Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL A-/Stable' rating to Non-Convertible Debentures aggregating to Rs 50 crore of Annapurna Finance Private Limited (Annapurna Finance). The rating on other debt instruments and long-term bank facilities has been reaffirmed at 'CRISIL A-/Stable'.

 

CRISIL Ratings on the bank facilities and debt instruments of Annapurna Finance continues to reflect its strong market position in the microfinance space in the east with long standing presence in Odisha, adequate capitalization, sound risk management and ground level practices, and comfortable liquidity. These rating strengths are partially offset by moderation in asset quality post pandemic, restrained profitability with elevated credit losses in the aftermath of Covid-19, regional concentration of operations in Odisha, inherently modest credit profile of borrowers and potential risk from local socio-political issues inherent to the microfinance sector.

 

After registering a 5 year CAGR of 55% till fiscal 2020, AFPL’s growth momentum was disrupted by the outbreak of Covid-19 at the onset of fiscal 2021. Consequently, against an annual growth of 34% in fiscal 2020 and a growth of 56% for fiscal 2019, the company’s AUM grew at a moderate rate of 20% over fiscal 2021 to reach Rs 4793 crore by March 31, 2021. In the aftermath of the second pandemic wave, consolidated AUM declined by 3% over Q1 2022. Nonetheless, despite a passive growth trend over the last 2-4 quarters, AFPL has sustained its strong position in the microfinance sector of India, particularly in its core territory of Odisha. With microfinance being its key area of focus, 86% of the portfolio comprises microfinance loans with balance 14% is constituted of MSME loans which the company has been extending for 12-18 months now.

 

Apart from the slowdown in business, AFPL’s asset quality - which had remained stable over the years - also moderated in the aftermath of the pandemic. The GNPA (90+ dpd), which has historically remained below 4% (except at the time of demonetisation), surged at 6.6% (on gross AUM) as on March 31, 2021 followed by some correction in June and July 2021 that resulted in a GNPA of 6.4% as on July 31, 2021. Monthly collection efficiency had also declined in the immediate aftershock of the second wave however, driven by gradual relaxation in lockdown - it revived to 91% in July 2021. Total restructured portfolio as on July 31, 2021 was reported to be Rs 308 crore which accounts for 6.3% of the total advances as on that date. Over the remaining part of fiscal 2022, accretion of another 1-2% points is expected to the restructured portfolio.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has evaluated the standalone business and financial risk profile of Annapurna Finance.

Key Rating Drivers & Detailed Description

Strengths:

• Strong market position in the microfinance space in eastern India with long-standing presence in Odisha

Annapurna Finance has retained its position of a leading NBFC - MFI in eastern India with strong foothold in Odisha. Impacted by the pandemic outbreak and following lockdown, AFPL’s AUM grew at 19.6% over fiscal 2021 to Rs 4,793 crore as against a growth of 36% registered for the preceding year. The company has been able to scale the business in terms of size as well as operational presence, and while doing so, it has maintained the operational parameters and infrastructure at comfortable levels. In fiscal 2019, the company started extending MSME loans and that portfolio formed ~14% of the gross AUM as on March 31, 2021. In the medium to long term, AFPL plans to transfer this MSME portfolio to a new subsidiary which is under formation and is yet to receive an RBI license. Over Q1 2022, the AUM declined by 3% on account of restricted field movement and lockdown following the second wave. Thereafter, as public activity has resumed, disbursements have started picking up and growth is expected to revive in the latter half of fiscal 2022. The company operates across 19 states through a network of over 950 branches spread across 330 districts.

