Key Rating Drivers & Detailed Description

Strengths:

* Improved capital position and financial flexibility after recent round of equity raising

Driven by a cumulative capital infusion of Rs 1,100 crore by Mr. Sachin Bansal through NTPL, the capitalization of Navi group has improved significantly. NFPL’s standalone networth, which stood at Rs 80 crore as on March 31, 2019, increased to Rs 952 crore as of March 31, 2020 as a result of initial round of capital infusion. Thereafter, as the company received two more tranches of Rs 100 crore as capital, NFPL’s reported networth further increased to Rs 1165 crore as on December 31, 2021. Correspondingly, the company’s adjusted gearing has also remained comfortable. On December 31, 2021, this metric stood at 2.1 times whereas excluding the interest free debt from NTPL, adjusted gearing was even lower at 1.0 times.

Of the total capital NFPL has received since October 2019, Rs 261 crore has been down-streamed to CIFCPL in tranches of Rs 147 crore equity and Rs 114 crore compulsorily convertible debentures which got converted to equity in May 2020. This has resulted in a stronger capital position for CIFCPL, evidenced by the improvement in adjusted gearing (including direct assignment) to 4.6 times as of December 31, 2021 from 7.1 times, as of March 31, 2019. On book gearing as on December 31, 2021 was 3.9 times.

Mr. Bansal holds about 98% in NTPL; which in turn holds 99.6% stake in Navi Group. NTPL’s networth stood at about Rs.3,905 crore as of December 31, 2021 – and most of it has been infused into Navi Group as a combination of interest free debt and equity. As on December 31, 2021 – Rs 1,302 crore was parked in NFPL as interest free debt from NTPL which has been deployed in treasury investments by the former. Nonetheless, CRISIL Ratings understands that this line of interest free debt will eventually be replaced by external funding on NFPL’s balance sheet. Over the medium to long term, NTPL is expected to raise a sizable amount of capital which is expected to support Navi group’s growth plans. Even after factoring in the existing and potential allocation of capital within the group, a substantial amount of liquidity will be maintained within the NTPL group at all points in time and, it will be fungible across the group depending upon entity specific requirements.

In consideration of NTPL’s demonstrated track record of allocating and extending capital support, CRISIL Ratings expects Navi group’s consolidated capital position to remain strong in relation to its scale and nature of business.

* Long track record of operations in the microfinance space supported by the experience of senior management

Having started as an NGO in 2007, CIFCPL has an operational track record of almost 16 years. Until 2019, the company was operating as a mid-sized MFI with majority of growth having been attained in the last 3-4 fiscals as external investors were on-boarded. After receiving most of its capital from Mr. Bansal in October 2019, the AUM of CIFCPL has grown at a robust 54% over fiscal 2020 and 58% over fiscal 2021 without any material dilution in operational metrics like average ticket size, AUM exposure per borrower, number of customers per loan officer, etc. For 9M 2022, despite a slowdown in Q1 2022 during the second pandemic wave, the company was able to regain momentum over the latter half of the calendar year and, driven by higher than pre-Covid average monthly rate of disbursements, CIFCPL clocked a 62% growth in its AUM over the period. This growth has been coupled with gradual expansion into newer states, resulting in moderate geographical diversification.

Mr. Anand Rao – the founder of CIFCPL - continues to spearhead the company as its Joint Managing Director. The co-founder, Mr. Samit Shetty has resigned from executive role but remains on the board of CIFCPL. The leadership team of CIFCPL has extensive experience across fields like microfinance, operations, accounts, banking, risk management and, is being further strengthened by on-boarding of professionals for newer roles. The group will continue to benefit from the same.

* Adequate risk management practices; ability to maintain sound portfolio quality in the vulnerable microfinance portfolio and unseasoned non-microfinance segments remains critical

After peaking at 9.2% in May 2017, 90+ dpd for the microfinance portfolio at CIFCPL had restored to 0.9% as of June 30, 2020. The prior deterioration in asset quality was a consequence of ground level socio-political issues which had erupted after demonetisation, and concentration of CIFCPL’s loan portfolio in two of the more impacted states – Karnataka and Maharashtra, made it worse. After the pandemic outbreak in March 2020, the microfinance borrower segment has remained highly susceptible and driven by lagged and partial repayments from the customers, slippages have remained elevated. From 1.3% and 0.9% as on June 30, 2020, CIFCPL’s 30+ dpd and 90+ dpd surged to 5.8% and 4.2%, respectively, as of March 31, 2021. This was followed by a brief correction however, in the aftermath of the second wave – 90+ dpd again surged to 5.4% in June 2021. However, resolution across delinquency buckets has been improving gradually and resultantly, 90+ dpd reduced to 3.8% as on December 31, 2021.

