Rating Rationale
July 09, 2019 | Mumbai
Northern Arc 2019 Mosec Brevis
(Originators: Light Microfinance Private Limited, Pahal Financial Services Private Limited and Village Financial Services Limited)
'CRISIL A- (SO)' for Series A1 PTCs and 'CRISIL BB+ (SO)' for Series A2 PTCs, Converted from Provisional Rating to Final Rating
 
Rating Action
Trust Name Details Amount Rated (Rs Crore) Pool Principal (Rs Crore)  Original Tenure (Months)# Credit Collateral
(Rs Crore)		 Ratings/ Credit Opinion Rating Action
Northern Arc 2019 Mosec Brevis Series A1 PTCs 37.50 23.66 21 2.70 CRISIL A- (SO) Converted from Provisional Rating to Final Rating
Series A2 PTCs 2.62 2.62 2.70 CRISIL BB+ (SO)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
*After June 2019 Payouts
#Indicates door to door tenure from pool cut-off date. Actual tenure will depend on the level of prepayments in the pool, and exercise of the clean-up call option
Detailed Rationale

CRISIL has converted the provisional rating assigned to Series A1 pass-through certificates (PTCs) and Series A2 PTCs issued by 'Northern Arc 2019 Mosec Brevis' to 'CRISIL A- (SO)' and 'CRISIL BB+ (SO)' respectively. The transaction is backed by microfinance loan receivables originated by Light Microfinance Private Limited (Light), Pahal Financial Services Private Limited (Pahal) and Village Financial Services Limited (Village). The ratings are based on the credit support available to the PTCs, credit quality of underlying pool receivables, origination and servicing capabilities of the originators and soundness of the transaction's legal structure.
 
As required, CRISIL has received the following final executed documents. The executed documents are in line with the transaction terms at the time of provisional rating. Hence, CRISIL has converted the provisional rating to final rating.
 
Legal Documents:

  • Trust deed
  • Assignment Agreement
  • Servicing Agreement
  • Accounts Agreement
  • Power of attorney

Other Documents:

  • Information memorandum
  • Legal opinion
  • Trustee's awareness letter
  • Auditor's certificate
  • Seller's representations and warranties letter

For detailed information on CRISIL's policy on provisional ratings, click here: Revision in CRISIL policy for assigning 'provisional' ratings
 
The transaction has a 'Par with monthly subordinated Excess Interest Spread' structure, wherein the sellers, (Light, Pahal and Village) assigned the pool to 'Northern Arc 2019 Mosec Brevis', settled by Catalyst Trusteeship Limited (CTL) which issued Series A1 PTCs and Series A2 PTCs in exchange of a purchase consideration equal to 86.0% and 6.0%, respectively, of the pool principal. Total credit support available in the transaction at the time of securitization was as follows:

  • Internal credit support in the form of scheduled cash flow subordination, aggregating Rs 10.90 crore and Rs 7.84 crore for Series A1 PTCs and Series A2 PTCs, respectively
  • External credit-cum-liquidity collateral of Rs 2,69,88,258 (6.2% of pool principal or 5.3% of pool cashflows) also provides support to Series A1 and Series A2 PTCs. Of the Rs.2.70 crore credit enhancement, Rs. 1,30,64,121 is provided by Light which is 7.50% of Light pool principal, Rs. 91,22,377 is provided by Pahal which is 5.50% of Pahal pool principal and Rs. 48,01,760 is provided by Village which is 5.00% of Village pool principal

Series A1 PTCs are senior, and have the first priority right on the trust property. These PTCs are entitled to receive monthly interest. Principal and interest payments for Series A2 PTCs are fully subordinated to payouts for Series A1 PTCs. The transaction envisages ultimate payment structure for principal payouts for both Series A1 and Series A2 PTCs. On maturity of Series A1 PTCs, Series A2 PTCs are entitled to monthly interest. A trutee has been appointed to monitor the transaction on behalf of the PTC holders. Light, Pahal and Village will continue to service their respective pool contracts as the servicing agent. In the structure, excess interest spread, over collateralisation and credit enhancement from one originator are not fungible and cannot be used to cover shortfall for other originators.

