Svatantra Microfin Private Limited: Update

August 30, 2019

Summary of rating action Previous Rated Amount Current Rated Amount Instrument Rating Action (Rs. crore) (Rs. crore) Long-term bank lines 1,000 1,000 [ICRA]A-(Stable); outstanding Subordinated debt programme 75 75 [ICRA]A-(Stable); outstanding 1,075 1,075 *Instrument details are provided in Annexure-1

Rationale ICRA has taken note of the change in shareholding of the company with the promoters – the Birla family, now holding direct stake (99%) and shareholders – holding/investment company of Aditya Birla Group holding 1% stake as on July 31, 2019 in the company, as against earlier shareholding through holding/investment companies (100%) of Aditya Birla Group. The rating factors in the capital support and financial flexibility owing to Svatantra’s strong ownership, with promoters and holding/investment company of Aditya Birla Group owning the entire stake in Svatantra as on July 31, 2019. The rating also factors in Svatantra’s leadership, experienced management team, prudent lending policies and robust systems and processes and improving geographical diversification. The rating is also supported by the adequate capitalisation and improving profitability of the company. The ratings are however constrained by risks associated with unsecured lending. The rating factors in the risks associated with unsecured lending, political and operational risks arising out of cash handling and high attrition rates in the industry. Given the marginal profile of its borrowers and the risk of their overleveraging, the credit quality of micro-loan portfolios is fundamentally characterised by a high level of volatility. The ratings also factor in Svatantra’s moderate, though improving, scale of operations and large expansion plans. However, Svatantra’s adequate capitalisation along with improvement in company’s collection efficiency and asset quality indicators provide comfort in this regard. Going forward, the company’s ability to recruit and train employees, control credit costs, maintain an optimal cost structure while raising adequate capital as it expands geographically would be critical from a rating perspective.

Outlook: Stable ICRA believes the company would continue to benefit from the financial flexibility and capital support from the promoters. The outlook may be revised in case of material change in ownership structure or support from promoters. The outlook may also be revised to Negative in case of stretch in liquidity position of the company or significant deterioration in asset quality subsequently affecting the profitability of the company.

Key rating drivers

Credit strengths Strong capital support and commitment of promoters – The company is owned by promoters – the Birla family (99%) and holding/investment company (1%) of Aditya Birla Group. The rating factors in the support it receives from the promoters in the form of regular capital infusions and board supervision. The promoters have been regularly infusing equity capital into 1

the company with most recent being ~Rs. 40 crore in May 2019. ICRA believes the company would continue to benefit from the capital support and financial flexibility on account of its promoters.

Experienced management team, robust systems and processes - The rating factors in the company’s experienced management team which has helped in scaling and diversification of operations. The company has a robust risk management team, which prepares the guidelines for credit risk, geographical concentration, cross-selling of financial services, assessment of the various businesses and operating risks. Svatantra has efficiently invested in technology, which differentiates it from other microfinance institutions (MFIs). The company has invested significantly in technology to ensure the real-time availability of collection data, e-verification of customer details and cashless disbursements. It has also shifted to an integrated loan origination and management system, which integrates the core operations, accounting, human resources and learning and development modules to further strengthen its systems and processes.

Adequate capitalisation profile supported by regular capital infusion from parent - Svatantra’s capitalisation remains adequate with a capital to risk weighted assets ratio (CRAR) of 19.68% (Tier I: 13.43%) as on March 31, 2019. The capitalisation position is supported by regular equity infusion by the promoters (~Rs. 66 crore in FY2017, ~Rs. 27 crore in FY2018 and ~Rs. 40 crore in FY2019). ICRA takes note of the increase in the gearing level to 6.3 times as on March 31, 2019 from 3.88 times as on March 31, 2018 as the company largely funded its incremental growth through borrowed funds. In April 2019, the company received ~Rs. 40 crore from the promoters to support its growth plans. ICRA expects Svatantra’s capitalisation position to remain comfortable going forward, given the regular capital infusions and support from promoters.

Credit challenges Moderate scale of operations; concentration risk remains high – While the company has scaled up its operations in the last four years with a portfolio of Rs. 1,232 crore outstanding as on March 31, 2019, the portfolio remains moderate compared to peers. The portfolio diversification has improved with Maharashtra and Madhya Pradesh accounting for 45% of the portfolio as of March 2019 vis-à-vis 81% as on March 31, 2017. However, the concentration risk still remains high with the top 10 districts constituting 28% of the portfolio outstanding and 196% of net worth as on March 31, 2019.

