| Fino Finance Private Limited | ||||
| Rating removed from 'Watch Negative'; Rating reaffirmed and BLR Withdrawn | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has removed its rating on the long-term bank facility and debt instruments of Fino Finance Private Limited (FINO Finance) from 'Rating Watch with Negative Implications' and assigned a 'Negative' outlook. The rating has been reaffirmed at 'CRISIL BB+'. CRISIL has also withdrawn its rating on the bank facilities of Rs 111.07 crore on the company's request and in line with its withdrawal policy. |
| Analytical Approach |
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For arriving at the rating, CRISIL has evaluated the standalone business and financial risk profile of Fino Finance. CRISIL has also factored in the expected financial support from parent, Fino PayTech. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Expectation of strong support from, and operational synergies with, FINO PayTech The FINO group's credit risk profile is supported by its extensive reach in providing business correspondent services at reasonable rates through innovative technology solutions. FINO PayTech has also transformed one of its subsidiaries into a payments bank, which launched banking operations in June 2017. The FINO group is the largest business correspondent for banks, with presence in 499 districts in 28 states in India. Since its inception, the group has transacted with around eight crore customers through over 30,000 transaction points. The group is the fourth largest player in the domestic remittance business. FINO Finance is the only group company that offers loan products and, hence, is strategically important to FINO PayTech, as indicated by the presence of key common directors and senior management. Bharat Petroleum Corporation Ltd (BPCL; 'CRISIL AAA/Watch Developing/CRISIL A1+') and The Black Stone Group, which are key stakeholders in FINO PayTech, have representation on the board of FINO Finance. In the past, FINO PayTech has raised Rs 400 crore of additional capital largely from BPCL and two ICICI group companies. In fiscal 2018, FINO PayTech infused Rs 75 crore equity into FINO Finance, which helped the latter absorb the credit loss incurred in the aftermath of demonetisation. In future, to make operations self-sustainable, FINO Finance plans to raise capital on its own compared with the earlier practice of FINO PayTech raising capital and infusing it into subsidiaries. While FINO Finance will raise capital through equity dilution, the management has confirmed that FINO PayTech will continue to hold a majority stake over the medium term. Furthermore, FINO Finance will remain integral to FINO PayTech and will receive financial, managerial and operational support from the parent on an ongoing basis and in case of distress. Besides, the common brand emphasises the continued association of FINO PayTech with FINO Finance. * Adequate capital position With networth of Rs 78.8 crore on March 31, 2020, FINO Finance's capital position is adequate for its current scale of operations, supported by the past round of equity infusions by FINO PayTech. The company planned to raise Rs 100 crore in the second half of fiscal 2020 by on-boarding a strategic partner or through other routes of direct investment, which did not fructify. As on March 31, 2020, adjusted gearing was 2.7 times. Over the medium term, the company intends to operate at gearing (adjusted for off-book portfolio) of 5-7 times. Weaknesses: * Profitability, though improving, remains constrained by high operating expenses; ability to generate substantial internal accrual is yet to be demonstrated Profitability, after having revived in fiscal 2019-as reflected in return on managed asset (RoMA) of 0.4% (from negative 7.5% in fiscal 2018)-was impacted again in fiscal 2020. This was driven by decline in assets under management to Rs 445 crore as on March 31, 2020, from Rs 544 crore a year earlier, as the company consciously curtailed its exposure to regions with high delinquencies. Profitability was also impacted by high operating expenses. Historically, operating expenses have been above 7%, and they increased further to 10% in fiscal 2018 and remain at a similar level, as the company implemented door-to-door collection for overdue clients following demonetisation. Furthermore, the branches FINO Finance shares with FINO Payments Bank are typically more expensive to run than a standard MFI branch given their better infrastructure and location in semi-urban geographies with higher rentals. Consequently, overall profitability is expected to remain modest over the medium term on account of high operating expenses. In fiscal 2020, FINO Finance reported profit after tax of Rs 4.6 crore and RoMA of 0.8%. * Modest asset quality Despite a significantly large portion of the portfolio being hit after demonetisation, the company's asset quality has improved. Delinquencies were higher than those of close peers because of concentration in in, Uttar Pradesh (39%), Madhya Pradesh (27%), Bihar (16%)and Maharashtra (13%). While 30+ days past due (dpd) and 90+ dpd peaking at 34.1% and 23.3%, respectively, as on April 30, 2017, they improved to 5.1% and 2.3%, respectively, as on March 31, 2019, and stood at 7.4% and 2.6%, respectively, as on December 31, 2019. As on March 31, 2020, 90+ dpd stood at 1.6%. Because of weakening of asset quality, caused by