Detailed Rationale

CRISIL Ratings has assigned its ‘CCR BBB/Stable’ corporate credit rating to Save Solutions Private Limited (SSPL; part of the Save group). The rating indicates ‘moderate degree of strength with regard to honouring of debt obligations’.

 

The rating is driven by 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.

 

SSPL began operations as a business correspondent in January 2013 by getting empaneled with the State Bank of India (SBI) in Bihar and Jharkhand. The business correspondent operations were earlier under Save Society (since 2009) and were transferred to SSPL. The Save group has developed expertise in setting up customer service points (CSPs) which are micro versions of a bank branch established to provide door-step services and to increase financial inclusion of the rural population. CSPs provide basic banking services such as cash deposit, cash withdrawals, fund transfers, opening of bank accounts, and enrolling customers in social services schemes. SSPL is the second largest player in terms of number of CSPs and the largest in terms of transaction volume, transaction value and profitability. The company is empaneled with three scheduled commercial banks: the SBI, Bank of India (BoI) and Bank of Baroda (BoB). It is also empaneled with some regional rural banks in Bihar, Uttar Pradesh (UP) and Uttarakhand.

 

The promoters have been in the financial services space in Bihar, UP, Uttarakhand and other geographies for more than 20 years and have developed an understanding of the local demographics.

 

The adequate capitalisation of the Save group is reflected in healthy networth and gearing of Rs 231 crore and 0.5 time, respectively, as on December 31, 2020 (Rs 95 crore and 0.8 time, respectively, as on March 31, 2020). The group will likely expand its lending business, but will maintain adequate capitalisation with gearing not increasing beyond 4 times over the medium term.

 

The business correspondent segment has grown at a healthy pace while maintaining a healthy cost to income ratio (58% for the first nine months of fiscal 2021 against 57% for fiscal 2020). Stable income from this business will help maintain profitability. Nevertheless, ability to scale up the lending business while managing credit cost will be critical.

 

As the group started operations in Bihar and UP, these regions account for a majority of its business. Furthermore, the SBI accounts for more than 90% of business correspondent commission, and BoI and BoB contribute the rest. Ability to reduce concentration in operations is a key monitorable.

 

As the lending business started growing actively only from mid fiscal 2019, seasonality is low in the lending book. Ability to maintain portfolio quality and collection efficiency while scaling up will be a key monitorable.

 

Under the Covid-19 Regulatory Package announced by the Reserve Bank of India, lenders were allowed to grant moratorium on loans. CRISIL Ratings understands that the Save group availed moratorium from 65% of the lenders during April-May 2020. The group did not avail any moratorium from June to August 2020. It made payments as scheduled for loans for which moratorium was not granted. While the group had extended moratorium to customers, collections improved from August 2020. Collection efficiency in the microfinance business improved to around 92% during December 2020 from 88% during September 2020 and to 88% from 75% in the micro, small and medium enterprise (MSME) finance business. Nevertheless, given that the group has not reached the pre-Covid collection efficiency level, the risk of increase in credit losses persists. The group made provisions (including write-offs) of Rs 4.3 crore (microfinance + MSME) in fiscal 2020, and provided Rs 1.3 crore more till December 2020.

 

After witnessing two major disruptions in the past decade, the microfinance industry has faced challenges this fiscal too, starting with the pandemic, followed by natural calamities, and the ongoing socio-political issues in Assam and the farm protests. Such events directly affect the income-generation ability and savings of microfinance borrowers, who typically have weaker credit risk profiles. With repayment discipline of borrowers impacted, the collection efficiency of microfinance institutions (MFIs) will have to be monitored. This indicates the fragility of the business model with regard to external risks. As the business involves lending to the poor and downtrodden sections of the society, MFIs will remain susceptible to socially sensitive factors and tight regulatory control.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of SSPL and its wholly owned subsidiaries, Save Microfinance Pvt Ltd and Save Financial Services Pvt Ltd. The three 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 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) optimise 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 9,300 CSPs and had handled more than 7.1 lakh transactions with total value of close to Rs 27,375 crore till December 31, 2020, 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 co-ordinator, 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 231 crore and 0.5 time, respectively, as on December 31, 2020. The group was able to attract equity investment 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 Pvt Ltd) 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 minimises fixed expenses, resulting in a low cost to income ratio (58% for the first nine months fiscal 2021 against 57% for fiscal 2020). Commission income from business correspondent activities rose to Rs 138 crore for the first nine months of fiscal 2021 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. The group has already received approval for setting up 3,500 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 18% till the first nine months of fiscal 2021. 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 86% (10% revenue comes from microfinance and 4% from the MSME business). That said, the group’s ability to scale up the lending business while managing credit cost will be critical to support profitability.

 

Weakness:

* 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 119 crore as on December 31, 2020, from Rs 23.4 crore as on March 31, 2019. As of February 24, 2021, the overall microfinance AUM stood at Rs 156 crore. The loans against property (LAP)/MSME loan book increased to Rs 57 crore as on December 31, 2020, from Rs 49 crore as on March 31, 2020.

 

Asset quality in the lending business was hit in the first two quarters of fiscal 2021 because of the pandemic. The 90+ days past due (dpd) increased to 2.8% as on December 31, 2020, from nil as on March 31, 2020, in the microfinance business, but declined to 12.2% from 15.6% in the MSME segment. Excluding the earlier delinquent loan book of Rs 7.2 crore originated in fiscal 2017, 90+ dpd in the MSME segment was lower at 1.8% as on December 31, 2020, and 3.3% as on March 31, 2020. The group plans to run down its earlier book of Rs 7.2 crore and has provided around Rs 2 crore against this book. Ability to maintain portfolio quality and collection efficiency will be crucial as the group scales up operations.

*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 2020. 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. The group is looking to diversify.

 

The 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. Ability to reduce concentration in revenue is a 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 a comfortable asset liability management profile, reflected in cumulative positive mismatches across all buckets up to one year as on December 31, 2020. The group had liquidity of Rs 151.7 crore as on December 31, 2020. It has debt obligation of Rs 59.6 crore over the three months through March 2021. Liquidity is supported by steady collections in the microfinance and non-banking financial company (NBFC) businesses and stable commission from business correspondent operations. Liquidity cover for three months is adequate at 2.2 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
• Increase in the lending business with 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 and BoI across the country and has developed a network of CSPs in rural geographies. The company has presence in 30 states through more than 9,000 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)

	Unit	Dec 20/9MFY21	Mar 2020	Mar 2019
Total assets	Rs crore	417	238	152
Total Commission Income	Rs crore	128	139	104
Total income	Rs crore	161	171	121
Profit after tax	Rs crore	13	14.4	18.8
Return on assets	%	5.4	7.4	15.3
Cost to Income	%	58.1	57.3	35.7
GNPA (90+ dpd)(Managed AUM)	%	5.5	4.2	1.8
GNPA*(Own book)	%	5.6	4.2	1.8
Adjusted gearing (including off-book)	Times	0.5	0.8	0.3

*Proforma basis

 

Key financial indicators (SSPL - Standalone)

	Unit	Dec 20/9MFY21	Mar 2020	Mar 2019
Total assets	Rs crore	358	321	189
Total Commission Income	Rs crore	128	139	104
Total income	Rs crore	138	150	113
Profit after tax	Rs crore	12.9	8.7	4.0
Return on networth	%	10.7	16.3	24.0
Cost to Income	%	40.1	42.8	29.5
GNPA (90+ dpd)	%	NA	NA	NA
Gearing	Times	0.3	0.5	0.3

 

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	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