| Belstar Microfinance Limited | ||||
| 'CRISIL PPMLD AA- r/Stable' assigned to Long Term Principal Protected Market Linked Debentures | ||||
| 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 PP MLD AA-r/Stable’ ratings to the Rs 125 crore Principal Protected Market Linked Debentures and reaffirmed the ‘CRISIL AA-/Stable’ rating on the long-term bank facilities and debt instrument of Belstar Microfinance Ltd (Belstar).
The ratings centrally factor in the strong articulation of financial support to Belstar from its parent, Muthoot Finance Ltd (Muthoot Finance; ‘CRISIL AA+/Stable/CRISIL A1+’), because of its strategic importance to the parent. The ratings also factor in the adequate capitalisation and earnings of Belstar and benefits of operational support from the Hand in Hand group. These strengths are partially offset by geographical concentration in portfolio, moderation in asset quality and susceptibility of the microfinance sector to regulatory and legislative risks.
As on March 31, 2021, assets under management (AUM) stood at Rs 3,299 crore, registering a two-year growth of 34%. The business momentum that picked up from October 2020 after the setback suffered during the first wave of the pandemic was affected again in the first quarter of fiscal 2022 on account of the second wave; which led to lower disbursements. However, from July 2021 onwards, disbursement revived to an average of over Rs 337 crore per month, leading to an AUM of Rs 3,835 crore as of December 2021.
Collection efficiency (including overdues but excluding prepayments) that improved to 100% in March 2021 because of high collections from overdue payments dropped to 72.6% in May 2021 because of the impact of the pandemic. However, this has been increasing steadily since the second quarter of the current fiscal and stood at 92.1% in December 2021. Ability to improve overall collections (besides healthy collections from incremental disbursements) and eventually reach pre-pandemic levels of 98-99% on a steady-state basis will remain a key monitorable.
The 90+ days past due (dpd) remained moderate at 5.5% in December 2021 as compared to 2.9% in March 2021 (1.1% in March 2020). Additionally, the company has outstanding restructured portfolio (under RBI Resolution framework 2.0) of Rs 254 crore (6.6% of the AUM) as of December 2021, of which billing for Rs 215 crore started from January 2022 onwards. Any change in the payment discipline of borrowers will affect delinquency levels, and hence the ability of Belstar to manage asset quality and maintain healthy collections will remain a monitorable. |
Analytical Approach CRISIL Ratings has assessed the standalone financial and business risk profiles of Belstar and has factored in its strategic importance to, and the strong financial support expected from, Muthoot Finance. |
Key Rating Drivers & Detailed Description Strengths: * Strategic importance to, and expectation of continued financial support from, the parent Muthoot Finance will likely continue to support Belstar both on an ongoing basis and during distress, given its majority ownership and presence on the board of directors of Belstar, and the strategic importance of the latter to the group. The microfinance business helps diversify the financial product suite of the parent. The business is established and growing at a healthy pace, and formed 6.3% of the group AUM as on December 31, 2021. Also, the business is scalable and expected to grow steadily over the medium term. Muthoot Finance has infused Rs 183.83 crore in Belstar till date. While Belstar does not have a common branding with the Muthoot group, it carries a tagline as part of its name to clearly state that it is a subsidiary of Muthoot Finance. The Muthoot group has a strong presence on the board of Belstar through Mr George Alexander (son of the managing director of Muthoot Finance), Mr George M Jacob (son of the joint managing director of Muthoot Finance) and Mr K R Bijimon (key management person).
* Adequate capital position Networth was Rs 555 crore and adjusted gearing (including securitisation) 7.0 times, as on December 31, 2021 (gearing was 6.2 times as on March 31, 2021). The company signed a definitive agreement with Affirma Capital in August 2021 for capital infusion of Rs 350 crore, of which Rs 275 crore is expected to be infused by March 2022 and the rest in the first quarter of the next fiscal. Gearing should be around 6 times on a steady state basis over the medium term.
On account of the gap between current and pre-Covid collection levels, there is a risk of increase in credit losses and its potential impact on capitalisation metrics. Ability to ramp up internal accretion so that the company can sustain capital position and keep adjusted gearing within the targeted cap while sustaining growth shall remain a key monitorable. Nevertheless, Belstar should remain adequately capitalised over the medium term on the back of the strong financial flexibility of the Muthoot group to infuse equity, both for growth as well as in times of distress.
* Above-average earnings, albeit moderated on account of higher provisioning to combat the pandemic Belstar has adequate earnings backed by moderate operating and credit costs. Operating cost (5-5.5% for the past three fiscals) is lower compared with other microfinance institutions (MFIs) due to its branch-based collection model. Credit cost also has been low historically at 0.2-1.3%. Return on managed assets (RoMA) stood at 3.6% in fiscal 2019 and 3.5% in 2020. However, in fiscal 2021, net profit fell to Rs 47 crore from Rs 99 crore in fiscal 2020, primarily due to higher provisioning of Rs 81 crore to account for contingencies arising from delinquencies. Consequently, RoMA stood at 1.3% for fiscal 2021. However, pre-provisioning profit stood at Rs 138 crore in fiscal 2021 against Rs 156 crore in fiscal 2020. Similarly, in the nine months ended December 31, 2021, the company reported pre-provisioning profit of Rs 112 crore and provisioning of Rs 94 crore, which led to profit after tax of Rs 15.9 crore and lower RoMA of 0.5% (annualised). Given the current stress on asset quality especially from the older book, the time frame within which Belstar is able to bring credit costs back to pre-pandemic level will be a key rating sensitivity factor.