Key Rating Drivers & Detailed Description
Supporting Factors 
  • Credit support available in the structure at the time of securitization
  • Credit collateral of Rs 2.70 crore (6.2% of the pool principal) provides credit support to Series A1 and Series A2 PTCs.
  • Of the Rs.2.70 crore credit enhancement, Rs. 1,30,64,121 is provided by Light which is 7.50% of Light pool principal, Rs. 91,22,377 is provided by Pahal which is 5.50% of Pahal pool principal and Rs. 48,01,760 is provided by Village which is 5.00% of Village pool principal
  • The PTCs also benefit from scheduled cashflow subordination aggregating Rs 10.90 crore for Series A1 PTCs and Rs 7.84 crore for Series A2 PTCs.
  • Modest seasoning of contracts in the pool at the time of securitization
  • The contracts in the pool have a weighted average seasoning of 6.3 months and amortisation of 35.6% as of the cut-off date.
  • All the contracts in the pool are current as of cut off date
Constraining Factors
  • Susceptibility to political and regulatory environment
  • The microfinance industry remains susceptible to risks arising out of socio-political issues and regulatory changes. Such events have the ability to disrupt loan repayments of underlying borrowers.
  • The unsecured nature of microfinance loans and inherent modest credit risk profile of the borrowers are considered
Liquidity Position
  • The credit cum liquidity enhancement available in the transaction at the time of securitization was      Rs. 2.70 crore (6.2% of pool principal) which is in the form of fixed deposit. The enhancement fully covers promised interest payouts to Series A1 PTCs for all months even with no collections from underlying receivables.
About the pool
The pool securitised comprises of microfinance loan receivables. At the time of securitisation, the pool had weighted average net seasoning of 6.3 months. The pool is highly concentrated with top 3 states state in the pool accounting for 81.4% of pool principal. Average ticket size for the pool is Rs.29,083. All the contracts in the pool were current as on pool cut-off date. CRISIL has adequately factored all these aspects in its rating analysis.

Rating Assumptions
To assess the base case shortfalls for the transaction, CRISIL has analysed the moving portfolio delinquency information, static pool performance and collection efficiency for all the originators upto Dec 2018.
 
Light: - 60+ dpd and 0+ dpd on the portfolio is 1.3 per cent and 1.6 per cent as of Dec-18 respectively. Due to demonetisation, the 60+ dpd and 0+ dpd peaks observed were 9.9 per cent and 12.5 per cent respectively, but there have been recoveries from the peaks observed. Significant recoveries have been observed in the static pool across vintages.
 
Pahal: - 60+ dpd and 0+ dpd on the portfolio is 0.2 per cent and 0.6 per cent as of Dec-18 respectively. Due to demonetisation, the 60+ dpd and 0+ dpd peaks observed were 6.8 per cent and 10.7 per cent respectively, but there have been recoveries from the peaks observed. Significant recoveries have been observed in the static pool across vintages.
 
Village: - 60+ dpd and 0+ dpd on the portfolio is 0.6 per cent and 0.8 per cent as of Dec-18 respectively. The performance of village portfolio was robust even after demonetisation. Peak 0+ DPD observed is 2.83% in Dec-2016.
 
Based on these aspects, CRISIL has estimated base case shortfalls in the pool at 6.0-8.0 per cent of cash flows. CRISIL has also assumed a monthly prepayment of 0.5 per cent - 1.0 per cent in its credit enhancement calculation.

 
Counterparty details

Capacity

Counterparty Name

Counterparty Rating/ Track record

Effect on credit ratings in case of non-performance

Originator Light
Pahal
Village		 Not rated by CRISIL No effect.
Servicer Light
Pahal
Village		 Not rated by CRISIL Significant effect, because of change in servicing quality and replacement cost of servicer. However, currently CRISIL does not envisage the need for replacement. The Trust or investor has right to change the servicer with an intimation to CRISIL.
Collection and Payout Account Bank ICICI Bank Rated 'CRISIL AAA/CRISIL AA+/Stable' Negligible effect. Account bank can be changed without impacting the rating.
Collateral in the form of Fixed Deposit Fincare SFB Rated 'CRISIL A1+' Negligible effect. Bank with whom the fixed deposit is maintained can be changed without impacting the rating.
AU SFB Rated 'CRISIL AA-/Stable/CRISIL A1+'
Trustee CTL Adequate past track record Negligible effect. Can be replaced at minimal cost.
 
