Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A-/Stable’ rating on the bank loan facilities of Navi Finserv Private Limited (NFPL; erstwhile Chaitanya Rural Intermediation Development Services Private Limited - CRIDS).

 

This rating remains centrally driven by the comfortable capital position of Navi group (NFPL and its 100% subsidiary – Chaitanya India Fin Credit Private Limited - CIFCPL), which has strengthened significantly post acquisition of majority stake in NFPL by Mr. Sachin Bansal in October 2019. Mr. Sachin Bansal, presently holds about 98% stake in Navi Technologies Private Limited (NTPL) which, in turn, holds 99.6% stake in Navi group - as the ultimate holding entity.

 

The rating also factors in Navi group’s increased financial flexibility to raise capital, its long track record of operations in the microfinance sector of India supported by the experienced leadership team of CIFCPL, adequate risk management systems and improving resource profile of the group. These ratings are partially offset by modest core profitability, susceptibility of the microfinance portfolio to socio-political challenges, and limited seasoning in the non-microfinance portfolio.

 

Navi group’s capital position remains strong reflected in a reported networth of close to Rs 1200 crore and an adjusted gearing of 2.9 times (including interest free debt from parent – NTPL, excluding this – gearing was 1.7 times) as on September 30, 2021. Since October 2019, Navi group has received about Rs 1100 crore as capital from NTPL and is expected to raise another round of capital in the near to medium term which would support its growth plans. On a steady state basis, the company will continue to receive capital support from its parent.. At NTPL level, reported networth stood at Rs 3,905 crore as on December 31, 2021 of which, more than 50% is available as surplus that can be made available to subsidiaries at short notice, if need be.

 

Supported by this financial flexibility, Navi group’s liquidity position remains strong. As on December 31, 2021, Navi group had Rs 1819 crore as liquidity available in the form of cash and liquid investments. Against this, it had Rs 586 crore of debt obligations to be met over the following 4 months. Additionally, NTPL’s stance on extending need based support further substantiates the high financial flexibility of Navi group to raise funds as and when needed. Also, the stance around maintaining at least 15% of external liabilities as on-tap liquidity for the lending business remains intact.

 

CIFCPL’s assets under management (AUM) has grown at an annualized rate of 62% during nine months ended December 31, 2021 to Rs 2042 crore (Rs 1396 crore as on March 31, 2021). Alongside scale, the geographical diversity in the portfolio has also improved. As compared to fiscal 2019 when top two states (Karnataka and Maharashtra) accounted for 91% of the AUM, the share of top two states (Karnataka and Bihar) in the AUM reduced to 62% as of December 31, 2021. Newer geographies of operations like Uttar Pradesh, Madhya Pradesh, Chhattisgarh, Tamil Nadu, Rajasthan and Gujarat are expected to contribute to incremental growth.

 

In terms of asset quality, the 90+ dpd (excluding write offs) had peaked at 5.4% in June 2021 and has corrected gradually since then to 3.8% as on December 31, 2021. Total restructured portfolio for the  microfinance segment stood at Rs 34 crore as on September 30, 2021 and of this, 53.9% was current. For customers whose loans were restructured, a repayment holiday of one month in May 2021. The cumulative exposure to these borrowers was ~Rs 24 crore as on December 31, 2021.  The company has not made any major write offs since March 2020.

 

NFPL had launched its digital personal loan portfolio in May 2020, under its revised business strategy. Despite the Covid imposed disruptions, this portfolio has grown significantly over the last 3-4 quarters and stood at Rs 1432.8 crore as on December 31, 2021 – registering a 12 month growth of 238%. In the immediate aftermath of Covid-19 second wave, the delinquencies from the personal loan book had increased to 6.1% (90+ dpd excluding write offs as on September 30, 2021). Stressed assets (NPAs + write offs + reported restructured assets) for the personal loan portfolio were 13.2% as on September 30, 2021. However, with reduction in causalities and eventual uplifting of lockdown restrictions – 90+ dpd has corrected to 1.0% (excluding write offs) and stressed assets stood at 6.4% as on December 31, 2021. Correction in NPAs and regularization of restructured portfolio also contributed to it. Correspondingly, overall collection efficiency also improved from 89% to 96% over this period and, for the portfolio created after June 2021, collection efficiency up till 30 dpd bucket has remained above 98%. The company’s ability to be able to sustain its collections performance in the medium to long term, remains a monitorable.

