Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A1+’ rating to the Rs 50 crore commercial paper programme of Fusion Micro Finance Ltd (Fusion) and reaffirmed its ‘CRISIL A+/Stable’ rating on the long-term bank facilities of the company.

 

The ratings reflect the established market position of Fusion with regional diversification in portfolio and healthy capitalisation backed by steady accretion. The ratings also factor in the steady improvement in the company’s earnings and asset quality backed by sound risk management practices. These strengths are partially offset by the inherent modest credit profile of borrowers and potential risk from local socio-political issues in the microfinance sector.

 

Fusion has grown its portfolio steadily and is among the top five microfinance institutions (MFIs) in India. Its assets under management (AUM) rose 23% on-year to Rs 11,476 crore as of March 2024 (Rs 9,296 crore as of March 2023). The company has equal focus on asset quality improvement and growth. Its 90+ days past due (dpd) improved to 2.9% as on March 31, 2024, from 3.5% as on March 31, 2023, and 5.7% as on March 31, 2022. CRISIL Ratings notes that Fusion did not sell any portfolio to asset reconstruction companies (ARCs) and wrote off Rs 319 crore (2.8% of the portfolio as of March 2024) in the past 12 months. Collection efficiency has remained strong with low delinquencies for loans originated in the past 12-18 months.

 

On the asset quality front, the company did face some recovery challenges in a few northern states (mainly Punjab and Haryana). This was primarily due to ‘Karz Mukti Abhiyan’ that resulted in collection efficiency in states such as Punjab falling to 75% during the fourth quarter of fiscal 2024. Nevertheless, the overall asset quality was not affected as these states accounted for only 2.8% of the company’s AUM as on March 31, 2024. The overall collection efficiency stood in range of 96-97% during the past 12-14 months. Consequently, the 90+ dpd stood 2.9% as on March 31, 2024, as against 3.5% as on March 31, 2023. The overall credit cost, however, increased to around 3.1% during fiscal 2024 (from 2.2% during the previous fiscal) mainly on account of the company’s decision to write off portfolio of Rs 319 crore. The company’s ability to maintain its asset quality while growing its portfolio at a steady pace will remain a key rating sensitivity factor.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of Fusion.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position and track record with regionally diversified presence: Incorporated in 2010, Fusion has a strong track record of operations across business cycles and landmark challenges such as demonetisation and the Covid-19 pandemic. As on March 31, 2024, the company had AUM of Rs 11,476 crore (Rs 9,296 crore as on March 31, 2023, and Rs 6,786 crore as on March 31, 2022). Its market position is supported by geographical diversity in the loan portfolio. As on March 31, 2024, the highest exposure to a state was 23.5% (Uttar Pradesh) and exposure to the top three states was limited to 54.8% (Uttar Pradesh, Bihar and Odisha) of the overall AUM. The company benefits from its large network of 1,200 MFI branches and 97 SME branches in over 453 districts across 22 states, with a strong focus on rural and semi-urban areas.

 

• Healthy capitalisation, supported by steady accretion: Fusion has maintained healthy capital position backed by steady accretion. The networth stood at Rs 2,848 crore and gearing at 3.0 times as on March 31, 2024 (networth was Rs 2,322 crore and gearing 2.9 times a year earlier). The company had cumulative accretion of Rs 892 crore in the past two fiscals, which strengthened the capital position, thus providing room for growth. Nevertheless, the ability of the company to maintain its gearing while growing its portfolio will remain key monitorable.

 

• Improving profitability: The company’s pre-provisioning profitability remained above 5% in the past four fiscals and was at 8.8% in fiscal 2024 and 7.8% in fiscal 2023. The credit cost remains steady at ~3.1% for fiscal 2024 as against 2.2% as on March 31, 2023 (5.3% as on March 31, 2022). That said, increase in interest income, controlled operating expense and improving credit cost helped the company report profit after tax (PAT) of Rs 505 crore and return on managed assets (RoMA) of 4.3% during fiscal 2024, as against PAT of Rs 387 crore and RoMA of 4.3% in fiscal 2023. The company will likely sustain its improved profitability over the medium term.

 

• Improving asset quality with sound risk management practices: The asset quality of Fusion has been improving, as indicated by the decline in gross non-performing assets (GNPAs) to 2.9% in March 2024 from 3.5% in March 2023. CRISIL Ratings notes that Fusion did not sell any portfolio to ARCs and wrote off Rs 319 crore (2.8% of the company’s portfolio as of March 2024) in the past 12 months. The collection efficiency has remained strong with low delinquencies for loans originated in the past 12-18 months. However, during fiscal 2024, the company faced challenges for its exposure in Punjab due to floods and the ‘Karz Mukti Abhiyan’, which led to an increase in delinquencies and pulled down collection efficiency in the state to ~75% as on March 31, 2024. While the overall asset quality will continue to improve gradually, return to the pre-pandemic level and sustenance remain monitorable.

