Svatantra Microfin Private Limited April 05, 2018 Summary of rated instruments Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Long Term Bank Lines 250 500 [ICRA]A-(Stable); assigned Total 250 500 *Instrument details are provided in Annexure-1 Rating action ICRA has assigned a rating of [ICRA]A- (pronounced ICRA A minus) to the Rs. 500 crore1 (enhanced from Rs. 250 crore) long term bank lines of Svatantra Microfin Private Limited (Svatantra) 2. The outlook on the long-term rating is stable. Rationale The rating factors in strong capital support to Svatantra and strong commitment and leadership by Founder and Chairperson, Ms. Ananya Birla. The rating also factors in the diverse experience of the core management team across microfinance, agriculture finance and banking businesses, and the company’s prudent lending policy and good MIS systems. ICRA also takes note of the company’s comfortable capitalisation profile and good financial flexibility. The rating is constrained by the company’s moderate scale, geographically concentrated operations and relatively high operating expenses. Further, post demonetisation, the company’s asset quality indicators deteriorated owing to its exposure in the districts of Amravati and Washim where collection efficiency dipped significantly. However, Svatantra’s adequate capitalisation along with improvement in company’s collection efficiency and asset quality indicators provide comfort in this regard. 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. ICRA notes the company’s plans for a significant portfolio growth driven by higher seasoning of portfolio in existing branches (most branches were opened over the last two years) and network expansion. Going forward, the company’s ability to recruit and train employees, control credit costs and maintain an optimal cost structure and raising adequate capital as it expands geographically would be critical from a rating perspective. Additionally, the company’s ability to maintain prudent lending policies while growing at the envisaged pace will be monitored. Outlook: Stable ICRA believes Svatantra will continue to benefit from the experience board and strong management, adequate capitalisation and comfortable liquidity position. The outlook may be revised to 'Negative' if asset quality or capitalisation indicators deteriorate sharply, or there is a stretch in the liquidity position of the company. 1 100 lakh = 1 crore = 10 million 2 For complete rating scale and definitions, please refer to ICRA's website (www.icra.in) or other ICRA rating publications 1 Key rating drivers Credit strengths Strong capital support and commitment of promoter; experienced management team – The rating factors in strong capital support given the promoter profile with TGS Investment & Trade Private Limited (rated [ICRA]AA(Stable)/[ICRA]A1+) holding 30.46% and Birla Group Holdings Private Limited holding 16.24% stake in Svatantra as on December 31, 2017. The rating also factors in the strong leadership of the founder and chairperson, Ms. Ananya Birla, in steering the company towards robust growth, the diverse experience of the core management team across microfinance, agriculture finance and banking businesses. Robust systems and processes with prudent lending policies –The company has a strong risk management team, which prepares the guidelines on credit risk, geographical concentration, cross selling of financial services, assessment of the various businesses and operating risks. The company has also invested significantly in technology to ensure real time availability of collection data, e-verification of customer details and cashless disbursement. The company has also shifted to an integrated loan origination and management system which integrates core operations, accounting, human resources and learning and development modules to further strengthen its team. Comfortable liquidity position and financial flexibility; strong ability to raise funding from diverse sources - Svatantra’s liquidity position remains comfortable with no asset liability mismatches in the short term and adequate sanctioned but unutilized bank lines to meet any short-term shortfall. Also, the company has access to diverse sources of funds at competitive rates on the back of strong support from promoters. Credit challenges Moderate scale of operations with high concentration risk – The rating remains constrained due to the moderate scale