Rating Rationale
June 26, 2024 | Mumbai
 
Verity 03 24
(Originator: Spandana Sphoorty Financial Limited)
‘CRISIL AA (SO)’ for Series A1 PTCs converted from provisional rating to final rating
 
Rating Action
Tranche Name Amount Rated (Rs.Crores) Outstanding Amount^
(Rs.Crores)		 Balance Tenure^ Credit Collateral (Rs.Crores) Ratings/Credit
Opinions		 Rating Action
Series A1 PTCs 84.56 74.43 18 4.12 CRISIL AA (SO) Converted from Provisional Rating to Final Rating
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
^ As after May 2024 payout

 

Detailed Rationale

CRISIL Ratings has converted its provisional ratings assigned to Series A1 Pass-Through Certificates (PTCs) issued by ‘Verity 03 24’ to final ratings of 'CRISIL AA (SO)'. The PTCs were issued under a securitisation transaction originated by Spandana Sphoorty Financial Limited (SSFL; rated ‘CRISIL A/Positive’).

 

This transaction is backed by a pool comprising microfinance loan receivables originated by SSFL. The ratings are based on credit quality of the underlying pool receivables, origination and servicing capabilities of SSFL, credit support available to the PTCs, payment mechanism for the transaction, and soundness of the transaction’s legal structure.

 

CRISIL Ratings has now received the final legal/executed documents for this transaction. These executed documents are in line with terms of the transaction envisaged when provisional ratings were assigned. Hence, CRISIL Ratings has converted the provisional ratings to final ratings.

 

Executed documents:

  • Declaration of Trust
  • Assignment Agreement
  • Accounts Agreement
  • Servicing Agreement
  • Power of Attorney 

 

Other Documents:

  • Information Memorandum
  • Legal Opinion
  • Trustee Letter
  • Auditor’s Certificate(s)
  • Originator’s Representations and Warranties Letter

 

The transaction has a ‘Par with EIS’ structure. SSFL has assigned the loan pool to ‘Verity 03 24’, a trust settled by Catalyst Trusteeship Limited (CTL), which has issued Series A1 PTCs to investors in exchange for a purchase consideration equal to 87.25% of the pool principal outstanding as on the cut-off date (February 29, 2024).

 

Series A1 PTC holders are promised timely interest on a monthly basis and principal on ultimate basis on the maturity date of the PTCs. Investor payouts for PTCs are supported by cash collateral, overcollateralisation and subordination of excess interest spread (EIS).

 

Total credit support available in the transaction structure is as below:

 

  • Internal credit enhancement from scheduled cashflow subordination (assuming zero prepayments) aggregating to Rs 26.86 crore (27.7% of pool principal) which includes Rs 12.36 crore of principal overcollateralisation (12.75% of initial pool principal) and Rs 14.51 crore of EIS (15.0% of initial pool principal) for Series A1 PTCs.
  • External cash collateral in the structure amounting to Rs 4.12 crore (4.25% of initial pool principal) in the form of Fixed Deposit.

Key Rating Drivers & Detailed Description

Strengths:

  • External cash collateral in the structure amounting to Rs 4.12 crore (4.25% of pool principal) and internal credit enhancement from scheduled cashflow subordination (assuming zero prepayments) amounting to Rs 26.86 crore (27.7% of pool principal) for Series A1 PTCs.
  • All of the 27,060 contracts in the underlying loan pool are current on repayment as of the cut-off date (February 29, 2024).
  • The pool has a weighted average seasoning of 5.9 monthly instalments and a pre-securitisation amortisation of 20.6% as of the cut-off date.

 

Weaknesses:

  • The microfinance industry remains susceptible to risks arising out of socio-political issues and regulatory changes. Such events can disrupt loan repayments of underlying borrowers.
  • The 30+ delinquencies on SSFL’s portfolio have witnessed an uptick from 3.0% in Mar-2024 to 5.7% in May-2024. The increased slippages in early buckets are understood to majorly stem from SSFL’s transition from a monthly collection model to a weekly collection model for incremental disbursements from around a quarter of their branches. Field officers’ and borrowers’ adaptation to this new operating model across geographies will continue to remain a key monitorable over the medium term and could have a bearing on the collection performance of loans in the underlying pool.

 

These aspects have been adequately factored in its rating analysis by CRISIL Ratings.

Liquidity: Strong

Liquidity is strong given that the credit enhancement available in the structure is sufficient to cover losses exceeding 1.5 times the currently estimated base shortfalls.

Rating Sensitivity factors: 

Upward factor:

  • Credit enhancement available in the structure adequately covering for 2.3 times the estimated adjusted base shortfalls on the residual cash flows of the pool due to sustained healthy collections from the pool.

 

Downward factors:

  • Credit enhancement available in the structure failing to cover 2.0 times the estimated adjusted base shortfalls due to weaker than expected performance of the pool.
  • A sharp downgrade in the rating of the servicer/originator.
  • Non-adherence to the key transaction terms envisaged at the time of the rating.

About the Pool

The transaction is backed by microfinance receivables originated by SSFL. The key pool characteristics are outlined below:

  • The contracts in the pool have weighted average seasoning of 5.9 months, which has led to pre-securitisation principal amortisation of 20.6% as of the pool cut-off date.
  • The pool is diversified in terms of geography with the top 3 state and top 3 districts accounting for 53.3% and 8.3% of the pool principal respectively.
  • The average ticket size for contracts in the pool is Rs 45,089, with a weighted average interest rate of 25.0%.
  • All the contracts in the underlying loan pool were current as of the cut-off date (February 29, 2024).

