Detailed Rationale

CRISIL Ratings has assigned the ‘CRISIL BBB/Stable’ rating to the non-convertible debentures (NCDs) of Satya Microcapital Ltd (Satya). The rating is driven by the company’s adequate capitalisation backed by recent fund infusion, extensive experience of the promoter in the microfinance business, geographically diversified portfolio, and diversified resource profile. These strengths are partially offset by average, though improving, profitability – constrained by high operating expenses and borrowing costs, limited loan cycle vintage in the portfolio with asset quality remaining a monitorable, and susceptibility to local socio - political issues inherent to microfinance industry and modest credit risk profile of the borrowers.

 

The company has raised Rs 121 crore of equity capital since fiscal 2020 from financial investors such as Gojo & Company Inc and Dia Vikas Capital Pvt Ltd. Of this, Rs 68 crore was raised in the first quarter of current fiscal despite the Covid-19 pandemic. As a result, Satya’s current adjusted networth is Rs 251 crore and CRISIL adjusted gearing (including off-book) at 4.2 times, compared with adjusted networth of Rs 86 crore and adjusted gearing of 8.8 times as on March 31, 2019. The company plans to raise additional equity capital of around Rs 150 crore in the fourth quarter of fiscal 2021. The company’s ability to ramp-up internal accretion so that it can sustain its capital position and keep adjusted gearing within the targeted cap of 6 times is a key monitorable.

 

Satya is promoted by Mr Vivek Tiwari, who has over 20 years of experience in the microfinance industry before he started Satya in 2016. The company benefits from the experience of the board, which has a healthy mix of independent directors and comprises Ms. Surekha Marandi (Ex-chairperson and member of Financial Inclusion Fund administered by NABARD) and Mr Mukul Jaiswal (Co-chairman of Sa-Dhan) among others, including representation from investors that together extend strategic support to the company.

 

As on March 31, 2020, Satya’s assets under management (AUM) stood at Rs 1,008 crore (including off-book of Rs 282 crore), registering a two-year compound annual growth rate (CAGR) of 115%. However, this momentum was arrested due to lower disbursements in the first quarter of fiscal 2021 on account of Covid-19 pandemic. As a result, AUM stood at Rs 1,081 crore as on December 31, 2020. The company has expanded its presence to 22 states, with highest exposure to a single state being 23% and the top five states being 71% besides per district exposure capped at 2%.

 

The company’s collection efficiency (including over-dues but excluding prepayments) revived towards the end of Q1 2021 and reached 81.7% in September 2020. Efficiency improved to over 100% in December 2020 because of high overdue payments while current collections stood at 93.7%. As the economic challenges and Covid-19 affliction curve have not yet normalised, the company’s ability to further improve collections to reach pre-Covid levels of over 99% on a steady state basis will be a key monitorable. The company started disbursing from July 2020, with overall disbursements at Rs 467 crore until December 2020. In addition to disbursing loans to fresh borrowers, the company also pre-closed the loans of existing borrowers and disbursed fresh loan to provide them with additional liquidity to revive their businesses, resulting in higher prepayments in Q3 2021. Sustainability of collections for the incremental disbursements will be a key monitorable.

 

Under the Covid-19 Regulatory Package announced by the Reserve Bank of India (RBI), lenders were allowed to grant moratorium on loans. CRISIL Ratings understands that Satya availed moratorium from 70% of the lenders during April-May 2020; and around 30% lenders in phase-II from June to August 2020. Satya made scheduled payments for loans wherever moratorium was not granted. On the asset side, the company had extended moratorium to its customers. However, it witnessed better collections from June 2020. Nevertheless, on account of the gap between current and pre-Covid collection levels, there is a risk of increase in credit losses and its potential impact on capitalisation metrics. Early bucket delinquencies (0-60 days) may remain elevated over the coming months. The company made provisions (including writeoffs) of Rs 9.9 crore in fiscal 2020, and has provided for Rs 9.8 crore in the current fiscal until December 2020.Overall provisioning in fiscal 2021 is expected at 2.5-3% of the AUM.

 

Satya has a diversified resource profile with good mix of exposure to loans from banks, NBFCs (non-banking financial companies) and financial institutions. The company has strong relationships with over 40 lenders with the total debt in combination of term loans, NCDs and Commercial Paper. The average cost of borrowing, however, is high at 13.56% (13.92% in fiscal 2020) in the current fiscal. The company is also active in raising securitised book (direct assignment [DA] + pass through certificates [PTC]) and has business correspondent relationships with a few banks.