For NFPL which houses the non-microfinance portfolio of the group, digital personal loans has been a key segment and has grown at a robust rate of over 200% over 12 months through December 31, 2021. NFPL had an AUM of Rs 1,770 crore as on December 31, 2021 and 90% of this comprised digital loans. Close to 70% of this portfolio has been created in the last 6 months of calendar year 2021 and has limited seasoning. As on March 31, 2021, GNPAs from the personal loan book stood at 4.43% (excluding write offs, NPAs inclusive of write offs and restructured portfolio were 15.2%) which further elevated and peaked at 15.1% (excluding write offs and restructured portfolio) as of July 2021 on account of asset quality moderation post second pandemic wave. In H1 2022, the company wrote off Rs 47 crore worth of loans and as at the end of Q2 2022, had a restructured portfolio of Rs 23 lacs. Thereafter, as the collections started to restore and the portfolio grew aggressively, 90+ dpd also declined to 1% (excluding write offs, including write offs – NPA was ~13%) as of December 31, 2021.For the housing loan portfolio, which was started in December 2020, reported nil NPAs as of December 31, 2021. The company offers attractive yields of 7-8% on these loans however, sustaining gross lending spreads in a highly competitive housing loan segment will need to be demonstrated as current borrowing costs are high. NFPL is currently managing segment profitability through a combination of low leverage and use of interest rate derivative instruments.

Considering the growth plans for the non-microfinance portfolio (digital personal loans and home loans), the group’s ability to maintain asset quality and profitability alongside scale and seasoning will remain a key rating sensitivity factor. Over the course of growth, the risk management systems at CIFCPL and NFPL are expected to evolve resulting in increased operational efficiency. While microfinance would remain a manpower intensive vertical, the company would explore its integration of ground level activities to the group’s centralized MIS by leveraging digital interphase. On the other hand, NFPL has been operating with a full-fledged digital underwriting engine and would continue to strengthen the same. For the housing loan book, which is being managed through a hybrid underwriting model (physical and digital), the ability of the group to achieve optimal efficiency and adequate risk management will be key.

* Improving resource profile

Ever since its association with NTPL, Navi group’s resource profile has been improving. The lender base of the group has expanded with more banks coming on-board and cost of borrowing has also reduced by about 350-400 bps on fresh borrowings post equity infusion in October 2019.

Of CIFCPL’s lender base of over 30 as on December 31, 2021 - which comprises Banks, NBFCs and DFIs, the share of banks and FIs in the total borrowing mix had increased to 68% from 24%, over the last 6-8 quarters. The improvement in resource profile can also be evidenced in the declining blended cost of funds (I.e., existing & fresh borrowings), from >14% pre – 2018 to approximately 10.7% levels now. Over 9M 2022, the company has raised incremental sanctions to the extent of Rs. 910 crore from banks and DFIs which would support its overall resource profile and liquidity position. As the resource profile diversifies further with an increasing share of bank funding in the total debt base, the cost of borrowing may decline further.

Funding base of NFPL remains skewed towards the interest free debt from NTPL. From Rs 772 crore extended in January 2020, the quantum of interest free debt from the parent – NTPL – increased to Rs 2,323 crore in May 2020. However, it was eventually reduced to Rs 1,824 crore as of June 2020, and further to Rs 1302 crore by December 31, 2021. This intra group debt is expected to be fully replaced by external debt in the long term – which would impart further diversity to the company’s borrowing profile. Over 9M 2022, NFPL has raised Rs 842 crore as incremental funding. As a philosophy, the management intends to maintain at least 15% of external debt of Navi group as on-tap liquidity for the group – at all points in time.