About the Originator
Light
Light Microfinance Pvt Ltd was registered as a NBFC with RBI and got classified as NBFC-MFI with effect from May 2014. It is headquartered at Ahmedabad, and has a gender and poverty focused program, targeting rural and semi-urban areas. The company follows a JLG model and provides microfinance loans to women borrowers for income generating purposes. It is present in 6 states with major portfolio in Gujarat and Rajasthan. The loan sanctions happen at the head office and 100% disbursement are cashless. Average ticket sizes are in the range of 25-30k.
 
Pahal
Pahal Financial Services Private Limited is an NBFC MFI registered with Reserve Bank of India operating in the state of Gujarat, Madhya Pradesh (MP), Rajasthan and Maharashtra. It is headquartered in Ahmedabad and started operations in March 2011. The company follows a JLG model and provides microfinance loans to women borrowers for income generating purpose mainly focusing on urban and semi-urban regions. Credit appraisal happens at the head office and 100% of the loans are directly disbursed to bank accounts. They follow a monthly collection model and collections are done in center meetings where 15-17 members are present. Ticket sizes are in the range of 28-32k and loan tenures of 2 years.
 
Village
Village Financial Services Ltd (VFS: Formerly known as Village Financial Services Private Limited), is headquartered in Kolkata and started its microfinance activities in the year 1997, acquired NBFC 'Spencer Vinimay Private Ltd' (SVPL) in 2006 and renamed it as Village Financial Services Private Limited. VFS is engaged in the business of lending to individual women borrowers under 'Joint Liability Group (JLG) model. West Bengal and Bihar form major part of the portfolio and as of Dec 18, it is present is 10 states. Village mainly caters to the rural population and due to the long history has strong connect with its borrowers. 80-85% of the disbursements are cashless for Village and average tenure of the loans s 1.5 years.
 
Past rated pools
This is the sixteenth Mosec transaction being rated by CRISIL.
Key Financial Indicators (Light)
Particulars as on Unit Dec 18
(9 month)		 Mar 18
Assets under management Rs crore 215 51.6
Total income Rs crore 31.8 24.1
Profit after tax (PAT) Rs crore 1.4 0.3
Return on managed assets % 0.9 0.3
GNPA % 1.2 4.2
Adjusted gearing Times 5.7 2.8
 
Key Financial Indicators (Pahal)
Particulars as on March 31 Unit 2018 2017
Assets under management Rs crore 228 126
Total income Rs crore 40 38
Profit after tax (PAT) Rs crore -7 2
Return on managed assets % - 1.2
GNPA % 0.4 0.2
Adjusted gearing Times 8.8 2.7
 
Key Financial Indicators (Village)
Particulars as on Unit Dec 18 Mar 18 Mar 17
Assets under management Rs crore 853 683 388
Total income Rs crore 141 116 78
Profit after tax (PAT) Rs crore 22 9 6
Return on managed assets % 3.2 1.5 1.6
GNPA % 0.53^ 0.61 1.22
Adjusted gearing Times 6.6 7.7 8.5
^90+ days past dues

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
Type of Instrument Rated Amount
(Rs Cr.)		 Date of Allotment Maturity Date* Coupon Rate (XIRR) Outstanding
Ratings		 Credit cum liquidity Enhancement (Rs Cr.)
Series A1 PTCs 37.50 02-Mar-19 17-Dec-20 12.50% CRISIL A- (SO) 2.70&
Series A2 PTCs 2.62 02-Mar-19 17-Dec-20 12.50% CRISIL BB+ (SO) 2.70^
*Indicates door to door tenure. Actual tenure will depend on the level of prepayments in the pool
&At the time of securitisation, additional credit support includes Rs.10.90 crore in form of scheduled cash flows subordination (assuming zero prepayments) - Includes overcollateralization of Rs. 6.11 crore (14.0 per cent of pool principal)
^At the itme of securitisation, additional credit support includes Rs.7.84 crore in form of scheduled cash flows subordination (assuming zero prepayments) - Includes overcollateralization of Rs. 3.49 crore (8.0 per cent of pool principal)
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018 2017 2016 Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Series A1 PTCs  LT 23.66 CRISIL A- (SO) 29-03-19 Provisional CRISIL A- (SO)              
Series A2 PTCs LT 2.62 CRISIL BB+ (SO) 29-03-19 Provisional CRISIL BB+ (SO)              
All amounts are in Rs.Cr
Links to related criteria
CRISILs rating methodology for ABS transactions
Evaluating risks in securitisation transactions - A primer
Legal analysis in structured finance transactions

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