Detailed Rationale

CRISIL Ratings has removed its corporate credit rating (CCR) on Save Solutions Private Limited (SSPL; flagship entity of ‘Save Group’) from ‘Rating Watch with Developing Implications’ and reaffirmed the existing ratings at ‘CCR  BBB’ while assigning a ‘Stable’ outlook.

 

CRISIL Ratings has placed the ratings on ‘Watch with Developing Implications’ on December 7, 2021 following announcement made by Save Group with regard to acquisition of New Habitat Housing Finance and Development Ltd (New Habitat Housing). On November 26, 2021, Save group announced that they would be acquiring 100% stake in New Habitat Housing. Save group received the approval from Reserve Bank of India on November 24, 2021, for this acquisition. The transaction was completed during Q4 fiscal 2022, post receipt of all required regulatory and other mandatory approvals.  The total acquisition stood at Rs 74 crore (for entire 100% stake). In order to fund this transaction, Save group had utilize funds from recently raised equity through follow on equity round of Rs 60 Crores on November 9, 2021 from its existing set of investors i.e. Agrif Cooperatief Ua (Incofin) and Maj Invest Financial Inclusion Fund III K/S along with internal accruals. Both investors have invested equity capital in equal proportion.

 

The rating continues to reflect the established position of the Save group and the extensive experience of its promoters in the business correspondent segment. The rating also factors in adequate capital position of the group backed by recent equity infusion and stable earnings. These strengths are partially offset by high geographic concentration, low vintage of the lending book with asset quality remaining a monitorable, and susceptibility to local socio-political issues inherent in the microfinance industry.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Save Solutions Pvt Ltd and its wholly owned subsidiaries, Save Microfinance Pvt Ltd and Save Financial Services Pvt Ltd and New Habitat Housing Finance and Development Ltd.  The four companies, collectively referred to as the Save group, have strong operational synergies, and common promoters and senior management.

 

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:

• Established brand in the business correspondent space

The Save group has developed a healthy customer service points (CSP) network for extending banking services in rural areas. The group acts as a service provider to banks and helps establish CSPs which operate as a mini or micro bank branch. The CSPs are operated by agents selected by SSPL. The agents get 55-80% of the commission received from the banking partner and SSPL retains the remaining. The Save group provides end-to-end services from appointing and training agents to providing technical support and sales support, and periodic monitoring of CSPs. This model has helped banks (particularly the SBI) optimize operational costs by replacing branches that have high establishment and running costs with CSPs. This has helped the Save group become a leading solutions provider in the business correspondent space. It has an active network of around 12,000 CSPs as on March 2022.  The group had handled more than 7.5 lakh transactions with total value of over Rs 41,000 crore  in fiscal 2021 (Rs 37,029 crore for fiscal 2020). The group has among the highest revenue per CSP and has bagged substantial incremental CSP appointments from its banking partners.

 

• Extensive experience of the promoters in the business correspondent segment

The promoters were recovery agents for the SBI in Bihar and UP and got into the business correspondent segment for distribution of the products and services of the bank. Their experience has helped the group develop its business model of establishing CSPs. The promoters have established risk management systems that address majority of the risks in the business. For instance, the prepaid model ensures a cap on the quantum of transactions wherein every CSP has to deposit funds upfront with SSPL and can perform transactions only to that limit. Each CSP also goes through inspection at three levels'by the district coordinator, an internal audit team of the Save group and the bank’s inspection team. Frequent inspections help detect and resolve issues and enhance operational efficiency. Extensive understanding of local demographics has helped the promoters establish the group’s lending business which has operational synergies with the business correspondent operations.

