February 05, 2021 Svatantra Microfin Private Limited: Rating reaffirmed and simultaneously withdrawn for long-term bank lines

Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) [ICRA]A- (Stable); reaffirmed and Long-term bank lines 1,000.00 0.00 simultaneously withdrawn Subordinated debt 75.00 75.00 [ICRA]A- (Stable); outstanding Total 1,075.00 75.00

*Instrument details are provided in Annexure-1 Rationale

ICRA has reaffirmed and simultaneously withdrawn the [ICRA]A- (Stable) rating for the Rs. 1,000-crore long-term bank lines of Svatantra Microfin Private Limited (Svatantra). The rating has been withdrawn at the company’s request, in line with ICRA’s policy on the withdrawal of credit ratings. The rating factors in the strong capital support and financial flexibility, given Svatantra’s ownership, with the promoters and the holding/investment company of the owning the entire stake in Svatantra as on December 31, 2020. The rating also factors in the company’s experienced management team, prudent lending policies and robust systems and processes. ICRA also takes note of the improving geographical diversification of operations with a presence in 17 states through a network of 515 branches spread across 249 districts. The rating factors in the company’s strong financial flexibility and its fairly-diversified borrowing profile. It also factors in Svatantra’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. 50 crore in September 2020 (~Rs. 160 crore in FY2020; ~Rs. 40 crore in FY2019). The adjusted gearing remained moderate at 5.66 times as on December 31, 2020 (5.97 times as on March 31, 2020). 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 increase in delinquencies in light of the Covid-19 pandemic, the credit costs are likely to increase in FY2021, affecting the profitability of the company. 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. 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 – Svatantra 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. 50 crore in September 2020 (~Rs. 160 crore in FY2020; ~Rs. 40 crore in FY2019). ICRA believes Svatantra would continue to benefit from capital support and financial flexibility on account of its promoters.

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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. It 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, and cashless disbursements and 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 follows 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 17 states through a network of 515 branches spread across 249 districts, catering to than 10 lakh borrowers with a managed loan portfolio of Rs. 2,840 crore as on December 31, 2020. ICRA takes note of the improvement in the geographical diversification of operations with the top three states comprising 51% of the portfolio outstanding as on December 31, 2020 (53% as on March 31, 2020; 61% as on March 31, 2019). Further, the top 10 districts comprised 20% of the portfolio outstanding (20% as on March 31, 2020; 27% as on March 31, 2019) and 121% of the net worth as on December 31, 2020 (143% as on March 31, 2020; 187% as on March 31, 2019).

Adequate capitalisation supported by regular equity infusions – The company’s capitalisation profile remains adequate with a capital to risk weighted assets ratio (CRAR) of 20.02% (Tier I: 17.40%) as on December 31, 2020. The capitalisation profile is supported by regular capital infusions by the promoters. The adjusted gearing remained moderate at 5.66 times as on December 31, 2020 (5.97 times as on March 31, 2020). 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. ICRA expect the promoters to continue supporting the company.

Strong financial flexibility, diversified borrowing profile and low cost of funds – The borrowing profile comprised loans from banks (60%), non-banking financial companies/financial institutions (NBFCs/FIs; 14%), debentures (12%) and securitisation/assignment (14%) as on December 31, 2020. The funding profile is fairly diversified with borrowings from 39 different lenders comprising a good mix of private and public sector banks and NBFCs as on December 31, 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, it raised Rs. 1,457 crore from various lenders in 9M FY2021.

Credit challenges Ability to improve collection efficiency and control credit costs – 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 adverse impact on the asset quality as the borrowers’ cash flows and economic activity have slowed down. Moreover, incremental business growth has been hindered with a slowdown in disbursements in H1 FY2021. Svatantra commenced field activities and collections as early as May 2020 and reported a current collection efficiency (current collections/current demand) of 84% in December 2020 (87% in September 2020). Consequently, the near-term delinquencies (30+dpd) increased to 6.47% as on December 31, 2020 from 1.23% as on September 30, 2020. The company’s ability to improve the collection efficiency and control delinquencies and credit costs will be a key rating monitorable.