Weakness: * Geographical concentration of portfolio Tamil Nadu accounts for a large proportion of the portfolio, though its share has reduced to 46% as on December 31, 2021, from 72% as on September 30, 2018. The high geographical concentration is mainly on account of association with the Hand in Hand group, which has a strong presence in the state. More importantly, 16% of the loan book is concentrated in three districts and 26% in six districts, all of which are located contiguously. The AUM in the top three districts is around 109% of the networth. The concentration, especially in contiguous districts, is higher compared with other MFIs rated by CRISIL Ratings. This increases susceptibility to local socio-political risks inherent in the microfinance business. Nevertheless, the strong local presence of the Hand in Hand group in these districts might be a mitigant.
Belstar is focusing on other states to drive incremental growth and reduce the share of Tamil Nadu. Amidst fast growth in the portfolio, efforts to reduce concentration and establish presence in new geographies will be key monitorables.
* Moderation in asset quality The 90+ dpd was around 1% and the 30+ dpd was 1.4-1.7% for the past three fiscals. Their portfolio was Rs 453 crore as of December 2016, with more than 75% in Tamil Nadu that was relatively less impacted by demonetisation in November 2016. Additionally, the self-help group (SHG) model has helped as it involves inculcation of a savings habit among members before disbursement. Moreover, the company has taken steps through adoption of technology such as usage of tablets and 100% NEFT disbursements to reduce instances of employee fraud.
However, asset quality weakened in fiscal 2021 owing to the pandemic. The 90+ dpd and 30+ dpd stood 2.9% and 4.0%, respectively, as of March 2021. Furthermore, the asset quality of the industry at large and that of Belstar was impacted by the second wave. The 30+ and 90+ dpd of the company stood at 8.1% and 5.5%, respectively, as on December 31, 2021 (broadly comparable with other microfinance players).
As the current economic challenges and Covid-19 affliction curve have not yet normalised, the ability of the company to further improve collections to pre-Covid levels of over 99% on a steady state basis will be important in the coming months. Furthermore, considering the growth in loan portfolio, ability to commensurate asset quality performance will be a key monitorable. After the first wave of Covid-19, Belstar started disbursing from July 2020 onwards, with overall disbursements at Rs 2,434 crore in fiscal 2021 (Rs 1,063 crore of disbursement in the fourth quarter itself). In the nine months of fiscal 2022, the company has disbursed Rs 2,291 crore of loans with an average of Rs 379 crore per month in the third quarter. Sustainability of collections and impact of the pandemic on asset quality will also be key monitorables.
* Susceptibility to regulatory and legislative risks associated with 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. The microfinance sector remains susceptible to regional issues such as elections, natural calamities and borrower protests, which may result in momentary spurt in delinquencies. This indicates the fragility of the business to external risks. As the business involves lending to the poor and downtrodden sections of society, MFIs will remain exposed to socially sensitive factors, including high interest rates, tighter regulations and legislations. |
Liquidity: Strong Cash and equivalent, including liquid investments, stood at Rs 336 crore as on January 31, 2022. It has debt obligation of Rs 564 crore (including operating expense and excluding PTC/DA over the two months through March 2022. Liquidity is supported by steady monthly collection of Rs 230 crore (excluding prepayments) in the past 2-3 months, which was adequate to meet monthly debt obligation and operating expenses. Belstar has liquidity cover (assuming 90% collections and excluding PTC/DA payments) of 1.0 times for two months. Liquidity is cushioned by Rs 1,246 crore sanctioned by various financial institutions, which has not been utilised yet. CRISIL Ratings understands Muthoot Finance will provide funding support to ensure timely servicing of debt. |
Outlook Stable The outlook on Belstar reflects the outlook on its parent, Muthoot Finance. CRISIL Ratings believes Belstar will continue to receive strong operational, financial and managerial support from Muthoot Finance and maintain adequate capitalisation and healthy earnings over the medium term |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Belstar was incorporated in January 1988 in Bengaluru. It obtained a non-banking financial company (NBFC) licence from the RBI in March 2001 and was reclassified as an NBFC-MFI in 2013. The company was acquired by the Hand in Hand group, a non-governmental organisation, in September 2008. Muthoot Finance, the largest gold loan NBFC in the country, made an equity investment in Belstar in 2016 and held stake of 70% as on December 31, 2021. Belstar had a portfolio of Rs 3,855 crore as on December 31, 2021, with operations in 18 states and 170 districts. Under the SHG model, it has groups of 10-20 people and an average ticket size of Rs 45,000, and in the joint liability group model, it has groups of 4-10 people and an average ticket size of Rs 25,000. |
Key Financial Indicators
Note: *annualised |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Yet to be issued |
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