Ability to manage political and communal risks, given the marginal borrower profile – The rating factors in the risks associated with unsecured lending to marginal borrowers with limited ability to absorb income shocks. 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 and operational risks, which could negatively impact the company’s operations, and thus its financial position.

Expansion plans in relation to current scale of operations – ICRA notes the company’s plans to increase its portfolio significantly during FY2020 with commensurate branch expansion and hiring of employees. In light of rising borrower leverage in the industry coupled with high client and employee attrition rates, Svatantra’s ability to on-board borrowers with good credit history, recruit and retain employees and further improve geographical diversity would be key for managing high growth rates.

Liquidity position The company had adequate liquidity in the form of unencumbered cash and liquid balances to the tune of Rs. 103 crore and undrawn sanctions of Rs. 409 crore as on March 31, 2019. The liquidity profile is also supported by inflows from loan repayments to the tune of ~Rs. 60 crore per month assuming 80% collections, against scheduled debt repayment of Rs. 496 crore during FY2020. As the advances comprise relatively shorter-tenure microfinance loans compared to the tenure

of borrowed funds, the asset liability maturity profile remains comfortable. While ICRA expects the company to meet its debt obligations in a timely manner, given the cash in hand and expected inflow from loan repayments, it would be important for Svatantra to maintain its collection efficiency while ensuring regular flow of funds to meet its internal growth projections as it envisages disbursement of ~Rs. 180 crore per month, on an average. Further, ICRA expects support from the promoters should the need arise.

Analytical approach Analytical Approach Comments ICRA’s Credit Rating Methodology for Non-Banking Finance Companies Applicable Rating Methodologies Impact of Parent or Group Support on an Issuers Credit Rating Svatantra is owned by promoters – the Birla family (99%) and Parent/Group Support holding/investment company (1%) of Aditya Birla Group and 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. Ananya Birla, was incorporated in 2012 and started its microfinance operations in March 2013. As on March 31, 2019, it operated through 275 branches in 149 districts of 10 states. Svatantra reported a growth in its total portfolio by 116% in FY2019 as the portfolio stood at Rs. 1,231.63 crore as on March 31, 2019 (Rs. 570.70 crore as on March 31, 2018).

Key financial indicators (audited) FY2018 FY2019 Net interest income 46.58 89.24 Total income 74.52 177.62 Profit after tax (10.24) 16.66 AUM 570.6 1,231.63 Net worth 118.18 174.54

% CRAR 19.90% 19.68% Gearing 3.88 6.35 Gearing (including off-book) 3.88 6.86

% Return on average managed assets -2.34% 1.66% % Return on average net worth -9.30% 11.38%

% Gross NPAs 3.67% 2.44% % Net NPAs 0.67% 0.58% Net NPA/net worth 3.14% 3.80%

Amount in Rs. crore; All ratios are as per ICRA calculations

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for last three years Current Rating (FY2020) Chronology of Rating History for the Past 3 years Amount FY2019 FY2018 FY2017 FY2016 FY2015 Sl. Amount Instrument Rated August No. Type Outstanding (Rs. 2019 May-18 Apr-18 Jul-17 Apr-16 - - (Rs. crore) crore) Long Term Long [ICRA]A- [ICRA]A- [ICRA]A- [ICRA]A- [ICRA]A- 1 1,000 930 - - Bank Lines Term (Stable) (Stable) (Stable) (Stable) (Stable) Subordinated Long [ICRA]A- [ICRA]A- 2 Debt 75 75 - - - - - Term (Stable) (Stable) Programme

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

Annexure-1: Instrument details Current Date of Amount Rating ISIN Instrument Issuance Coupon Rate Maturity Date Rated and / Sanction (Rs. crore) Outlook Feb 2016 – Mar 9.75% - Feb 2020 – Feb [ICRA]A- NA Term Loans 1,000 2019 11.80% p.a. 2023 (Stable) INE00MX0 Subordinated debt [ICRA]A- 31-May-18 11.70% p.a. 30-Nov-23 75 8011 programme (Stable) Source: Company

ANALYST CONTACTS Karthik Srinivasan Supreeta Nijjar +91 22 6114 3444 +91 124 4545 324 [email protected] [email protected]

Prateek Mittal +91 33 7150 1132 [email protected]

RELATIONSHIP CONTACT L Shivakumar +91 22 6114 3406 [email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected]

Helpline for business queries:

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm) [email protected]

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