 

• Adequate capital position

The capital position has been adequate as indicated by networth and gearing of Rs 296 crore and 1.4 time, respectively,  on a provisional basis as on December 31, 2021. During fiscal 2022, the group has received capital infusion of Rs 60 crore in Nov 21 from MAJ Invest and Incofin in equal proportion. The group will be utilizing these funds towards acquisition of New Habitat. The group has attracted equity investment in past as well of Rs 120 crore from private equity investor Maj Invest during July 2020, one of the peak pandemic months. It had raised Rs 40 crore equity from Agrif Cooperatief Ua (Incofin) during fiscal 2018. Both these investors have good understanding of the microfinance business and hold stake in many large and mid-sized MFIs. CRISIL Ratings believes the Save group will maintain adequate capital position and keep gearing under 4 times even as it expands its lending business.

 

• Stable earnings

Healthy growth in the business correspondent space has led to stable earnings for the group. The fee-based model minimizes fixed expenses, resulting in a low cost to income ratio. For the  nine months of fiscal 22 cost to income ratio stood at 73% as against 78 % for fiscal 21. Commission income from business correspondent activities rose to Rs 123 crore for nine months of  fiscal 2022 from Rs 70.4 crore in fiscal 2017 and is expected to grow at a steady pace given the increase in the number of CSPs and growing transactions per CSP. During the fiscal 22, the group had received approval for setting up CSPs in various locations. Healthy monitoring, support and operational systems will help scale up operations at the CSPs. The group had three-year average return on equity of around 10%-11% till nine months of fiscal 2022. CRISIL Ratings believes profitability of the Save group will benefit from stable income from the business correspondent segment, which accounts for a lion’s share of the revenue at 70% (20% revenue comes from microfinance and 4% from the MSME  and 6% revenue from housing finance business as of December 2021). That said, the group’s ability to scale up the lending business while managing credit cost will be critical to support profitability.

 

Weaknesses:

• Low vintage of group’s lending business

The group started actively growing its lending businesses from mid fiscal 2019, resulting in low seasonality in the loan book. The microfinance loan book increased to Rs 333 crore as on December  31, 2021, from Rs 112 crore as on March 31, 2020. The loans against property (LAP)/MSME loan book increased to Rs 64 crore as on December 31, 2021, from Rs 49 crore as on March 31, 2020.

 

Asset quality in the lending business was hit in the first two quarters of fiscal 2022 because of the pandemic. In Micro finance book, the 90+ days past due (dpd) increased to 4.1% as on June 30, 2021 from 2.2% as on March 31, 2021. Nevertheless, post application of lockdown relaxations, the collections in MFI segment improved which resulted in 90+ dpd reducing to around 2.6% as on September30, 2021 and 2.1% as on December 31, 2021. Asset quality position in the MSME remained weak with 90+ dpd elevated due to legacy issues. The 90+ dpd in this book was over 22.0% as on December 31, 2021 from 11.5% as on March 2020.The group, nevertheless, proposes to run down this legacy book which stood at Rs 6 crore as of  December 31, 2021 (it was at Rs 7.2 crore earlier). Ability to maintain portfolio quality and collection efficiency will be crucial as the group scales up operations. Further, post the acquisition of New Habitat Housing, group’s ability to maintain asset quality in affordable housing segment will also remain key monitorable. As on December New Habitat Housing reported 8.62% of GNPA as compared with 6.22% of GNPA for fiscal 21.

 

• High geographic concentration

Given that the group started the business correspondent operations in Bihar and UP, these regions account for a majority of the overall business. Around 42% of CSPs were in Bihar and UP as of December 2021. Consequently, around 53% of business correspondent revenue came from these two states. The geographical concentration extends to the lending business because of its operational synergies with the business correspondent activities. SBI accounts for more than 90% of business correspondent commission and BoI and BoB contribute the rest. The group seeks to get empaneled with more banks over the medium term. Nevertheless, ability to reduce concentration in revenue and also expand lending business in other districts/locations will continue to remain key monitorable.