of operations of the company. While the company has scaled up its operations in the last four years with a portfolio of Rs. 524.66 crore outstanding as on February 28, 2018, the portfolio remains small as compared to peers. Also, the company is presently operating in seven states with the states of Maharashtra (43%) and Madhya Pradesh (25%) accounting for majority of the portfolio as on December 31, 2017 indicating a high concentration risk. Further, the top ten districts constituted 44% of the portfolio outstanding as on December 31, 2017. Deterioration in asset quality post demonetization – Pursuant to the demonetisation action by the Government of India leading to inadequate currency supply, political interference in some states, and disruption in borrower cash flows which led to a decline in collection efficiencies and subsequent deterioration in asset quality with gross non-performing assets (GNPA) of 7.21% as on February 28, 2018 as compared to nil GNPA as on October 31, 2016. ICRA notes that the collection efficiencies have since been improving which should help contain losses overall. Although the delinquency in the harder buckets have started to stabilize, the asset quality remains a key rating monitorable. Subdued profitability on account of elevated credit costs and high operating expenses – In light of the company’s fast paced growth plans and deep rural focus, operating expenses are likely to remain elevated over the medium term which is likely to impact profitability indicators negatively. Further, the profitability indicators are also expected to be depressed on account of stress on asset quality. During 9MFY2018, the company reported a loss of Rs. 27.41 crore as compared to a net profit of Rs. 2.09 crore in FY2017. In ICRA’s opinion, Svatantra’s ability to maintain asset quality while growing its portfolio would remain critical for its long-term profitability. 2 Marginal borrower profile with limited ability to absorb income shocks – The rating factors in the risks associated with marginal borrower profile, unsecured lending business, political risks, and operational risks arising out of cash handling, along with challenges associated with high pace of growth and high attrition rates in the industry. Analytical approach: For arriving at the ratings, ICRA has applied its rating methodologies as indicated below. Links to applicable criteria: ICRA’s Credit Rating Methodology for Non-Banking Finance Companies 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, 2017, it operated through 83 branches in 51 districts of Maharashtra, Madhya Pradesh, Uttar Pradesh, Chhattisgarh and Rajasthan. The company ventured into the states of Odisha and Bihar in FY2018. During 9MFY2018, the company reported an annualised growth in total portfolio of 87% as the portfolio stood at Rs. 421.58 crore as on December 31, 2017. During 9MFY2018, the company reported a loss of Rs. 27.41 crore as compared to a net profit of Rs. 2.09 crore in FY2017. Key financial indicators (Audited) FY2016 FY2017 9MFY2018 Total Income 14.82 43.90 44.86 Operating Profit/(Loss) (3.55) 1.55 1.83 Net Profit/(Loss) (4.52) 2.09 (27.41) Yield on Average Loans 15.43% 20.68% 15.64% Cost of Average Interest-Bearing Funds 9.35% 11.55% 8.86% Net Interest Margin / AMA 9.49% 13.09% 10.03% Operating Profit / AMA (4.09%) 0.70% 0.67% PAT / AMA (4.89%) 1.00% (10.11%) PAT / Average Net worth (15.74%) 3.08% (41.42%) Net worth 33.97 101.94 74.53 Gearing 3.17 1.65 4.53 CRAR 36.79% 37.53% 15.99% Gross NPA 0.00% 13.83% 9.94% Net NPA 0.00% 13.62% 2.60% Amounts in Rs. crore; All ratios are as per ICRA’s calculations Status of non-cooperation with previous CRA: Not applicable Any other information: None 3 Rating history for last three years: Chronology of Rating History for the past Current Rating (FY2018) 3 years Sl Amount FY2018 FY2017 FY2016 FY2015 Instrument Amount No Rated April Type Outstanding (Rs. 2018 Jul-17 Apr-16 - - (Rs. crore) crore) Long Term Long [ICRA]A- [ICRA]A- [ICRA]A- 1 500 480 - - Bank Lines Term (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 www.icra.in 4 Annexure-1: Instrument Details Amount Current Date of Issuance Rated ISIN No Instrument Name Coupon Rate Maturity Date Rating and / Sanction (Rs. Outlook crore) [ICRA]A- NA Term Loan 1 26-Feb-16 - 01-Feb-23 150 (Stable) [ICRA]A- NA Term Loan 2 10-Oct-17 - 27-Dec-23 30 (Stable) [ICRA]A- NA Term Loan 3 27-Dec-17 - 31-Mar-20 300 (Stable) Long