demonetisation, the company provided for Rs 74.7 crore (net of recovery) cumulatively in the past two fiscals. Given the rigorous collection initiatives undertaken, the company expects to maintain this pace of recovery over the near to medium term. In terms of branch-wise delinquencies, the traction in asset quality is slower in certain districts of Madhya Pradesh, Uttar Pradesh and Maharashtra. To sustain the portfolio quality and mitigate the geographical concentration risk, the company has been focusing on diversifying its portfolio across states and districts. The company diversified into Jharkhand and Chhattisgarh in the first half of fiscal 2020. As of March 2020, operations were majorly concentrated in four states. Considering FINO Finance has significant exposure to states with high incidence of Covid-19, and that the time taken for operations to restore to normalcy may be prolonged, asset quality pressures may manifest over the near to medium term. * Potential risk of local socio-political issues and inherently modest credit risk profile of borrowers in the microfinance sector The microfinance sector witnessed two major disruptive events in the past decade: the crisis promulgated by the ordinance passed by the government of Andhra Pradesh in 2010 and demonetisation in 2016. In addition, the sector has faced issues of varying intensity in several geographies. Promulgation of the ordinance on MFIs by the Andhra Pradesh government in 2010 demonstrated the vulnerability of the sector 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 delinquencies following demonetisation and the subsequent socio-political events. This indicates the fragility of the business model to external risks. More so, the portfolio largely comprises microfinance loans to clients with below-average credit risk profiles and lack of access to formal credit and those based in regions with limited credit history. Typical borrowers are farmers or those involved in agriculture-related activities. Their income flow could be volatile and dependent on the local economy. Pressure on household cash flow because of unforeseen circumstances may affect the repayment capability of borrowers. As their business involves lending to the poor and downtrodden sections of the society, MFIs are exposed to socially sensitive factors, including charging of high interest rate and, consequently, tighter regulations and legislation. Considering the income-generating capacity of the borrower segment will be significantly impacted by the nationwide lockdown to contain the Covid-19 pandemic, recoveries may take time to stabilise. |
| Liquidity Stretched |
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As on June 30, 2020, FINO Finance had cash and equivalents of Rs 25.2 crore. The company has sought moratorium for the extended period of June-August 2020. After factoring in the moratorium, the company's liquidity buffer (assuming 50% collections and factoring in cash and equivalents available as on June 30, 2020) to cover its total debt obligation and operating expenses until August 2020 is comfortable. However, for the post-moratorium period starting September 2020, the overall liquidity to meet the debt obligation and restart disbursements will be dependent upon the company raising additional funds or the collection efficiency quickly reaching pre-pandemic levels. In case FINO Finance is not able to raise incremental funds, the restart of operations and its ability to service debt will depend largely on need-based, timely financial support from the parent, FINO PayTech. |
| Outlook: Negative |
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The negative outlook reflects the uncertainty around sustainability of collection efficiency due to the challenging macro-environment and continued intermittent lockdowns and lifting of restrictions in light of the Covid-19 pandemic. Furthermore, the company caters to borrower segments with modest credit profiles and relatively under-banked customers whose cash flow is more vulnerable to the level of economic activity. |
| Rating Sensitivity factors |
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Upward factors * Improvement in liquidity buffer from current levels * Ability to improve collection efficiency and reach pre-pandemic levels * Substantial improvement in earnings leading to improvement in RoMA to above 1.5% Downward factors * Inability to ramp up liquidity and improve the debt obligation cover from the current level * Inability to raise additional funds-equity or loans-by November 2020 * Significant increase in adjusted gearing beyond 6 times on a steady state basis * Inability to improve the collections weakening the asset quality |
| About the Company |
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Incorporated in 1994 and registered with RBI in 2002 as a non-deposit-taking NBFC, FINO Finance was acquired by Financial Inclusion Network & Operations Ltd (FINO) in December 2010 to establish microfinance operations. Since then, it has been operating as an NBFC-MFI. It lends to women in rural and semi-urban areas through the joint liability group model. |
| Key Financial Indicators - FINO Finance | |||||||||||||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels. |
| 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 various bank facilities | ||||||||||||||||||||||||
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