 

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

The microfinance sector witnessed two major disruptive events in the past decade: first, the crisis promulgated by the ordinance passed by the government of Andhra Pradesh in 2010, and second, the demonetisation of high-value currency notes in 2016. The ordinance by the Andhra Pradesh government demonstrated the vulnerability of MFIs to regulatory and legislative risks. It 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 delinquencies post demonetisation and subsequent socio-political events. The MFI Bill, 2020, passed recently by the Assam Assembly may increase asset-quality challenges. Additionally, any loan waivers will make matters worse due to their impact on repayment discipline of borrowers. The sector remains susceptible to local elections, natural calamities and borrower protests, which may result in momentary spurt in delinquencies. As the business involves lending to the poor and downtrodden sections of society, MFIs will remain susceptible to socially sensitive factors, including high interest rates, and tighter regulations and legislation.

 

A significant portion of the portfolio of the Save group comprises loans under the joint liability group (JLG) mechanism. Customers generally have weak credit risk profiles and lack access to formal credit. Also, their income flow is volatile and dependent on the local economy. With slowdown in economic activity after the pandemic, there may be pressure on the cash flows of borrowers, thereby affecting their repayment capability. Ability to reinstate repayment discipline among customers (such that the pre-Covid level of periodic collections is achieved) will be a monitorable.

Liquidity: Adequate

The Save group has  adequate liquidity  supported by by steady collections in the microfinance and non-banking financial company (NBFC) businesses and stable commission from business correspondent operations. The group had liquidity (including cash & bank balance, liquid investments, and unutilized bank limits) of Rs 384 crore as on March  31, 2022. Liquidity cover for three months is adequate at over 3.8 times.

Outlook: Stable

The Save group will benefit from its established presence and the extensive experience of its promoters in the business correspondent space. The financial risk profile will continue to be supported by adequate capital position and stable earnings.

Rating Sensitivity factors

Upward factors

• Ramp-up in business correspondent operations with reduction in geographical concentration
• Scale-up of lending business with its share in overall profitability increasing to over 30%
• Sustenance of 90+dpd below 2% in the lending business

 

Downward factors

• Loss of empanelment with any bank leading to a significant fall in revenue
• Weakening in asset quality or earnings, resulting in stressed profitability and capital position
• Inability to maintain adjusted gearing below 4 times on a steady-state basis

About the Group

SSPL operates as a business correspondent for SBI, BoB, BoI and PNB  across the country and has developed a network of CSPs in rural geographies. The company has presence in 30 states through more than 12,000 CSPs. It is the largest business partner of SBI in terms of revenue and second largest in terms of volume.

 

Save Microfinance Pvt Ltd extends microfinance loans under the JLG model. Save Financial Pvt Ltd extends loans to MSMEs.

Key Financial Indicators: Consolidated

CRISIL adjusted financials	Unit	Dec 21 (9M FY22)^	Mar 2021	Mar 2020
Total assets	Rs crore	925	556	324
Total Commission Income	Rs crore	123	168	139
Total income	Rs crore	192	227	184
Profit after tax	Rs crore	8	21	16
Return on assets	%	4	4.7	5.6
Cost to Income	%	73.1	78	78
GNPA (90+ dpd)*	%	5.82	5.3	4
Adjusted gearing (including off-book)	Times	1.4	0.79	0.86

^on a provisional basis *includes both MFI, MSME and Housing lending book

 

Key financial indicators: Standalone

CRISIL adjusted financials	Unit	Dec 21 (9M FY22)	Mar 2021	Mar 2020
Total assets	Rs crore	544	345	321
Total Commission Income	Rs crore	123	168	139
Total income	Rs crore	134	184	150
Profit after tax	Rs crore	6.1	17.7	8.7
Return on networth	%	3.1	7.8	16.3
Cost to Income (Net basis)	%	66.0	41.2	42.8
GNPA (90+ dpd)	%	NA	NA	NA
Gearing	Times	0.7	0.3	0.5

 

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	NA	NA	NA	NA	NA	NA	NA

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Save Microfinance Private Limited	Full	100% Subsidiary
Save Financial Services Private Limited	Full	100% Subsidiary
New Habitat Housing Finance and Development Ltd	Full	100% Subsidiary