 

•  Capitalisation is adequate in relation to the scale of operations; ability to sustain its capital position by raising the intended quantum of capital remains critical

Annapurna Finance's capital position is adequate with a tangible networth of Rs 993 crore as on June 30, 2021. Over fiscal 2019, the company had raised Rs 155 crore as compulsorily convertible preference shares in the first quarter, and another round of Rs 137 crore in the last quarter of the year. Driven by this addition to networth, the company's adjusted gearing has reduced and stood at 5.8 times as of March 31, 2020, as compared to 8.9 times as on March 31, 2018. Subsequently, the company raised another round of Rs 228 crore as CCPS in fiscal 2021 which led to a further reduction in gearing to 5.4 times as on March 31, 2021. 

 

Given the idiosyncratic risks inherent in the sector, the company intends to maintain its adjusted gearing at 5.5-6 times and tier I CAR at above 20% - on a steady state basis, which is in line with CRISIL's expectation. In order to uphold this stance alongside prevailing asset quality challenges and medium term growth plans, the company is in the process of raising Rs 300 crore as CCPS in the current calendar (2021) year as well.

 

The company has marquee investors like Asian Development Bank (ADB, holds 12.8% stake in the company) who have demonstrated track record of extending support, if need be. Furthermore, the terms of ADB's equity investment allow Annapurna Finance to avail further equity of around USD 10 million. For the company to maintain its capitalisation metrics at stated levels amidst heightened credit losses in the aftermath of the Covid-19 outbreak, CRISIL Ratings believes Annapurna Finance will be required to raise additional capital in the near to medium term. In this regard, the company's strong articulation on its intent to raise about Rs 300 crore of equity capital by end of calendar year 2021, has been centrally factored into the rating.

 

• Sound risk management practices

Annapurna Finance has also strengthened its risk management practice in the last few years. The company has established an in-house geo information system to facilitate early identification of any potential issues across geographies. This not only enables the company to monitor asset quality performance in its existing regions but also assists in identification of newer regions with high growth potential and low risk. The model of lending through self-help groups, along with sound ground level and internal audit processes have also helped Annapurna Finance to maintain strong asset quality performance in its core geographies of Odisha and Chhattisgarh over the years in the pre-Covid scenario. However, considering the rapid growth in loan portfolio and significant expansion into newer geographies in the past few years, and prevailing challenges due to the pandemic, asset quality performance in newer geographies remains a key monitorable.

 

Weaknesses:

• Moderation in asset quality in the aftermath of the pandemic

Asset quality performance of Annapurna Finance had remained broadly stable after deteriorating post demonetization. During that time, socio-political issues in the Vidarbha region of Maharashtra and adjoining regions of Madhya Pradesh fueled the ground level problems. Over the last 2-3 years, barring few instances of floods, cyclones, operational issues in some of the north eastern states, the company’s delinquencies have remained comfortable. However, since the outbreak of pandemic in March 2020, slippages have increased leading to elevated GNPAs. On March 31, 2021, Annapurna Finance reported a GNPA of 6.6% whereas NNPA stood at 2.8%. Following the pandemic second wave, monthly collection efficiency declined from 97% to 80% between March to May 2021 however, as the lockdown restrictions were relaxed – collections also improved to 95% in June and 91% in July 2021. As on July 31, 2021, 90+ stood at 6.4%. The company had a restructured portfolio of Rs 308 crore as on July 31, 2021 – all of which was restructured in fiscal 2021. As part of this scheme, the company has offered to either defer the repayments by 4-5 months (moratorium), reduce the EMI to 50% or, exempt the interest component of the EMI to be paid by its borrowers.

 

As the ground level situation remains volatile with some states witnessing a rise in Covid infections, the pace and magnitude of improvement in collection efficiency to pre-pandemic levels and its consequent impact on profitability, will be a key monitorable.