 

As per IndAS, in fiscal 2020, Satya reported net profit of Rs 7.5 crore translating to return on managed assets (RoMA) of less than 1%. High opex and borrowing costs and pandemic related provisioning made in the fourth quarter of fiscal 2020 further act as constraints. For the nine months ended December 31, 2020, Satya reported net profit of Rs 10.3 crore and RoMA of 1.1% (annualised) after factoring in credit cost (provisioning + writeoffs) of Rs 9.8 crore. However, profitability from the core business, despite marginal improvement, will remain moderate until the company gains operating leverage by improving scale of operations. Satya’s asset quality as reflected in 30+ and 90+ days past due (dpd) including writeoff stood at 1.5% and 0.8%, respectively as on March 31, 2020 (0.1% and 0.1% as on March 31, 2019). Portfolio delinquencies 30+ and 60+ (including write-offs) stood at 6.3% and 3.5% respectively as on December 31, 2020. Although portfolio delinquencies have not been high in the past, the company’s loan portfolio has grown significantly in the last two years resulting in limited loan cycle vintage. Sustenance of adequate asset quality with growth and expansion of portfolio across newer territories will be a key monitorable.

 

After witnessing two major disruptions in the past decade, the microfinance industry is yet again facing quite a few challenges in the current fiscal starting with the pandemic, followed by natural calamities, the ongoing socio-political issues in Assam and lately the farm protests. These events directly affect the income-generation ability and savings of borrowers of microfinance institutions (MFIs), who typically have weaker credit risk profiles. With repayment discipline of microfinance borrowers impacted, the sector’s collection efficiency will bear watching. This also indicates the fragility of the microfinance business model vis-a-vis external risks. Since business involves lending to the poor and downtrodden sections of the society, MFIs will remain exposed to socially sensitive factors and, consequently, lead to tighter regulations and legislation.

 

Liquidity was adequate and sufficient to fund liability-side outflows as per schedule. As on December 31, 2020 liquidity buffer to cover total debt and opex over the following two months was over 1 time (with zero collection) and 1.8 times (with 75% collection).

Analytical Approach

CRISIL Ratings has evaluated the standalone business and financial risk profile of Satya.

Key Rating Drivers & Detailed Description

Strengths:

*Adequate capitalisation supported by regular equity infusion

Satya's capital position, reflected in adjusted networth of Rs 172 crore as on March 31, 2020 and Rs 251 crore as as on December 31, 2020, is adequate. Satya raised about Rs 121 crore in the past 18 months from financial investors such as Gojo & Company Inc. and which significantly improved its capital position. Of the total sum, Rs 68 crore  was raised in May 2020 despite the challenging economic environment which is demonstrative of the constant support from its investors  With Rs 118 crore infused by Gojo & Company Inc, it is now the largest shareholder in the company. The company plans to raise additional equity capital of around Rs 150 crore in the fourth quarter of fiscal 2021.

 

While adjusted gearing (including off-book) was high at 8.8 times at the end of March 2019, it reduced to 5.9 times as on March 31, 2020. With the expected equity infusion, it will reduce further to around 3 times. The company’s ability to ramp up internal accretion so that it can sustain its capital position and, thereby, keep adjusted gearing within the targeted cap of 6 times remains a key monitorable. Nevertheless, Satya is also likely to raise the required equity capital and ensure overall capital position remains adequate. This will also substantiate maintenance of adjusted gearing at around 6 times and an overall capital adequacy ratio of over 20%, and will be a rating sensitivity factor.

 

*Extensive experience of the promoter in the microfinance industry further supported by experienced board and senior management

Satya is promoted by Mr Vivek Tiwari, who has over 20 years of experience in the microfinance industry before he started Satya in 2016. Besides the promoter’s robust understanding of financial product requirements for the customers in the microfinance space, the company also benefits from the experienced board which has a mix of independent directors

 

The leadership team comprises professionals with average experience of over a decade in the fields of microfinance, audit, operations, banking people management, and information technology (IT). Given its focus on digital integration of operations, processes are carried out through an e-platform. Besides online generation of granular credit quality report for the entire portfolio, the company has distinct portals for business (Br.Net) and collections (Trucell) for better functional boundaries. While 100% disbursements are done cashless, the management is focused on attaining 100% cashless collections; currently 45% collections is done cashless.

 

* Geographically-diversified portfolio

Portfolio stood at Rs 1,008 crore as on March 31, 2020, up 62% from Rs 622 crore a year earlier. The company had a CAGR of 115% over the past two years. In fiscal 2021, due to the lockdown, disbursements were put on hold until the end of June. Subsequently, disbursements have recovered to pre-Covid levels, averaging Rs 123 crore per month (September to December 2020). As on December 31, 2020, AUM stood at Rs 1,081 crore.