 

The housing loan product, which was launched by NFPL in March 2021 has also grown at a robust rate and stood Rs 175.6 crore as on December 31, 2021. Given the target market for this product comprises prime salaried customers as of now, these housing loans are offered at competitive yields to customers such that average yield for the portfolio was 7.9% as on September 30, 2021. Owing to limited track record of portfolio performance and strong customer profile being on-boarded, delinquencies have remained under control with nil NPAs from this book. 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. 

 

The group’s profitability position, though improving, has remained susceptible to volatility in credit costs over the last few quarters and a sharp rise in marketing expenses incurred by NFPL in H1 2022. Resultantly, the consolidated RoMA for H1 2022 dipped to 1.1% (annualized) from 2.6% for fiscal 2021. Consolidated credit costs, for these two periods stood at 2.1% as against 4.0% whereas operating expenses increased to 7.0% from 3.0%.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of NFPL with its 100% subsidiary, CIFCPL – given the high degree of operational and funding synergies between the two. Together, the two are referred to as Navi group. Incrementally, commitment of funding, managerial and operational support from NTPL and high financial flexibility with readily investible funds has also been factored into the rating.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

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.

Liquidity: Strong

Navi group’s liquidity position remains strong. As on December 31, 2021 - it had Rs 1819 crore as liquidity available in the form of cash and liquid investments. Against this, it had Rs 586 crore of debt obligations to be met over the following 4 months. Additionally, NTPL’s consolidated networth of Rs 3,905 crore on December 31, 2021, and its stance on extending needs based support further substantiates the high financial flexibility of Navi group to raise funds as and when needed. Also, the stance around maintaining at least 15% of external liabilities as on-tap liquidity for the lending business remains intact.

 

The treasury control and monitoring by NTPL along with the funding support received in the recent past and future commitment and plans, are expected to ensure maintenance of adequate liquidity cushion for Navi group in the medium term.

Outlook Stable

CRISIL Ratings believes Navi group’s capital position will remain strong in relation to the scale and nature of its operations, largely supported by NTPL’s demonstrated track record and future commitment of extending support.

Rating Sensitivity Factors

Upward Factors

• Profitable scale up in operations, alongside sustenance in asset quality of the lending business.
• Sustained improvement in consolidated lending business profitability – with RoMA being maintained at above 2.5% on a steady state basis.

 

Downward Factors

• Any change in stance of support committed by NTPL to Navi group – potentially leading to capital position being weaker than that estimated; significant rise in gearing for Navi group to beyond 4 times subject to the portfolio mix between home loans and unsecured loans.
• Any deterioration in overall or standalone asset quality and profitability, constraining the internal accruals to networth.

About the Company

Navi Finserv Private Limited (formerly known as Chaitanya Rural Intermediation Development Services Private Limited) was formed in February 2012 to carry on the business of sourcing, underwriting and carrying on the business of lending to individuals and entities including micro, small and medium enterprises, rural credit and other body corporates across India and provide credit related services as an NBFC, including, inter alia, intermediation services for financial services agents and money transfer agents; credit linkage services; acting as a banking correspondent and generally carrying out all activities permissible to be carried out as an NBFC. It acquired its current brand name in June 2020 after getting acquired by Mr. Sachin Bansal led – Navi Technologies Pvt Ltd in October 2019. NFPL extends digital personal loans and housing loans and, is the holding company of Chaitanya India Fin Credit Private Limited (CIFCPL) since November 2014. CIFCPL, which carries out microfinance operations.

Key Financial Indicators

As on/ for the period ended	Unit	Sep-21 (6M)	Mar-21 (12M)	Mar-20 (12M)	Mar-19 (12M)
Total managed assets^	Rs Cr	4960	4,679	4,437	2,235
Total income#	Rs Cr	332	424	240	187
Profit after tax#	Rs Cr	28	118	15	35
Adjusted Gearing (including debt from NTPL)^	Times	2.9	2.9	3.1	2.1
Return on managed assets (annualised)^#	%	1.1%	2.6%	0.6%	2.8%

#including treasury gains

^including off book

 

Key Financial Indicators of NFPL (Standalone)

As on/ for the period ended		Sep-21	Mar-21	Mar-20
Total managed assets^	Rs crore	3288	3271	3687
Total income#	Rs crore	191.1	307.6	52.8
Profit after tax#	Rs crore	12.9	97.5	10
Adjusted Gearing (including debt from NTPL)^	Times	1.8	1.5	2.9
Gearing (excluding intra group debt)	Times	0.5	0.3	0.3
Return on managed assets (annualised)^#	%	0.8	2.8	0.5

#including treasury gains

^including off book

Any other information: Not applicable