 

• Regional concentration of operations in Odisha

Annapurna Finance's portfolio is geographically concentrated within Odisha which accounts for close to 31% of the total AUM as on June 30, 2021, although this exposure has declined from 50% levels observed in fiscal 2015. Top 3 states (Bihar, Madhya Pradesh and Odisha) account for 59% of the AUM as on the same date. In terms of districts, the top five districts - accounting for 14% of the portfolio, are all located in Odisha and most of them are adjacent to each other. In a situation where ground-level issues erupt in any single district or the region is hit by a natural calamity, the probability of spill over is high and this could impact the adjoining districts as well. Taking this into cognizance, the management is taking focused effort to improve geographical diversity and reduce the exposure to a single state to below 30% over the medium term. Additionally, they have put limits on branch and district exposure linked to the networth of the company.

 

• Moderate profitability with elevated credit losses in the aftermath of Covid-19 outbreak

Earnings profile, after remaining subdued over fiscal 2018 due to demonetization related credit costs, had started to recover. From a net profit of Rs 10 crore and a RoMA of 0.5% for fiscal 2018, the company’s net profit and RoMA for fiscal 2020 increased to Rs 83 crore and 1.8% respectively. However, following the pandemic outbreak and its impact on asset quality, credit costs for fiscal 2021 increased to 3.2% after remaining ~1% previously, in the normal course of business. Resultantly, RoMA for fiscal 2021 was muted at 0.03%. For the first quarter of fiscal 2022 as well, higher interest reversals on NPAs and elevated credit costs yielded a RoMA of 0.2% (annualized) for the quarter.

 

With the expectation of slow revival in collections for the sector to pre-Covid levels, the company is at a risk of bearing elevated credit losses for a longer stretch of time in fiscal 2022, which would result in earnings remaining muted for the period. Its ability maintain strong operational profitability and curtail incremental slippages so as to restore overall profitability remains critical.

 

• Inherently modest credit profile of the borrowers

A significant portion of the portfolio comprises microfinance loans to clients with below-average credit risk profiles and lack of access to formal credit. Typical borrowers are cattle owners, vegetable vendors, tailors, tea shop owners, provision store owners, and small fabrication units. The income flow of these households could be volatile and dependent on the local economy. With the slowdown in economic activity after the lockdown, there was pressure on such borrowers’ cash flows at the household level in the immediate aftermath, thereby restricting the repayment capability of these borrowers. However, since more than 80% of the company’s borrower base is in rural areas wherein the impact of the pandemic and lockdown has been lower, the restoration in their occupational activities has been encouraging.  Even though collections have started to revive from July 2021 onwards, the restoration to pre-pandemic level is some distance away, and the ability of Annapurna Finance to reinstate repayment discipline among its customers will be a monitorable.

 

• Potential risk from local socio-political issues in the microfinance sector

The microfinance sector has witnessed two major disruptive events in the past decade. The first was the crisis promulgated by the ordinance passed by the Government of Andhra Pradesh in 2010 and the second was demonetisation in 2016. In addition, the sector has faced issues of varying intensity in several geographies. Promulgation of the ordinance on MFIs by the Government of Andhra Pradesh in 2010 demonstrated their vulnerability to regulatory and legislative risks. The ordinance triggered a chain of events that adversely affected the business models of MFIs by impairing their growth, asset quality, profitability, and solvency. Similarly, the sector witnessed high level of delinquencies post-demonetisation and the subsequent socio-political events. For Annapurna Finance, while the impact of demonetisation was relatively lesser as compared to other peers, it did witness marginal uptick in early bucket delinquencies as a consequence of the issues in Odisha and regional disturbance in pockets of Assam. This indicates the fragility of the business model against external risks. As the business involves lending to the poor and downtrodden sections of the society, MFIs will remain exposed to socially sensitive factors, including charging of high interest rates, and consequently, tighter regulations and legislation.

Liquidity: Strong

The company had cash and cash equivalent, including liquid investments, of Rs 855 crore as on July 31, 2021, against debt obligation of Rs 707 crore due for servicing over the three months until October 2021. In addition, the company had unutilised term loan of Rs 250 crore and securitisation lines of Rs 100 crore as on July 31, 2021. The liquidity is also supported by the steady level of collections (Rs 250-300 crore) that the company has been reporting for the last 3-6 months. The additional infusion of Rs 300 crore planned for this calendar year should further add to the buffer.