Weakness:

* Core profitability, constrained by high operating expenses, expected to improve hereafter with improving efficiencies, though credit costs remain a key monitorable

Consolidated profitability of Navi group was subdued until fiscal 2020 on account of persistently high operating expenses and leverage. On a standalone basis, NFPL was operating at a RoMA of <2.0% whereas CIFCPL has had a RoMA of sub 1.5% over the years.

For fiscal 2019, at a consolidated level, where operating expense ratio was high at 8.8%, CIFCPL had an operating expense of 10.5%. Correspondingly, adjusted gearing at a consolidated level stood at 6.6 times on March 31, 2019 - whereas for CIFCPL – it was 7.1 times on the same date. These metrics have constrained the company’s earnings in the past however, after the recent round of equity infusion – there is visible improvement in profitability.

On a standalone basis - for fiscal 2021, CIFCPL’s operating expense declined to 6% benefitting from economies and its adjusted gearing (including off book) also stabilized at 3.6 times. Overall RoMA was 1.4% for the year. For 9M 2022 however, as credit cost remained relatively low, annualized RoMA improved to 1.9%. For NFPL, RoMA for fiscal 2021 stood at an improved 2.8% whereas for H1 2022, RoMA was 0.8% (annualized). However, a significant contribution to this came as treasury income. Upon adjusting for that, NFPL’s profitability position remains modest. In H1 2022, the company’s operating expenses surged to 7% from sub 2% levels for fiscal 2020 and 2021 - owing to marketing and sourcing expenses incurred during the period. In addition, credit costs remaining high at 2.4% (annualized) for the first half, acted as a further constrained in keeping the RoMA low. 

With the onset of Q4 2022, NFPL’s monthly profitability metrics have started to improve however, for full fiscal 2022 – the company’s earnings profile is expected to remain modest. In the medium term, as the portfolio scales, the unit metrics of both housing loan and personal loan portfolios shall improve driven by economies of scale.

* Microfinance portfolio quality remains susceptible to local socio-political issues due to regional concentration of operations

Despite gradual diversification in regional presence over the years, 62% of the company’s AUM is concentrated in two states – Karnataka (44%) and Bihar (18%). This increases the susceptibility of asset quality to regional socio-political issues which are an inherent risk to the microfinance industry. Apart from milestone events like Andhra Pradesh crisis in 2010, demonetization in 2016, and now Covid-19 outbreak; 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-demonetization and the subsequent socio-political events. Furthermore, CIFCPL caters to clients with below-average credit risk profiles and lack of access to formal credit. The income flow of these households could be volatile and dependent on the local economy. With the slowdown in economic activity since outbreak out of covid-19, there has been pressure on such borrowers’ cash flows at a household level thereby restricting their repayment capability. As the macro situation continues to restore, the revival in collections has been gradual and the company’s ability to reinstate repayment discipline among its customers will be a monitorable.

* Limited vintage in the non-microfinance portfolio

Driven by a sharp increase in monthly disbursements of digital personal loans – particularly in the second half of calendar year 2021, the digital personal loan portfolio has grown at a robust 191% (non-annualized) rate over 9M 2022 to reach Rs 1433 crore as of December 31, 2021. Considering the average tenure of this portfolio is about 20 months, majority of this book remains unseasoned. Housing loans, which are the second product offered by NFPL, were launched in December 2020 and have grown at a comparable rate over 9M 2022. The average tenure is about 20 years and therefore, this portfolio is also low on vintage. In light of low seasoning and high growth trajectory anticipation for this book, the group’s ability to maintain asset quality and profitability alongside scale will remain a key rating sensitivity factor. During fiscal 2021, due to multiple challenges like lockdown post pandemic, volatility in collections, ground level operational issues, etc.  NFPL had written off Rs 22 crore worth of loans. In H1 2022, another Rs 45.8 crore has been written off. Over the medium to long term, the company’s ability to maintain above-average asset quality by tightening its ground level monitoring and risk management will also be essential.

Key Financial Indicators of NFPL (consolidated)

#including treasury gains

^including off book

Key Financial Indicators of CIFCPL (standalone)

#including treasury gains

^including off book

Annexure - Details of Instrument(s)

*Yet to be issued

Annexure – List of entities consolidated

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