 

Portfolio growth has come with focus on maintaining overall geographic diversity to mitigate the impact of localised issues in any particular region. As on December 31, 2020, Satya was present in 22 states, against 7 states as on March 31, 2018. The company has opened 35 new branches in fiscal 2021 till now. As on December 31, 2020, the company had 180+ branches and expected to touch 200 branches by March 2021. In terms of state-wise concentration, the highest exposure to a single state (Uttar Pradesh) was 23% and to top five states was 71% - Uttar Pradesh (23%), Bihar (16%), Punjab (12%), Haryana (10%), and Rajasthan (9%). Moreover, the top five districts accounted for 7.9% of AUM as on December 31, 2020. Along with geographical diversification, the robust growth is supported by adequate monitoring of operational parameters, such as calibrated AUM exposure per branch, per district, amongst others.

 

While the company continues to further reduce geographical concentration, the ability to diversify while maintaining stable systems and processes to avoid any pressure on asset quality will remain critical.

 

Weaknesses

* Average profitability, constrained by high opex and borrowing cost

As per IndAS, in fiscal 2020, Satya reported net profit of Rs 7.5 crore translating in RoMA of 0.7%. Besides high opex and borrowing costs, additional pandemic-related provisioning made in the fourth quarter of fiscal 2020 acted as a constraint.

 

In fiscal 2020, Satya’s opex ratio stood at 6.96% and the average cost of borrowing was 13.92% (as percent of average managed assets). Adjusted gearing was 5.9 times as on March 31, 2020. This constraint to the profitability is offset to an extent by the past few tranches of capital infusion and current adjusted gearing improving to around 3 times. Average cost of borrowing, however, is high at 13.56% in the current fiscal despite a diversified resource profile comprising banks, small finance banks, NBFCs, and financial institutions. For the nine months ended December 31, 2020, Satya reported net profit of Rs 10.3 crore and RoMA of 1.1% (annualised) after factoring in Rs 9.8 crore of provisions (including writeoffs).

 

The company is currently in the growth phase with several branches opened in fiscals 2020 and 2021 to cater to new geographies. As these branches take time to achieve operating profitability, the company’s profitability from core business, despite marginal improvement, is expected to remain constrained. As the resource profile is diversified further with increasing share of bank funding, the cost of borrowing may decline in the coming period.

 

Profitability will also depend on the overall credit costs, which will be incurred on account of the pandemic-related lockdown. The company reported credit cost (provisions + write-offs) of Rs 9.9 crore (1% as of percentage of managed assets) in fiscal 2020, and Rs 9.8 crore (0.8% as a percentage of managed assets) for the nine months ended December 31, 2020 for the overdue loans. The increase in credit cost is on account of creating Covid-19 related contingency buffer and the expected stress in the overall book. The visibility around ultimate credit cost will likely come towards the end of fiscal 2021 and will be a key rating sensitivity factor.

 

* Limited loan cycle vintage in the portfolio; asset quality performance remains a monitorable

Having started operations in November 2016, Satya has limited operational track record of around 4 years. The company has attained significant growth in operations from fiscal 2019 after the external investors were on-boarded. The loan portfolio has grown at CAGR of 115% indicating that a majority of the portfolio has limited seasoning. However, this growth momentum was arrested in the first quarter of fiscal 2021 as disbursements remained subdued during the early phase of the lockdown. With the onset of second quarter, disbursements revived at a good pace and should contribute to moderate growth in AUM for fiscal 2021.

 

Although the company started operations just around demonetisation, it did not witness an impact on asset quality due to socio-political issues in north Uttar Pradesh and adjoining regions. Portfolio delinquencies for 30+ and 90+ dpd including writeoff has remained low at 1.5% and 0.8%, respectively as on March 2020 (0.1% and 0.1% as on March 31, 2019). However, the asset quality of industry at large and that of Satya has got impacted due to Covid-19. Satya’s 30+ and 60+ including write-offs stood at 6.3% and 3.5% respectively as on December 31, 2020, comparable with other microfinance players. Although delinquencies were not high in the past, the loan portfolio has grown significantly over the past two years resulting in limited loan cycle vintage.

 

As the current economic challenges and Covid-19 affliction curve have not yet normalised, the company ability to further improve collections to pre-Covid levels of over 99% on a steady state basis will be important in the coming months. Furthermore, considering the rapid growth in loan portfolio, significant expansion into new geographies and limited loan cycle vintage, Satya’s ability to sustain its risk management processes and commensurate asset quality performance in newer geographies will be a key monitorable. Satya started disbursing from July 2020 onwards, with overall disbursements at Rs 467 crore till December 2020. In addition to disbursing loans to fresh borrowers, the company also pre-closed the loans of existing borrowers and disbursed fresh loan to provide them with additional liquidity to revive their businesses, resulting in higher prepayments in Q3 2021. Sustainability of collections and impact of the pandemic on asset quality which have risen in the aftermath of Covid-19 outbreak will also be a key monitorable.

