CRISIL has assigned its 'CRISIL A-/Stable' rating to Rs.100 crore Non-Convertible Debentures 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'.
 
With the public lockdown being in its sixth phase, the restrictions are being lifted only in a phased manner and the degree of relaxations vary across regions depending upon the severity of covid-19 pandemic. This may result in prolonged disruption of income-generating activities carried out by microfinance borrowers.
 
Under the Covid-19 Regulatory Package that was announced by the Reserve Bank of India (RBI) in March 2020, all microfinance institutions (MFIs) had offered moratorium to their customers in line with MFIN directive. Subsequently, RBI allowed the lenders to extend the moratorium on bank loans by another 3 months till August 2020. However, as MFIs were allowed to commence operations with bare minimum staff from April 20, 2020, which were further relaxed in May 2020 - collections have started to improve thereafter.

On the liability side, under moratorium 1.0, CRISIL understands that Annapurna Finance had availed moratorium and consequently, 43% of its debt obligations scheduled to be honoured over April and May were covered under this relaxation. Under moratorium 2.0 - cumulatively for the months of June and July 2020 - 18.5% of the scheduled debt obligations were covered under moratorium.
 
In a scenario where collections remain weak or MFIs do not seek or receive moratorium on their bank loans, the liquidity levels that they maintain will be an important determinant of their immediate debt repayment ability. Herein, CRISIL believes that Annapurna Finance has adequate liquidity, on standalone basis, to manage during this period, wherein asset-side collections will be impacted while liability-side outflows continue as per schedule. The company's liquidity buffer (assuming zero collections and factoring in cash and equivalents available as on July 31, 2020) - to cover total debt and loan repayment and operating expenses till October 2020 - was over 1.6 times. The company has also been able to raise Rs 994 crore of debt over the first 5 months of fiscal 2020 which would allow it to also slowly ramp up disbursements and set pace for faster restoration in operations - once the lockdown is fully lifted.
 
CRISIL believes collection efficiency is likely to take time to restore to pre-pandemic levels as it may take some time for repayment discipline to be reinstated among the borrowers after such a disruption. CRISIL will closely monitor the collection efficiency for the coming months, post initial phase of moratorium is over, as that will be a lead indicator of potential credit losses.
 
Annapurna Finance, like other MFIs, has navigated big events in the past, such as demonetisation, natural calamities, and local socio-political challenges. However, the company incurred some credit losses that resulted in moderation of its earnings profile for the period immediately following these events. Presently as well, a small section of the company's portfolio has been impacted by Cyclone Amphan and given a high exposure to Odisha, early bucket delinquencies (0-60 days) may remain elevated over the coming months. With such degree of vulnerability to socio-political events, sufficiency of capital buffer to withstand asset-side shocks is critical for MFIs.
 
In this context, CRISIL draws comfort from Annapurna Finance's existing investor base comprising institutions such as the Asian Development Bank (ADB) that have a demonstrated track record of extending capital support to the company. Furthermore, the terms of ADB's equity investment allow Annapurna Finance to avail further equity of around USD 10 million. The company's stated stance is to maintain its capitalisation metrics ' adjusted gearing of 5.5-6 times and tier I capital adequacy ratio (CAR) of above 20%. To meet this objective and build additional capital buffer, the company intends to raise over Rs 225 crore of equity capital during fiscal 2021 (in tranches of Rs 75 crore in the second quarter and another Rs 150 crore in the third quarter of fiscal 2021). CRISIL has centrally factored this equity infusion plans into the rating.
 
As on March 31, 2020, Annapurna Finance's adjusted gearing (including off book) was 5.8 times as compared to 5.0 times, a year ago. Given the company's steady state philosophy and stated stance of maintaining adjusted gearing at 5.5-6 times, any increase in this metric beyond the committed threshold will be a key rating sensitivity factor.
 
Annapurna Finance has a long-standing presence in Odisha. Of the Rs 4,009 crore of assets under management (AUM) as on March 31, 2020, close to 39% was in Odisha. While diversity in regional presence has been increasing, its pace remains gradual.
 
