Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the bank facilities of Repco Micro Finance Limited (RMFL). Subsequently, the ratings have been withdrawn on bank facilities at the request of the company and on receipt of a no-objection certificate from the banker. The withdrawal is in line with CRISIL Rating's policy on withdrawal of its ratings.

 

The ratings continue to reflect the high financial flexibility of Repco Micro, with expectation of funding support from the parent -- Repatriates Cooperative Finance & Development Bank Ltd (Repco Bank), significant experience of the promoters and senior management and comfortable capitalisation metrics. These strengths are partially offset by moderate asset quality, geographically concentrated operations, and risks related to regulatory and legislative changes in the microfinance sector.

 

Assets under management (AUM) stood at Rs 868 crore as on March 31, 2021, a degrowth of 20% from the year ago. The business momentum was affected again in the first quarter of fiscal 2022 on account of the second wave; which led to lower disbursements. However, from July 2021 onwards, disbursement revived to an average of over Rs 70 crore per month, leading to an AUM of Rs 938 crore as of December 31, 2021.

 

Collection efficiency (including overdues but excluding prepayments) that improved to 103% in March 2021 because of high collections from overdue payments dropped to 23% in May 2021 because of the impact of the pandemic. However, this has been increasing steadily since the second quarter of the current fiscal and stood at 98% in December 2021. Ability of the company to maintain collections on steady state basis at 98% will remain a key monitorable.

 

On the asset quality front, the 90+ days past due (dpd) stood at 7.6% as on December 2021 as compared to 4.5% in March 2021 (1.9% in March 2020). Under the one-time restructuring scheme announced by the Reserve Bank of India (RBI) as a Covid-19 relief measure, CRISIL Ratings understand, Repco Micro has not done any restructuring till date. The ability of RMFL to improve asset quality and maintain healthy collections will remain a monitorable.

Analytical Approach

For arriving at the rating, CRISIL Ratings has evaluated the standalone business and financial risk profile of RMFL.

Key Rating Drivers & Detailed Description

Strengths:

• High financial flexibility due to funding support from parent and significant experience of promoters and senior management

Repco Micro's board comprises representatives from Repco Bank with experience in banking and other financial services. Smt R S Isabella is the managing director at Repco Micro and Repco Bank. She started her career in Karur Vysya Bank as an officer and has worked in various capacities in almost all key operational segments of banking. She joined Repco Bank in 1999 and has handled important portfolios such as credit, information technology, accounts and audit, pension, repatriates rehabilitation, and human resource training.

 

The management has developed good understanding of the operating geographies. The board also includes experienced professionals from the banking sector. Repco Micro has set up a senior team, with extensive experience in handling various functions in similar businesses including collections, back-end operations, credit and legal.

 

The company is expected to receive timely, need-based financial support from its parent, Repco Bank. Historically, Repco Bank has actively provided funds to Repco Micro through SODL besides term loan; SODL is a revolving limit that can be availed of when required.

 

• Comfortable capitalisation

Repco Micro has comfortable capitalisation, as indicated by networth of Rs 281 crore and gearing of 2.3 times as on December 31, 2021 (against Rs 265 crore and 2.6 times, respectively, a year ago). During last 2-3 years, Repco Bank and Repco Home Finance Ltd together infused capital worth Rs 20 crore in Repco Micro. Repco bank further infused equity of Rs 20.40 crore in March 2021 and Repco Home Finance Ltd infused Rs 9.6 crore in April 2021. The capital position of Repco Micro is also supported by stable accretion to reserve. Repco Micro has been consistently profitable for over seven years and this has in turn supported its capitalisation. Gearing remained at 3-5 times during the last three fiscals and will continue to be supported by stable accretion and need-based capital support extended by the promoter to achieve the planned scale-up in operations.

 

Weaknesses:

• Moderation in asset quality

The 90+ dpd has been low below 2% since inception. However, asset quality weakened in fiscal 2021 amid the pandemic. The 90+ dpd and 30+ dpd stood at 4.5% and 7.7%, respectively, as of March 31, 2021 as compared to 1.9% and 3.3% as on March 31, 2020. Furthermore, the asset quality of the industry at large and that of RMFL was impacted by the second wave. The 30+ and 90+ dpd of the company stood at 11.0% and 7.6%, respectively, as on December 31, 2021

 

The moderation in asset quality is led by coastal areas that are affected by cyclones every year and some specific districts where the borrower’s income is entirely depended on tourism. Yet, owing to initiative such as formation of a special task force for collections from overdue accounts, the management aims to settle the overdue portfolio by end of March 2022. The ability of Repco Micro to curtail slippages into deeper buckets and increase recovery from delinquent accounts will remain a key monitorable. As the current economic challenges and Covid-19 affliction curve have not yet normalised, the ability of the company to sustain its collection efficiency on a steady state basis will be important in the coming months. Furthermore, considering the growth in loan portfolio, ability to commensurate asset quality performance will be a key monitorable.