Moderate profitability – Svatantra reported a net profit of Rs. 44.74 crore in 9M FY2021 (Rs. 36.32 crore in FY2020), translating into a return of 14.26% on average net worth (13.32% in FY2020). With a decline in yields and an increase in the cost of average interest-bearing funds, the net interest margin moderated (NIM) to 9.19% of AMA in 9M FY2021 from 9.71% in FY2020. The credit costs remained low at 0.44% of AMA in 9M FY2021 (0.54% in FY2020). The operating expenses moderated to 4.58% of AMA in 9M FY2021 as administrative expenses were lower owing to the nationwide lockdown due to the Covid-19 pandemic. Svatantra reported a return of 1.75% on AMA in 9M FY2021 compared to 1.57% in FY2020. Given the increase in delinquencies due to the pandemic, the credit costs are likely to increase in FY2021 and affect the company’s profitability.

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

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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 December 31, 2020, Svatantra held free cash and bank balances of Rs. 578 crore against scheduled debt repayments of Rs. 733 crore till March 31, 2021. It also had access to unutilised funding lines to the tune of Rs. 390 crore as on December 31, 2020, which supports its liquidity profile. Svatantra raised Rs. 1,457 crore of debt funds in 9M FY2021, which also supports its liquidity profile. The company’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.

Rating sensitivities Positive factors – 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%. Svatantra’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 factors – 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 Rating Methodology for Non-Banking Finance Companies Applicable Rating Methodologies Impact of implicit support expected from parent or group on an entity’s credit rating Policy on Withdrawal of Credit Ratings Svatantra is owned by the promoters – the Birla family and the holding/investment Parent/Group Support 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 (RBI) as a non-banking financial 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 17 states through a network of 515 branches spread across 249 districts, catering to more than 10 lakh borrowers with a managed loan portfolio of Rs. 2,840 crore as on December 31, 2020.

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Key financial indicators (audited) Svatantra Microfin Private Limited FY2019 FY2020 9M FY2021* Accounting as per IGAAP IGAAP IGAAP Total income (Rs. crore) 177.62 360.97 381.65 Profit after tax (Rs. crore) 16.66 36.32 44.74 Net worth (Rs. crore) 174.54 370.86 465.61 Loan book (Rs. crore) 1,231.63 2,601.58 2,839.53 Total managed assets (Rs. crore) 1,382.56 3,248.48 3,581.09 Return on assets (%) 1.68% 1.57% 1.75% Return on net worth (%) 11.38% 13.32% 14.26% Gross gearing (times) 6.35 5.63 5.50 Net NPA (%) 0.58% 0.29% 0.00% *Unaudited; Source: Company, ICRA research; All ratios as per ICRA calculations

Status of non-cooperation with previous CRA: Not applicable

Any other information: None Rating history for past three years

Current Rating (FY2021) Chronology of Rating History for the past 3 years Amount Date & Date & Rating in Date & Rating in Amount Outstanding Date & Rating in FY2021 Rating in Instrument Rated as of FY2020 FY2019 Type FY2018 (Rs. December Aug 17, Aug 30, May 20, May 25, Apr 05, Jul 03, crore) 31, 2020 Feb 05, 2021 (Rs. crore) 2020 2019 2019 2018 2018 2017 [ICRA]A- (Stable); Long-term Long [ICRA]A- [ICRA]A- [ICRA]A- [ICRA]A- [ICRA]A- [ICRA]A- 1 1,000 930 reaffirmed and bank lines term (Stable) (Stable) (Stable) (Stable) (Stable) (Stable) simultaneously withdrawn Subordinated Long [ICRA]A- [ICRA]A- [ICRA]A- [ICRA]A- [ICRA]A- 2 75 75 debt term (Stable) (Stable) (Stable) (Stable) (Stable)

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 click here

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Annexure-1: Instrument details Amount Date of Issuance / Maturity Current Rating and ISIN No Instrument Name Coupon Rate Rated Sanction Date Outlook (Rs. crore) [ICRA]A- (Stable); Long-term bank lines – reaffirmed and NA NA NA NA 70.00 Unallocated/Proposed simultaneously withdrawn February [ICRA]A- (Stable); Long-term bank lines – February 2016 – 9.75% – 2020 – reaffirmed and NA 930.00 Term loans March 2019 11.80% p.a. February simultaneously 2023 withdrawn November INE00MX08011 Subordinated debt May 31, 2018 11.70% p.a. 75.00 [ICRA]A- (Stable) 30, 2023 Source: Company

Annexure-2: List of entities considered for consolidated analysis – Not applicable

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ANALYST CONTACTS Karthik Srinivasan Sachin Sachdeva +91 22 6114 3444 +91 124 4545307 [email protected] [email protected]

Prateek Mittal Jatin Arora +91 33 71501132 +91 124 4545330 [email protected] [email protected]

RELATIONSHIP CONTACT Jayanta Chatterjee +91 80 4332 6401 [email protected]

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