The rating also factors in the company's stable asset quality performance and strengthened risk management practices.
 
These strengths are partially offset by moderate profitability with expectation of additional 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.

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

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 operating as a MFI (NBFC-MFIs) in eastern India with loan AUM of Rs 4,009 crore as on March 31, 2020. The company has increased its loan portfolio by more than five times in the last 4 years, expanding its presence to about 718 branches spread across 293 districts and 18 states as on March 31, 2020, from 116 branches in 63 districts and 6 states as on March 31, 2015. It has a long-standing presence in Odisha where it has developed fairly good understanding of local economic activities benefitting from its existing association with People's Forum, a not-for-profit organisation engaged in social and developmental activities including self-help group formation for over 2 decades.
 
* Networth 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 at a networth of Rs 766 crore and a tier I CAR of 20.4% as on March 31, 2020. 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. 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. As part of this stance, the company had on-boarded ADB as a key investor in fiscal 2018 ' which currently holds 17% stake in the company. 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 in light of risk of heightened credit losses in the aftermath of the Covid-19 outbreak, CRISIL believes that 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 over Rs 225 crore of equity capital during fiscal 2021 (Rs 75 crore in Q2 and balance Rs 150 crore in Q3), has been centrally factored into the rating.
 
* Stable asset quality performance, and ability to control credit losses in the near term remains a monitorable
Asset quality performance of Annapurna Finance has remained broadly stable after witnessing a sharp decline in the aftermath of demonetisation because of socio-political issues in the Vidarbha region of Maharashtra and adjoining regions of Madhya Pradesh. The collection challenges were minimal in Odisha throughout this period. Portfolio quality measured in terms of NPAs has also improved to 1.4% as of March 31, 2020 from 2.1%, 3 years ago. The improvement is on account of two reasons: focused efforts of the management to improve recovery and writing off of bad loans with limited recovery prospects.

In the third quarter of fiscal 2020, because of floods, operational issues integral to one of the peer entities in Odisha, and disturbance in certain pockets of Assam, there was a minor uptick in delinquencies (30+ dpd) to 2.2% as of December 31, 2019 which remained almost flat at 2.1% towards the end of March 2020.
 
As an after effect of Cyclone Amphan, 5 branches of Annapurna Finance across Odisha and West Bengal have been impacted to a relatively higher degree - which account for close to 1% of the company's overall portfolio. While the delinquencies in the early bucket have remained elevated over the last few months, the asset quality is expected to restore thereafter ' driven by the demonstrated track record of borrower resilience witnessed across natural calamities like Cyclone FANI, floods, etc. in the past. In addition, as the situation around Covid-19 continues to evolve with collections correcting gradually with every passing month, the company's ability to restore collections at a faster pace and curtail overall credit losses, will remain a key monitorable.
 
* Strengthened 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 maintain sound 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. However, considering the rapid growth in loan portfolio and significant expansion into newer geographies in the past few years, asset quality performance in newer geographies remains a key monitorable.
 
Weaknesses
* Regional concentration of operations in Odisha
Annapurna Finance's portfolio is geographically concentrated with Odisha accounting for close to 39% of it as on March 31, 2020, although the company has diversified its operations to about 718 branches spread across 293 districts and 18 states. Moreover, the top five districts, accounting for less than 20% of the portfolio, are all located in Odisha and most of them are adjacent to each other, exposing the company to the risk of revenue concentration. During the course of ground-level issues such as the ones that developed in a few adjoining districts of Odisha during the second quarter of fiscal 2019, along with natural calamities like Amphan, floods that have become more frequent now, the potential deterioration in asset quality, because of high regional concentration of portfolio, may be higher. However, 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.
 
With specific reference to the spread of Covid-19, the situation in Odisha has moderated over the last few months though, remains better than a few hot spots such as Maharashtra and Tamil Nadu, where the number of cases is higher. However, this has been partially offset by another disruption in the form of Cyclone Amphan in the aftermath of which, about 5 branches of the company were impacted to a relatively higher degree. While the exposure to these high impact branches is low, momentary impact could be visible in portfolio housed in Odisha.
 
