March 23, 2021 Jana Holdings Limited: Rating reaffirmed Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) PP-MLD[ICRA]B+ (Negative); Non-convertible debentures 658.0 658.0 reaffirmed Total 658.0 658.0 *Instrument details are provided in Annexure-1 ICRA has reviewed Jana Small Finance Bank’s ("Bank") performance and carried out the rating exercise based on September 2020 audited financials/December 2020 unaudited financials and other data upto January 2021 shared by the Bank. However, the rationale discloses the information pertaining only to the period upto September 2020, in view of the expected DRHP filing by the Bank. Rationale The rating factors in Jana Holdings Limited’s (JHL) weak financial risk profile, its significant dependence on Jana Small Finance Bank Limited’s (JSFB) performance and the sensitivity of the rated instrument to any adverse changes in JSFB's valuation. The rating, however, draws comfort from the flexible structure of the rated instrument with no committed annual coupons during the tenure of the instrument. JHL’s earnings profile remains weak with net losses of Rs. 111.9 crore in H1 FY2021 (net loss of Rs. 199.6 crore in FY2020). Consequently, its gearing increased to 2.4x as on September 30, 2020 (1.9x as on March 31, 2020). ICRA also notes that JHL is not meeting the minimum consolidated capital adequacy ratio (CAR) of 15% and the standalone leverage ratio of 1.25x as per the regulatory requirements for a non-operative financial holding company (NOFHC). JHL’s consolidated CAR stood at -4.34% as on September 30, 2020 (-4.06% as on March 31, 2020 and -8.52% as on March 31, 2019). The company is also not meeting the minimum net owned funds requirement. The Negative outlook factors in the continued expected weakness in JHL’s earnings and capital profile, which could continue to impact its ability to meet the key prudential and regulatory requirements unless it raises commensurate capital. Jana Capital Limited (JCL; holding 100% in JHL) is in the process of raising capital and is considering various structures for securing the same. This would be used to infuse equity into JSFB via JHL. JSFB is also planning to open an initial public offer (IPO) for raising equity and for listing on the exchanges in the near term. Key rating drivers and their description Credit strengths Holding company of JSFB – JHL holds a 42.08% stake in JSFB (rated [ICRA]BBB (Stable)). JSFB with a portfolio of Rs.11,263.0 crore as on September 30, 2020 and spread over 22 states and UTs in India. JSFB commenced operations as a small finance bank from March 28, 2018. The bank has steadily scaled-up its exposure to micro, small, and medium enterprises, housing finance and gold loan portfolio, which has increased to 30% of the overall portfolio as on September 2020 as compared to 25% as on March 2020. As of September 30, 2020, microfinance/ unsecured loans constituted 70% of its portfolio with the balance being secured business loans (2.9%), MSE loans (12.5%), Affordable Housing (7.5%), Gold loans ( 4.9%) and others ( 1.8%). Also, its deposit base witnessed a healthy traction in FY2021 with a steady improvement in the tenor profile and granularity. JSFB’s liquidity is also supported by its access to refinance facilities in the recent past. JSFB, like other peers, is faced with increased asset quality pressures on account of Covid-19 disruptions leading to restructuring of some of its exposures and increase in 90+dpd vis a vis 2.7% in September 2020. This is expected to impact its near-term earnings performance. JSFB reported a profit of Rs. 30.1 crore in FY2020 (return on assets (RoA) of 0.2%) and Rs. www.icra .in Page | 1 82.4 crore in H1 FY2021 (RoA of 1.0%). Given JSFB’s current high leverage (12.3x as of September 2020) and asset quality pressures, its ability to support JHL is minimal. JSFB is in the process of raising capital via an IPO, apart from the infusion expected from JHL. Credit challenges Weak financial risk profile – JHL’s earnings profile remains weak with net losses of Rs. 111.9 crore in H1 FY2021 (net loss of Rs. 199.6 crore in FY2020). Consequently, its gearing increased to 2.4x as on September 30, 2020 (1.9x as on March 31, 2020). ICRA also notes that JHL is not meeting the minimum consolidated CAR of 15% and the standalone leverage ratio of 1.25x as per the regulatory requirements for an NOFHC. JHL’s consolidated CAR stood at -4.34% as on September 30, 2020 (-4.06% as on March 31, 2020 and -8.52% as on March 31, 2019). The company is also not meeting the minimum net owned funds requirement. JHL is in the process