 

Fusion has developed adequate risk management systems and practices over the past few years with expansion into new markets. This has helped maintain asset quality in existing regions and identify new regions for expansion. The company evaluates the potential area of operations on the Area Lucrative Index, which involves assessment of parameters denoting the credit potential of the region. The company also has an extensive audit team of 402 members as of March 2024, with the number of branches capped at two per auditor. The branches are graded twice a month on over 100 parameters, which helps detect ongoing or potential issues. In terms of geographic diversity, the company has expanded its presence to 22 states, with the top state accounting for 23.5% of its AUM as on March 31, 2024 (33% as on March 31, 2016, prior to demonetisation) and the top five states for 70% (94% as on March 31, 2016). Besides geographical expansion, the robust growth over the past few years was supported by adequate monitoring of operational parameters, such as calibrated increase in ticket size and AUM exposure per branch, per district and so on.

 

Weaknesses:

• Inherently modest credit profiles of 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 shops, provision stores and small fabrication units. The income flow of these borrowers could be volatile and depends on the local economy — any economic slowdown could lead to potential pressure on cash flow at the household level, thereby restricting repayment capability. The ability of Fusion to reinstate repayment discipline among its customers, such that the pre-pandemic level of periodic collections are achieved, remains monitorable

 

• Potential risk from local socio-political issues in the microfinance sector: The microfinance sector has witnessed various events over the years, including regulatory and legislative challenges that have disrupted operations. Some of these events include the Andhra crisis, demonetisation in 2016, Covid-19, and socio-political issues specific to certain states. These events have adversely affected the sector, elevating delinquencies and hurting the profitability and capitalisation metrics of NBFC-MFIs. These challenges underscore the vulnerability of the microfinance business model to external risks. Covid-19, in particular, introduced new challenges, aggravating existing vulnerabilities in the microfinance sector by heightening credit risks and the likelihood of loan default by borrowers.

 

While the sector has navigated these happenings, it remains susceptible to issues, including local elections, natural calamities, and borrower protests, which may increase delinquencies for a while. MFIs remain vulnerable to socially sensitive factors and the macroeconomic scenario.

Liquidity: Strong

Fusion has a comfortable asset-liability management (ALM) profile, with cumulative positive mismatches across all buckets up to one year as on March 31, 2024. The company had cash and equivalents of Rs 1,474 crore as on March 31, 2024 and the unutilised bank lines stood at ~Rs 1446 crore as on date. In fiscal 2024, the company raised about Rs 8,814 crore through term loans, non-convertible debentures and direct assignment.

Outlook: Stable

Fusion will maintain adequate capitalisation over the medium term, supported by its ability to raise capital. The business risk profile will benefit from the expanding scale of operations and improving asset quality.

Rating Sensitivity factors

Upward Factors:

• Increase in scale of operations while maintaining asset quality
• Sustained profitability (RoMA above 4%) while maintaining adjusted gearing below 3 times

 

Downward Factors:

• Deterioration in asset quality or earnings profile, resulting in stressed profitability and capital position
• Moderation in capitalisation – evidenced by adjusted gearing increasing to and remaining above 5 times commensurate with a decline in tier I capital adequacy ratio to below 18%

About the Company

Fusion was incorporated in 1994 as Ambience Fincap Pvt Ltd and later in 2009 was takeover by Mr. Devesh Sachdev and changed name to Fusion Microfinance. Fusion started operations as a non-deposit-accepting non-banking financial company in 2010 and was converted into an MFI on January 28, 2014. The company provides financial services to poor women and predominantly follows the joint-liability group model, wherein each group has 5-7 members. The loans are provided mainly for agricultural and allied activities, business activities, and establishment and expansion of micro enterprises. As on March 31, 2024, the company had a network of 1,200 MFI branches and 97 SME branches in over 453 districts across 22 states, with a strong focus on rural and semi-urban areas.

 

Promoted by Mr Devesh Sachdev, the company has attracted high-pedigree domestic and global investors over the years. After capital infusion in fiscal 2019 and the third quarter of fiscal 2020, Warburg Pincus (through Honey Rose Investment Ltd) acquired a 48.6% stake in Fusion, becoming the largest shareholder. This marked the exit of Belgian Investment Company (Belgian), NMI Frontier (NMI), RIF North II (RIF) and Small Industries Development Bank of India (SIDBI) from the investor group and reduction in the stakes held by Global Financial Inclusion Fund (Global Financial), Creation Investments and Oikocredit. Post the recent IPO, Warburg Pincus remains the majority shareholder along with the exit of Global Financial and Oikocredit

Any other information: Not Applicable