* Moderate profitability with expectation of additional credit losses in the aftermath of Covid-19 outbreak
Annapurna Finance's profitability for fiscal 2018 was impacted from higher provisioning requirement because of asset quality challenges resulting from socio-political issues in the Vidarbha region and bordering districts of Madhya Pradesh in the aftermath of demonetisation. While earnings have recovered in fiscal 2019 and fiscal 2020, as reflected in the improvement in absolute profit after tax (PAT) and return on managed assets (RoMA) from Rs 9.5 crore (IGAAP) and 0.5% (IGAAP) in fiscal 2018, to Rs 63 crore (IndAS) and 2.0% (IndAS) in fiscal 2019, and further to Rs 83 crore (IndAS) and 1.8% (IndAS) for 2020.
 
With the expectation of gradual revival in collectionsfor the sector, the company is at a risk of bearing elevated credit losses for a longer stretch of time in fiscal 2021, which would result in earnings remaining muted for the period. In addition, the credit losses arising out of Amphan, will also be a key factor.
 
* 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, the pressure on such borrowers' cash flows at the household level may sustain for the near term, thereby restricting the repayment capability of these borrowers. Additional pressure is expected on account of disturbance in income generating activities due to Amphan, floods which could probably last over a few months from now.
 
Even though there has been gradual traction in collections over the last 3 months, the revival to pre-pandemic level is expected to be phased as the lockdown is yet to be lifted fully. With RBI allowing extension of moratorium by till August 2020, the pace at which microfinance borrowers service debt, as the lockdown restrictions are lifted and economic activity increases, will be a key monitorable. Herein, CRISIL notes that collections during June and July have improved significantly from May levels for Annapurna, Sustainability of the same over next 2-3 months and ability to reach pre-covid collection efficiency remains 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.

Pursuant to the announcement of Nation-wide lockdown on March 24, 2020, the collections across branches were put on hold with no field work. With effect from April 20, 2020 branches started to open in a phased manner with bare minimum staff. During the first round of moratorium announced by RBI under regulatory package for Covid-19, Annapurna had extended a blanket moratorium to its borrowers, which was also in compliance with the MFIN order. Towards the end of moratorium 1.0, collections had started to pick up gradually. Subsequently, after RBI's announcement dated May 22, 2020 allowing the lenders to extend another 3 months of moratorium on bank loan payments, the company chose not to extend a blanket moratorium to its borrowers unlike last time and only make it available on an opt in basis. On the liability side, Annapurna continues to avail moratorium.
 
In terms of liquidity position, Annapurna Finance had estimated cash and equivalent of Rs 1,125 crore (excluding any form of unutilised lines) as of July 31, 2020. The company's liquidity buffer to cover all debt and loan repayment, including operating expenses till October 2020, was over 1.26 times.

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 believes that Annapurna Finance should be able to sustain its capitalisation at adequate levels - supported by its commitment of raising Rs 225 crore of capital by the third quarter of fiscal 2021.

Rating Sensitivity Factors
Upward Factors
* Ability to control 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 RoMA at over 2.5%

Downward Factors
* Any reduction in quantum or extension in timeline of equity capital raise planned for fiscal 2021.
* Inability to maintain steady state adjusted gearing at 5.5-6 times
* Deterioration in asset quality or earnings profile, leading to a stress on profitability and capital position.

Annapurna Finance, a Bhubaneshwar-based NBFC-MFI, is promoted by People's Forum, a not-for-profit organisation engaged in social and developmental activities (including self-help group formation and microfinance lending) in Odisha since 1990. It was initially set up as Mission Annapurna to carry out microfinance lending activities for People's Forum and was subsequently converted to a non-banking financial company in fiscal 2009.
 
Annapurna Finance predominantly follows the self-help group model wherein each group has anywhere between 10 to 20 members. New group formation involves an observation period of 3 months whereby the group members are informed about the importance of savings, and are trained to maintain their own accounts and develop the habit of regular savings. The loans are given mainly for agricultural and allied activities, business activities, and the establishment and expansion of micro enterprises.

Any other information: Not applicable