February 05, 2021 Svatantra Microfin Private Limited: Rating reaffirmed and simultaneously withdrawn for long-term bank lines Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs.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 crore) [ICRA]A- (Stable); reaffirmed and Long-term bank lines 1,000.00 0.00 simultaneously withdrawn Subordinated debt 75.00 75.00 [ICRA]A- (Stable); outstanding Total 1,075.00 75.00 *Instrument details are provided in Annexure-1 Rationale ICRA has reaffirmed and simultaneously withdrawn the [ICRA]A- (Stable) rating for the Rs. 1,000-crore long-term bank lines of Svatantra Microfin Private Limited (Svatantra). The rating has been withdrawn at the company’s request, in line with ICRA’s policy on the withdrawal of credit ratings.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 Aditya Birla Group 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. www.icra .in Page | 1 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 more 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 www.icra .in Page | 2 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.