Outlook: Stable

While Annapurna, being an MFI, is at the risk of witnessing marginally heightened credit losses because of business disruption in the aftermath of the Covid-19 outbreak, CRISIL Ratings believes that Annapurna Finance should be able to sustain its capitalisation at adequate levels ' supported by its commitment of raising Rs 300 crore of capital by the end of calendar year 2021.

Rating Sensitivity factors

Upward factors

• Ability to reduce credit losses over the medium term, and maintain capitalisation (tier I CAR) at comfortable level of above 20% and adjusted gearing at less than 5 times

• Improvement in scale and geographical diversity of operations with no state accounting for more than 25% of the AUM
• Improvement in earnings profile with steady state RoMA of over 2.5%

 

Downward factors

• Any extension in timeline of equity capital raise planned for fiscal 2022.
• Inability to maintain steady state adjusted gearing at 5.5-6 times
• Deterioration in asset quality or earnings profile for a prolonged period, leading to a stress on profitability and capital position

About the Company

Annapurna Finance Pvt. Ltd (AFPL) was established in 2009, and is now one of the top ten NBFC-MFIs in the country. It was formed as a not-for-profit entity, Peoples Forum, an NGO which worked for the development and welfare of unserved sections of the society. The microfinance activities started with the inception of Mission Annapurna Finance under Peoples Forum from the year 2005. Mission Annapurna Finance was able to reach the interior unserved areas of Odisha through its untiring effort of addressing the economic necessities of poor women at their doorstep. As the program grew, there was an utter need to transform itself into a more streamlined entity. The gradual transformation of Mission Annapurna Finance brought forth the name Annapurna Finance Pvt Ltd (AMPL) in the year 2009. Thereafter, AMPL registered itself with the Reserve Bank of India (RBI) as an NBFC-MFI in the year 2013.

 

The company offers both financial and non-financial services to the resource poor, unbanked and marginalized people in rural and semi-urban areas. The services aim to meet the evolving needs of community and people who are involved in agricultural and small business activities. It has also come up with customized insurance products for its clients. AFPL uses the group lending model (SHG and JLG) where poor women guarantee each other’s loans. Borrowers undergo financial literacy training and must pass a test before they are can avail loans. Monthly meetings with borrowers follow a highly disciplined approach. Re-payment rates on the Company’s collateral-free loans are more than 99% because of its regular monitoring and follow up on loan utilization. The company has also systematically introduced various individual need based products for its clients.

 

The company has introduced large size individual loans to provide financial assistance to the MSME segment. It has also introduced individual loans for Housing finance, catering to the affordable housing segment.

Key Financial Indicators

	Unit	March 2021	Mar 2020	Mar 2019
		IndAS	IndAS	IndAS
Assets under management	Rs crore	4,793	4009	3002
Total income	Rs crore	977	780	518
Profit after tax (PAT)	Rs crore	1.8	83	63
Return on managed assets	%	0.03	1.8	2.0
GNPA	%	6.6	1.4	1.4
Adjusted gearing	Times	5.4	5.8	5.0