 

• Geographical concentration of portfolio

Repco Micro has been operating for over seven years as a non-banking financial company-microfinance institution (NBFC-MFI) undertaking microcredit through its 93 branches located in 38 districts of Tamil Nadu and union territory of Puducherry. The company tends to benefit in terms of good understanding of local operational dynamics, owing to more than two decade of long regional presence of the parent. Repco Micro’s operations are predominantly concentrated in five districts that account for nearly 41% of the company's loan portfolio as on December 31, 2021. This increases susceptibility to local socio-political risks inherent in the microfinance business. Nevertheless, the strong regional presence of the parent in these districts may act as a partial mitigant. For entering new geographies, Repco Micro’s risk department will play a vital role as it will carry out detailed due diligence prior to setting up a new branch. Repco Micro's efforts to reduce the concentration and establish its presence in newer geographies will be closely monitored.

 

• Potential risks from legislative and regulatory changes in the microfinance sector

The microfinance sector witnessed two major disruptive events in the past decade. The first was the crisis promulgated by the ordinance passed by the government of Andhra Pradesh in 2010, and the second was demonetisation in 2016. Promulgation of the ordinance on MFIs by the government of Andhra Pradesh in 2010 exposed them 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. The sector witnessed high levels of delinquencies post demonetisation and subsequent socio-political events. The MFI Bill, 2020 passed by the Assam Assembly may increase asset-quality challenges for MFIs. Further, announcement of any loan waivers may worsen matters due to their impact on repayment discipline. The sector also remains susceptible to regional issues such as elections, natural calamities and borrower protests, which may result in momentary spurt in delinquencies. This indicates the fragility of the business model to external risks. As the business involves lending to the poor and downtrodden sections of society, MFIs will remain exposed to socially sensitive factors, including high interest rates and tighter regulations and legislations.

Liquidity: Adequate

Liquidity should remain adequate, supported by the timely, need-based funds to be extended by the parent, Repco Bank. As on February 28, 2022, the company had Rs 65.58 crore of liquidity in the form of cash and equivalents and unutilised cash credit and working capital lines.  Liquidity is supported by steady monthly collection of Rs 50 crore (excluding prepayments) in the past 4-5 months, which is adequate to meet monthly debt obligation and operating expenses. The liquidity cover for next 3 month period excluding collections from March to May 2022 stood at 1 time. Apart from these liquid funds, the company also has access to 25% of ad-hoc limit facility (Rs. 125 crore) from Repco Bank which can be raised as and when required.

Outlook: Stable

CRISIL Ratings believes Repco Micro will receive strong financial support from its parent over the medium term, and maintain adequate capitalisation.

Rating Sensitivity factors

Upward factors:

• Significant improvement in geographical diversification and reduction in dependence of single state, with proportion of Tamil Nadu reducing below 75%
• Sustainable improvement in asset quality with 90+ dpd improving to pre-pandemic level

 

Downward factors:

• Deterioration in asset quality or earnings profile, leading to a stress on the capital position.
• Adjusted gearing increasing to and remaining above 5 times for a prolonged period.
• Change in stance of support, or sizeable reduction in ownership, by Repco Bank

About the Company

Repco Micro was incorporated in 2007 as Repco MSME Development & Finance Ltd and registered as an NBFC with the RBI in 2010. It got classified as an NBFC-MFI in December 2013. The company is promoted by Repco Bank. Repco Micro extends loans to economically backward women through women self-help groups for income-generation purposes. Its main objective is to uplift poor women by promoting entrepreneurship and providing microcredit/ finance in different loan cycles at reasonable rates of interest.

Key Financial Indicators

As on/For the period ended	Unit	Dec-21	2021	2020
Portfolio Outstanding	Rs crore	937.6	867.7	1087.3
Total income	Rs crore	122.7	176.5	192.1
Profit after tax	Rs crore	12.4	40.5	54.1
Gross NPA	%	7.6	4.5	1.9
Gearing	Times	2.3	2.6	4.2
Return on assets	%	1.8	3.8	5.3

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity Level	Rating Assigned with Outlook
NA	Overdraft Facility	NA	NA	NA	200	NA	CRISIL A3+ (Rating Reaffirmed and Withdrawn)
NA	Long Term Bank Facility	NA	NA	NA	100	NA	CRISIL BBB/Stable (Rating Reaffirmed and Withdrawn)