020. Further, the company has raised Rs. 489 crore from 13 different lenders in YTD FY2021.

Credit challenges Ability to manage adverse impact of Covid-19 on operations and asset quality – The microfinance industry is facing many challenges following the spread of Covid-19 throughout the country. These include the continuity of business operations on the field and the possible adverse impact on the asset quality as the cash flows of microfinance borrowers and economic activity have undergone a slowdown. Moreover, incremental business growth has been hindered with slowdown in disbursements in Q1 FY2021. While Svatantra’s overall asset quality indicators were comfortable with gross NPA of 1.29% and net NPA of 0.29% as on March 31, 2020, its ability to navigate through the adversity and manage the impact on business growth, client retention and asset quality while maintaining the profitability indicators would be important from a rating perspective.

Moderate profitability – Svatantra reported a net profit of Rs. 36.32 crore in FY2020, translating into a return of 13.32% on the average net worth (Rs. 16.66 crore and 11.38%, respectively, in FY2019). With a decline in yields and an increase in the cost of average interest-bearing funds, the net interest margin moderated (NIM) to 9.71% of AMA in FY2020 from 9.89% in FY2019. The credit costs increased to 0.54% of AMA in FY2020 from 0.39% in FY2019 though they remain low. The operating expenses moderated to 5.94% of AMA in FY2020 from 7.21% in FY2019 as the company scaled up its operations. Svatantra reported a return of 1.57% on AMA in FY2020 compared to 1.68% in FY2019. Given the expected slippages due to the pandemic, the credit costs are likely to increase in FY2021, affecting the profitability of the company.

Ability to manage political, communal and other risks, given the marginal borrower profile – Microfinance remains susceptible to the risks associated with unsecured lending to marginal borrowers with limited ability to absorb income shocks and the rising borrower leverage levels owing to an increase in multiple lending in the areas of operations. Further, political and operational risks associated with microfinance may result in high volatility in the asset quality indicators. The microfinance industry is prone to socio-political, climatic and operational risks, which could negatively impact Svatantra’s operations. The company’s ability to onboard borrowers with a good credit history, recruit and retain employees and improve the geographical diversity of its operations would be key for managing high growth rates. Liquidity position: Adequate As on July 31, 2020, Svatantra had a cash and bank balance and liquid investments of Rs. 456 crore against scheduled debt obligations of Rs. 424 crore till November 30, 2020. The company had not applied for a moratorium on its scheduled debt obligations and continues to service the same in a timely manner. Svatantra raised ~Rs. 489 crore of debt funds in YTD FY2021, which supports its liquidity profile. The company has commenced its field activities and has started receiving collections, further supporting its liquidity profile. Svatantra’s ability to maintain and improve its collection efficiency and raise fresh funds in a timely manner will be important from a liquidity perspective. Further, ICRA expects support from the promoters should the need arise.

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Rating sensitivities Positive triggers – ICRA could revise the outlook or upgrade the rating if there is a sustained improvement in the company’s profitability indicators with a return on managed assets (RoMA) of more than 2%. The company’s ability to raise equity and debt capital to support the envisaged growth while maintaining a prudent capitalisation profile with an adjusted gearing of less than 6 times on a sustainable basis could positively impact the rating.

Negative triggers – Pressure on the company’s rating could arise in case of a material change in the ownership structure or support from the promoters. Also, a deterioration in the asset quality or operational efficiencies, which could affect its profitability with RoMA falling below 1.5% on a sustained basis could negatively impact the rating. A deterioration in the capitalisation profile with the adjusted gearing exceeding 7 times on a sustained basis or a stretch in the liquidity could exert pressure on the rating.

Analytical approach

Analytical Approach Comments

Applicable Rating Methodologies ICRA's Credit Rating Methodology for Non-Banking Finance Companies Svatantra is owned by the promoters – the Birla family and the Parent/Group Support holding/investment company of the Aditya Birla Group. It receives support in the form of regular capital infusions and board supervision. Consolidation/Standalone Standalone

About the company Svatantra Microfin Private Limited (Svatantra), promoted by Ms. Ananyashree Birla, was incorporated in 2012 and started microfinance operations in March 2013. The company is registered with the Reserve Bank of India (RBI) as a non- banking finance company – microfinance institution (NBFC-MFI). It provides microcredit to women borrowers, for income-generating activities, under the joint liability group (JLG) lending model. The borrowers are organised in groups of 5-25 people with each member of the group providing a credit guarantee for the other members. Svatantra was operating in 14 states through a network of 449 branches spread across 224 districts, catering to more than 10 lakh borrowers with a managed loan portfolio of Rs. 2,581 crore as on May 31, 2020.

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Key financial indicators (audited) As per IGAAP IGAAP For the period ended FY2019 FY2020 Net interest income 89.24 134.71 Profit after tax (PAT) 16.66 36.32 Net worth 174.54 370.86 Gross loan portfolio 1,231.63 2,601.58

% PAT / Average managed assets 1.68% 1.57% % PAT / Average net worth 11.38% 13.32% % Gross NPAs 2.44% 1.29% % Net NPAs 0.58% 0.29% % Net NPA / Net worth 3.80% 1.46% % Capital adequacy ratio 19.68% 19.45% Gearing (reported) 6.35 5.63 Gearing (adjusted) 6.35 5.97 Adjusted gearing = (on-book borrowings + PTCs)/(net worth) Amounts in Rs. crore; Source: Company & ICRA research

Status of non-cooperation with previous CRA: None

Any other information: None

Rating history for past three years Current Rating (FY2021) Rating History for the Past 3 Years FY2020 FY2019 FY2018 Instrument Amount Amount 17-Aug- Type 30-Aug- 20-May- 25-May- 05-Apr- Rated Outstanding 20 03-Jul-17 19 19 18 18 Long [ICRA]A- [ICRA]A- [ICRA]A- [ICRA]A- [ICRA]A- [ICRA]A- 1 Term Loans 1,000 930 Term (Stable) (Stable) (Stable) (Stable) (Stable) (Stable) Subordinated Long [ICRA]A- [ICRA]A- [ICRA]A- [ICRA]A- 2 75 75 - - Debt Term (Stable) (Stable) (Stable) (Stable) Amounts in Rs. crore

Complexity level of the rated instrument ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website www.icra.in

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Annexure-1: Instrument details Date of Amount Current Coupon Maturity ISIN Instrument Issuance Rated Rating Rate Date / Sanction (Rs. crore) and Outlook February 9.75% February 2016 2020 [ICRA]A- NA Term Loan - 11.80% 930.00 - March 2019 - February (Stable) p.a. 2023 Term Loan – [ICRA]A- NA NA NA NA 70.00 Unallocated (Stable) INE00MX080 [ICRA]A- Subordinated Debt 31-May-2018 11.70% p.a. 30-Nov-2023 75.00 11 (Stable) Source: Company

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Sachin Sachdeva +91 124 4545 307 Prateek Mittal [email protected] +91 33 71501132 [email protected]

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