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Non-convertible debentures*	NA	NA	NA	50	Simple	CRISIL A-/Stable
INE515Q07426	Non-convertible debentures	18-Nov-20	10.25	18-May-22	35	Simple	CRISIL A-/Stable
INE515Q07442	Non-convertible debentures	18-Nov-20	10.25	18-May-22	100	Simple	CRISIL A-/Stable
NA	Non-convertible debentures*	NA	NA	NA	10	Simple	CRISIL A-/Stable
INE515Q07418	Non-convertible debentures*	29-Sep-20	10.5	29-Mar-22	50	Simple	CRISIL A-/Stable
NA	Non-convertible debentures*	NA	NA	NA	80	Simple	CRISIL A-/Stable
INE515Q07400	Non-convertible debentures*	22-Sep-20	11.7	22-Sep-26	70	Simple	CRISIL A-/Stable
INE515Q07327	Non-convertible debentures	15-Jul-20	11.6	21-Apr-23	100	Simple	CRISIL A-/Stable
INE515Q07293	Non-convertible debentures	16-Jun-20	12.75	21-Apr-23	100	Simple	CRISIL A-/Stable
INE515Q07277	Non-convertible debentures	16-Oct-19	12.2	13-Oct-24	73	Simple	CRISIL A-/Stable
INE515Q07228	Non-convertible debentures	19-Dec-18	12.5	19-Dec-25	60	Simple	CRISIL A-/Stable
INE515Q07236	Non-convertible debentures	20-Dec-18	12.5	19-Dec-21	35	Simple	CRISIL A-/Stable
NA	Non-convertible debentures*	NA	NA	NA	5	Simple	CRISIL A-/Stable
INE515Q07210	Non-convertible debentures	15-Nov-18	11.53	15-Nov-22	46	Simple	CRISIL A-/Stable
INE515Q07251	Non-convertible debentures	20-Mar-19	12.5	20-Mar-25	70	Simple	CRISIL A-/Stable
NA	Non-convertible debentures*	NA	NA	NA	40	Simple	CRISIL A-/Stable
INE515Q08093	Non-convertible debentures	02-May-19	12.87	02-May-26	30	Simple	CRISIL A-/Stable
INE515Q07244	Non-convertible debentures	01-Mar-19	11.8	01-Mar-23	100	Simple	CRISIL A-/Stable
NA	Long-term bank loan facility	29-Aug-19	NA	29-Aug-21	1.44	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	24-Sep-19	NA	24-Sep-21	1.89	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	30-Aug-19	NA	30-Aug-21	18.33	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	NA	NA	NA	160.75	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	28-Feb-19	NA	28-Feb-22	3.82	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	04-Nov-16	NA	04-Nov-21	0.8	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	25-Jan-18	NA	25-Jan-21	3.75	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	31-Jan-19	NA	31-Jan-24	20	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	08-Jan-20	NA	08-Jan-25	55	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	29-May-20	NA	29-Apr-22	100	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	03-May-21	NA	31-Mar-23	1	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	20-Sep-19	NA	20-Sep-21	3.31	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	30-Sep-19	NA	30-Sep-21	53.37	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	26-Feb-18	NA	30-Jan-22	12.5	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	15-Nov-19	NA	15-Nov-21	10	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	29-Mar-19	NA	29-Mar-22	37.25	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	09-Oct-19	NA	09-Oct-21	3.13	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	29-Dec-17	NA	29-Dec-20	3.64	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	20-Jun-19	NA	20-Jun-22	13.62	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	26-Aug-19	NA	26-Aug-21	5	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	15-Jan-21	NA	15-Jan-23	38.33	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	25-Sep-19	NA	25-Sep-21	12.5	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	08-Mar-21	NA	08-Mar-23	23.96	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	08-Mar-21	NA	08-Mar-23	25	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	28-Jun-19	NA	28-Jun-22	11.26	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	20-Feb-20	NA	20-Feb-23	13.7	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	02-Jun-20	NA	02-Jun-23	16.68	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	26-May-20	NA	26-Jun-23	14.61	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	26-Mar-21	NA	26-Mar-23	50	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	24-Sep-20	NA	24-Jul-22	71	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	13-Jul-21	NA	13-Sep-23	100	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	20-Mar-21	NA	20-Mar-23	38.23	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	20-Mar-21	NA	20-Mar-23	19.78	NA	CRISIL A-/Stable
NA	Long-term bank loan facility	20-Apr-21	NA	20-Jul-23	15	NA	CRISIL A-/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	141.35	NA	CRISIL A-/Stable

*Yet to be issued