Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL BBB/Stable’ rating to the Rs.31 crore for Non-Convertible Debenture of Satya Microcapital Limited (Satya) and reaffirmed its rating on the bank loan facilities and existing NCDs.at ‘CRISIL BBB/Stable’.
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.
After registering a 2 year CAGR of 115% till fiscal 2020, Satya’s growth momentum moderated by the outbreak of Covid-19 at the onset of fiscal 2021. Nevertheless, with disbursements picking up from Q2 2021, the company’s AUM stood at Rs 1,476 crore registering an on-year growth of 46% in fiscal 2021. In the aftermath of the second pandemic wave, growth momentum moderated during Q1 fiscal 2022. However, growth in disbursements picked-up from July 2021 onwards which in-turn resulted company reporting AUM of Rs 2,884 crore in March 2022 registering Y-o-Y growth of 95%.
The company’s collection efficiency (including over-dues but excluding prepayments) that improved to over 100% in March 2021 because of high overdue payments, got impacted with the sharp spike in number of cases due to the second wave of the pandemic and various forms of lockdown being imposed by states to curb the spread of Covid-19 – it dropped to 87% in May 2021. However, collection efficiency1 improved from June 2021 onwards and stood at 96% in April 2022. Even the disbursement pace that slowed down in the first quarter of fiscal 2022, revived during the second quarter with an average disbursement of over Rs 200 crore per month till February 2022 and Rs 858 crore disbursement in March 2022 itself. The company’s, 90+ days past due (dpd) (including write-offs) moderated to 3.2% in March 2022 as compared to 1.4% as on March 2021 (0.8% in March 2020). Additionally, the company has total outstanding restructured portfolio (under RBI Resolution framework 1.0 and 2.0) of Rs 223 crore (14% of the AUM) as of September 2021. As of March 2022, restructured book stood at Rs 161.3 crore (5.6% of the AUM as of March 2022). The performance of the restructured portfolio besides the company’s ability to sustain collections for incremental disbursements and eventually reach pre-pandemic levels of over 99% on a steady-state basis will remain a key monitorable.
1Collection Efficiency = Total collections (excluding prepayments) / Scheduled billing |
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 552 crore as on March 31, 2022, is adequate. Satya raised about Rs 113.2 crore in Q4 2022 and Rs 221.5 crore in the fiscal 2021 from financial investor Gojo & Company Inc. and which significantly improved its capital position. With Rs 384 crore infused by Gojo & Company Inc, it is now the largest shareholder in the company. As of March 2022, adjusted gearing (including off-book) stood at 5.2 times as compared to 3.1 times in March 2021. Besides, the company plans to raise additional equity capital of around Rs 55 crore by the Q1 2023 to fund future growth and maintain adequate capitalisation with capital adequacy ratio at over 20%.
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. 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 while sustaining the growth shall remain a key monitorable.
* 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.
* Geographically-diversified portfolio In fiscal 2022, owing to the second wave of Covid19, disbursements were low in Q1 2022. However, it picked up from July 2021 onwards and stood at Rs 2,586 crore in fiscal 2022 with Rs 858 crore of disbursement done in March 2022 itself. With sharp rise in disbursements, company reported an AUM of 2,884 crore as of March 2022 registering Y-o-Y growth of 95%.
Portfolio growth has come with focus on maintaining overall geographic diversity to mitigate the impact of localised issues in any particular region. As on March 31, 2022, Satya was present in 21 states, against 7 states as on March 31, 2018. The company has opened over 150 new branches over the last one year. As on April 30, 2022, the company had 338 branches. In terms of state-wise concentration, the highest exposure to a single state (Uttar Pradesh) was 20.7% and to top five states was 61% - Uttar Pradesh (20.7%), Bihar (15.9%), Punjab (9.3%), Haryana (8.4%), and Rajasthan (6.7%). Moreover, the top five districts accounted for 9.1% of AUM as on April 30, 2022. 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.
Weakness: * Average profitability, constrained by higher operational and credit costs As per IndAS, in fiscal 2022, Satya net profit improved to Rs 32.5 crore translating in RoMA of 1.25% as compared to net profit of Rs 10.2 crore and RoMA of 0.7% in fiscal 2021. Besides high operating costs, high provisioning made in the fiscal 2022 acted as a constraint.
In fiscal 2022, Satya’s operating expense ratio stood at 6.5% (6.8% in March 2021). In terms of credit cost, company reported credit cost of Rs 17.1 crore (0.7% as a percentage of managed assets) as compared to Rs 25.6 crore (1.7% as a percentage of managed assets) in fiscal 2021. However, with the diversification in the resource profile, company has witnessed improvement in average cost of borrowing and it stood at 10.05% in fiscal 2022 as compared to 12.5% in March 2021.
The company is currently in the growth phase with several branches opened over the last three years 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 further in the coming period.
* 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 5 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 62% in fiscal 2020. 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 contributed to a growth of 46% in AUM for fiscal 2021. Similarly in fiscal 2022, due to the second pandemic wave, growth moderated during Q1 fiscal 2022. However, disbursement picked-up from July 2021 onwards and the company reported an AUM of Rs 2,884 crore in March 2022 with on-year growth of 95% indicating that the majority of the portfolio has limited seasoning.
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 write-offs has remained low at 4.2% and 1.4%, respectively as on March 2021 (1.5% and 0.8% as on March 31, 2020). However, the asset quality of industry at large and that of Satya has got impacted due to second wave of Covid-19. In fiscal 2022, Satya’s 30+ and 90+ stood at 6.4% and 3.2% respectively as on March 31, 2022, 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. Post the second wave of covid 19, disbursements have picked up from July 2021 onwards with overall disbursement of Rs 2,586 crore in fiscal 2022 with Rs 858.5 crore of disbursement in March 2022 itself. 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, resulting in higher prepayments in Q3 and Q4 2022. 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. 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 343 crore as on April 30, 2022, against debt obligation (including operating expense) of around Rs 240 crore for May 2022 to June 2022.
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 ~100 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
Downward factors
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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 21 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, West Bengal, through a network of more than 31,000 villages in 338 branches as of March 31, 2022.
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 23-25% for the JLG loans and 23% for individual loans. In March 2022, the company reported AUM of Rs. 2,884 crore and profit after tax (PAT) of Rs. 32.5 crore |
Key Financial Indicators
Note: ^including writeoff, #including off-books assets |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s):
*Yet to be issued |
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||
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This Annexure has been updated on 03-Jun-2022 in line with the lender-wise facility details as on 06-Jan-2022 received from the rated entity.
Criteria Details
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