 

* Susceptibility to potential risk from socio-political issues in the microfinance sector and inherently modest credit profile of the borrowers

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 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. The sector witnessed high levels of delinquencies post demonetisation and subsequent socio-political events. The MFI Bill, 2020 passed recently by the Assam Assembly may increase asset-quality challenges for MFIs. Additionally, any loan waivers announced will make matters worse due to their impact on repayment discipline. In addition, the sector remains susceptible to issues such as local elections, natural calamities and borrower protests among others, 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, tighter regulations and legislation.

 

The company started operation in November 2016, just around the time of demonetisation and hence did not get impacted. In the third quarter of fiscal 2020, hard bucket delinquencies increased due to the outbreak of protest against the new citizenship bill in Assam. While recent developments in Assam may significantly impact microfinance operations in the state, the impact on the company is not expected to be material as Satya’s exposure is not substantial at around 5% of its total portfolio. Additionally, a significant portion of the portfolio comprises loans given to individuals under the JLG mechanism. Customers generally have below-average credit risk profiles with lack of access to formal credit and high seasonality in income. The income flow of this segment of customers is volatile and dependent on the local economy. With slowdown in economic activity after the pandemic, there may be pressure on the borrowers’ cash flows, thereby affecting their repayment capability. However, the company's ability to reinstate repayment discipline among customers (such that pre-Covid levels of periodic collections are achieved) will be a monitorable.

Liquidity: Adequate

The company’s business model provides an inherently positive asset-liability maturity profile, driven by the shorter tenure of advances over liabilities, thereby keeping liquidity adequate. As a philosophy for liquidity management post Covid-19, the company maintains around two months of liquidity cover on a steady state basis. As a result, liquidity (excluding sanctioned term loan and securitisation lines) stood at Rs 123 crore as on December 31, 2020, against debt obligation (including opex) of around Rs 109 crore for January and February 2021.

 

Satya’s resource profile is diversified across a lender base comprising banks, non-banking financial companies (NBFCs), and other financial institutions. Liquidity is also supported by steady collections of Rs 43 crore on average reported in the past 2-3 months. Need-based and timely funding support from the parent and investors will aid liquidity.

Outlook Stable

Satya will continue benefit from its well diversified portfolio and the extensive experience of the promoter and management team.

Rating Sensitivity factors

Upward factors

• Increase in earnings leading to improvement in return on assets over 2.5% on a sustainable basis
• Increase in scale of operations while maintaining sound asset quality metrics
• Significant improvement in capitalisation profile

 

Downward factors

• Weakening in asset quality or earnings profile, resulting in stressed profitability and capital position
• Inability to maintain adjusted gearing below 6 times on a steady-state basis

About the Company

Satya MicroCapital Limited (formerly known as TFC Invest Limited) is a Delhi based, RBI-registered “NBFC - MFI”. It commenced microfinance operations in November 2016. Within a span of four years, the company has expanded its presence to 22 states and Union Territories, namely, Assam, Bihar, Chandigarh, Chhattisgarh, Delhi, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Jharkhand, Karnataka, Madhya Pradesh, Odisha, Puducherry, Punjab, Rajasthan, Tamil Nadu, Tripura, Uttar Pradesh, Uttarakhand, Meghalaya and West Bengal, through a network of 17,000 villages in 185 branches.

 

The company largely extends JLG up to Rs 50,000 and individual loans are up to ticket size of Rs 80,000. The company lends at interest rates of 23-24% for the JLG loans and 23% for individual loans. In fiscal 2020, the company reported AUM of Rs. 1,008 crore and profit after tax (PAT) of Rs. 7.5 crore

Key Financial Indicators

	Unit	Dec 2020	March 2020	March 2019
Total managed assets	Rs crore	1,325	1,198	863
Total income	Rs crore	185	209	102
PAT	Rs crore	10.3	7.5	-0.3
Return on managed assets	%	1.1*	0.7	-0.04
GNPA (90+ dpd)^	%	1.0	0.7	0.1
Adjusted gearing (including off-book)	Times	4.2	5.9	8.8

*on annualised basis;

^including writeoff

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 of instrument	Rating outstanding with outlook
NA	Non Convertible Debentures*	NA	NA	NA	50	Simple	CRISIL BBB/Stable

*Yet to be issued