| Arthimpact Digital Loans Private Limited | ||||
| 'CRISIL BB+/Stable' assigned to Bank Debt | ||||
| Rating Action | ||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||
| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL BB+/Stable’ rating to the long-term bank facility of Arthimpact Digital Loans Private Limited (ARTH).
The rating reflects the experience of the promoters and the management team and the easily scalable business model. However, limited seasoning in the portfolio, modest capitalisation and earnings profile constrain the rating. |
Analytical Approach CRISIL Ratings has analysed the standalone business and financial risk profile of ARTH |
Key Rating Drivers & Detailed Description Strengths:
The founders & promoters have significant experience in the financial services industry especially on financial inclusion and payments businesses. The top management also has extensive experience in handling various functions in similar businesses including data, technology, distribution, collections, operations risk and compliance.
Given their significant experience, the management has been able to put in place technology led strong systems and risk management processes at an early stage itself. This is especially important as the company primarily provides unsecured loans as a regulated Fintech. The management is focused on building scalable systems with an experienced team and a well governed board.
CRISIL Ratings believes that the experience of the promoters and management will stand ARTH in good stead as it scales up its portfolio.
The company provides high yielding unsecured working capital loans up to Rs. 2 Lacs to nano and micro enterprises. Since the loans are short-term and revolving in nature, the portfolio churn appears to be high. Given the Micro SME segment and the digital means for sourcing, underwriting and managing the lending business, the company is expected to be able to cater to large customer bases with controlled efficiency. Further, the company has also signed a Rs 100 crore credit line contract which should enable a scale up in the portfolio in the current fiscal itself. Nevertheless, the next round of equity raise will be crucial for future on-book growth. The company has plans for the same.
ARTH has evolved a digital lending platform with most of the operations from sourcing to credit evaluation happening digitally. Further, the business model of the group is based on a digital platform with a proprietary model for evaluating the credit profile of potential borrowers. The model is refined continuously based on the performance of the portfolio and feedback from the collections and credit teams.
Weaknesses:
The company had commenced its operations in late 2018 and has disbursed over Rs 470 crores till June 22 since beginning. In FY21-22 the disbursements were moderate at Rs 17 crores as compared to Rs 276 crores in FY20-21 owing to the Covid related impact on the economic environment. Consequently, The AUM of the company stood at Rs 12.9 crores as on June 30, 2022 as against Rs 24.8 crores as on March 31, 2021.
Amidst the nascent stage of operations, asset quality metrics as measured by 90+DPD have remained modest at 2.9% (Rs 0.381 crores) as of June 30,2022 compared to 2.5% (Rs 0.336 crores) as on March 31, 2022. Nevertheless, the collection efficiencies have remained at over 84% since November 2021 on a total demand basis. Arth covers risk from partners and the risk adjusted collection efficiency went from over 91% from November 2021 to 98% in June 2022. Given the nascent stage of operations and unsecured nature of the portfolio, the ability of the company to manage its asset quality is a key monitorable.
The company was reporting profits prior to fiscal 2022 as the disbursements and operating expenses were controlled. However, In the last one year, due to the slow growth in revenues and in turn the semi variable nature of the operating expenses, the cost to Income ratio appears to have marginally increased; whereas the actual cost of operations has decreased to Rs 6.62 Crores in comparison with previous year as it is directly proportionate to decline in revenue. Further, the cost of new borrowing is high for the company due to early stage and unsecured nature of the company.
Amidst the deterioration in asset quality, the credit costs increased to 0.2% as March 31, 2022 as against 0.04% as on March 31, 2021. However, the higher interest yields which range between 24% to 30%, given the segment of operation, will support the earnings profile.
As the company scales up its operations, ability to control credit costs and improve its cost to income ratio and therefore overall profitability remains a key monitorable.
The capitalization metrics are modest with a networth of Rs 11.2 crores and a tier 1 ratio and total capital ratio of 48.9% and 67%, respectively as on March 31, 2022, as against networth of Rs 10.7 crore and tier 1 and total capital ratio of 22.3% and 45%, respectively in the previous fiscal. Capitalisation has been supported by recent capital infusion of around Rs 10 crores in FY22 and Rs 6.5 Crore in Q1 FY23.
Therefore, as of Q1 FY 23 the net worth has grown to Rs 16.8 crores. And further infusion by current investor expected of Rs 4 crores in early Q3’FY23 will further strengthen the capitalization profile of the company.
The company has also initiated the next round of equity raise to support the long term Business plans. CRISIL Ratings believes that this equity infusion is a key monitorable as it would provide headroom for growth as well provide cushion against any asset side risk. |
Liquidity: Adequate Liquidity position of the company is adequate. Liquidity is primarily aided by low debt on the books. As on July 31, 2022, the company had cash and cash equivalent of around Rs 3.5 crores against debt repayments of 3.18 crores in next 6 months (Aug 2022 to Jan 2023). The company’s month on month average collection remains at 0.77 crores for past 6 months. The company plans to maintain the liquidity buffer of 6 months going forward as well. |
Outlook: Stable CRISIL Ratings believes that the ARTH will continue to benefit from the extensive experience of its promoters. However, a substantial equity raise and ability to control credit costs and improve on earnings profile are key monitorables. |
Rating Sensitivity factors Upward factors:
Downward factors
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About the Company ARTH is a non-deposit taking non-systemically important Impact led NBFC that provides unsecured working capital loans of Rs. 10,000 to Rs. 200,000 to nano and micro MSME segment in India.
The company operates Pan India with its physical presence in three big states: Uttar Pradesh, Haryana and Rajasthan and has around 12 offices, with 80 employees.
Apart from lending the company also provides insurance , payment and welfare support services through its proprietary ARTH Platform. Through this financial services platform, the company has the ability to offer integrated flexible, accessible and and affordable products to underserved Micro MSME. Additionally, ARTH has over 500+ local origination partners and 2000+ Arth Pay points. |
Key Financial Indicators
*Provisional based on unaudited financials |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||
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This Annexure has been updated on 02-Nov-22 in line with the lender-wise facility details as on 01-Nov-22 received from the rated entity.
Criteria Details
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