of merging into JCL, which is a core investment company (CIC). Thus, post the merger, the regulatory requirements of an NOFHC would not be applicable. However, the merged entity’s ability to meet the adjusted leverage requirement for a CIC (at or below 2.5x times) remains to be seen in view of its weak earnings profile and the high debt level and would depend on the capital raised by JCL and JSFB’s valuation post the IPO and listing. JHL has limited financial flexibility as JSFB is not yet listed and the income expectation (dividend income) from JSFB during the tenure of the non-convertible debentures (NCDs) is low. The proceeds of the NCDs (Rs. 958 crore of which Rs. 658 crore is rated by ICRA) issued to TPG Asia VI SF Pte. Ltd (TPG), Government of Singapore Investment Co. (GIC), ECL Finance Limited (ECL), Manipal Health Systems Private Limited (Manipal), and Centrum Group (Centrum) were infused as compulsorily convertible preference shares (CCPS) into JSFB (later converted into equity). Out of Rs. 958 crore, Rs. 943.9 crore was infused as equity into JSFB (the balance was retained in JHL for meeting corporate operating and statutory expenses). Some of the NCDs are secured by a) JSFB’s shares held by JHL over and above the 40% regulatory requirement to be held by an NOFHC in an SFB for five years (till March 2023), and b) the shares of JCL. The debt covenants agreed with the existing investors require approval from all investors for raising any additional debt in JHL. Thus, considering the various restrictions, including the majority domestic shareholding requirement at JCL and JSFB, the ability to offload the shares in a timely manner and at a reasonable valuation would be crucial. Of the two entities, JSFB is expected to be listed before the maturity of the NCDs while JCL is expected to remain unlisted. ICRA notes that TPG has subordinated its NCDs to ECL, Centrum and GIC and is at par with Manipal. The NCDs issued to TPG, GIC and ECL are rated by ICRA. Risks related to adverse movement in JSFB’s valuation – Some of the NCDs issued are to be redeemed at the base IRR of 16.5% with a cap of 25%, depending on JSFB’s valuation at the time of redemption over the current valuation. This makes the instrument highly sensitive to any adverse movement in JSFB’s valuation as the NCDs are expected to be redeemed primarily from the sale of shares of JSFB on listing. Also, some of JHL’s NCDs, which are maturing in FY2022, have to be refinanced. JSFB will remain exposed to the risks related to adverse share price movements post the listing event, which may impact JCL’s valuation. ICRA also notes that JSFB is planning an IPO in Q1/Q2 FY2022, the successful conclusion of which would enhance JHL’s financial flexibility. Liquidity position: Poor JHL’s liquidity position remains weak with the entire funds raised at JHL downstreamed as equity capital into JSFB. JHL has limited financial flexibility as JSFB is not listed and the dividend expectation from JSFB during the tenure of the NCDs is low. Some of JHL’s NCDs (not rated by ICRA) are maturing in FY2022 and would have to refinanced. The flexible structure of the rated instrument with no committed annual coupons during the tenure of the instrument provides some comfort. www.icra .in Page | 2 Rating sensitivities Positive factors – Given the Negative outlook, a rating upgrade is less likely in the near term. ICRA could revise the outlook to Stable if there is a significant improvement in the credit profile of JSFB or if there is a significant improvement in the capitalisation and liquidity profile of JHL. Negative factors – Pressure on JHL’s rating could arise if there is a material deterioration in the credit profile of JSFB or a weakening in the refinancing ability/liquidity profile of JHL. Analytical approach Analytical Approach Comments Applicable Rating Methodologies Rating Methodology for Non-Banking Finance Companies Parent/Group Support The rating factors in the performance of JSFB Consolidation/Standalone The rating is based on the standalone financial statements of JHL About the company Incorporated on March 10, 2016, Jana Holdings Limited (JHL) is a non-banking financial company – non-operative financial holding company (NBFC-NOFHC) with a 42.08% stake in Jana Small Finance Bank as on September 30, 2020. The company received its certificate of registration from the Reserve Bank of India (RBI) on January 27, 2017. JHL is a wholly owned subsidiary of Jana Capital Limited (JCL), which is a non-deposit taking systemically important core investment company registered with the RBI.