 

Rating Assumptions

To assess the base case shortfalls for the transaction, CRISIL Ratings has analysed the microfinance industry’s dynamic portfolio delinquencies on a state-level basis over various operating cycles, including the collection performance observed in stressed periods. Additionally, CRISIL Ratings has considered SSFL’s collection efficiency, dynamic portfolio delinquency, and static pool delinquency performance up to Dec 2023, along with write-offs, ARC sales, and restructuring information.

 

CRISIL Ratings has also analysed the portfolio cuts based on various parameters and compared the pool with the portfolio on these parameters. Further, CRISIL Ratings has factored the delinquency performance of the microfinance industry in various geographies.

 

CRISIL Ratings has estimated base case shortfalls in the pool at 7.0%-9.0% of cash flows. Additionally, stresses on account of economic, political and geography concentration factors have been applied to arrive at the adjusted base shortfalls for the pool.

 

CRISIL Ratings has also factored the following assumptions, basis the typical industry characteristics of the asset class and its criteria for rating asset backed securitisations:

 

  • CRISIL Ratings has assumed a monthly prepayment of 0.5%-1.5% of initial pool principal.
  • CRISIL Ratings does not envisage any risk arising on account of commingling of cash flows given the rating of the servicer.
  • CRISIL Ratings has run sensitivities based on various shortfall curves (front-ended, back-ended and normal) and has adequately factored the same in its analysis.
  • CRISIL Ratings has adequately factored in the risks arising on account of counterparties (refer to Counterparty Details)

 

Counterparty details

Capacity

Counterparty

Rating

Effect on transaction rating in case of non-performance

Originator

SSFL

CRISIL A/Positive

No effect.

Servicer

SSFL

CRISIL A/Positive

Significant effect, because of change in servicing quality and replacement cost of servicer. However, currently CRISIL Ratings does not envisage the need for replacement. The trustee, on behalf of the investors, shall retain the right to nominate an alternate collection agent in case of a “Servicer Event of Default”, linked to insolvency of the servicer or breach of any transaction terms.

Collection and Payout Account Bank

ICICI Bank Limited

CRISIL AAA/Stable/CRISIL AA+/Stable

Negligible effect. The trustee, on behalf of the investors, has the right to change the collection and payout account bank if needed.

Cash collateral bank

DCB Bank Limited

CRISIL AA-/Stable/CRISIL A1+

Negligible effect. The trustee, on behalf of the investors, has the right to change the bank with whom the cash collateral is maintained if needed.

Trustee

CTL

Not rated by CRISIL Ratings

Negligible effect. The trustee can be replaced by the investor if needed.

 

Transaction waterfall mechanism

Series A1 PTC holders are promised timely interest on a monthly basis and principal on ultimate basis on the maturity date of the PTCs. The collections from the pool, including the internal subordination through overcollateral as well as EIS, will be used to make promised interest payouts to PTC holders, followed by expected principal payouts as per the scheduled monthly principal collections.

 

However, in case of a collection shortfall, while the cash collateral can be used to make the promised interest payouts, any shortfall in expected principal collections will be carried forward as arrears. The cash collateral can be utilised to meet any outstanding principal arrears on the maturity date of the PTCs.

 

Any prepayments will be utilised for accelerated redemption of PTCs.

About the Originator

SSFL is a public limited company incorporated under the provisions of the Companies Act, 1956, on March 10, 2003. It was registered as a non-deposit accepting NBFC with the Reserve Bank of India and was classified as an NBFC-MFI effective April 13, 2015. The shares of SSFL were listed on the stock exchanges in India in August 2019 pursuant to the IPO of equity shares. SSFL, along with its subsidiaries, is engaged in lending, providing small-value unsecured loans to low-income customers in semi-urban and rural areas. The tenure of these loans is generally 1-2 years. While SSFL extends microfinance loans, its subsidiaries extend other services such as loans against property, gold loans, business loans and personal loans.

Key Financial Indicators

Particulars

Unit

September-2023

March-2023

March-2022

March-2021

Total assets

Rs crore

12001

9884.7

7569.1

9468.1

Total income

Rs crore

1167

1476

1480

1396

Profit after tax

Rs crore

244

12

70

145

Gross NPA (90+ dpd)

%

1.3

2.1

17.2

5.6

Gearing

Times

2.3

2.0

1.2

2.0

Return on managed assets

%

4.5

0.1

0.8

1.6

annualised

 

Performance of past rated pools

CRISIL Ratings has ratings outstanding on 8 other securitisation transactions originated by SSFL. The cumulative collection ratios in pools where payouts have commenced range from ~97% to ~99% and 90+ delinquencies (including overdues) have been below 3% as of May 2024 payouts.

Any other information: Not Applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Type of
Instrument

Rated Amount

(Rs Cr)

Date of
Allotment

Maturity

Date#

Coupon Rate
(%) (p.a.p.m.)

Complexity
level

Outstanding

Ratings/Credit Opinions

Cash Collateral

(Rs Cr)

INE0UZE15017

Series A1 PTCs

84.56

28-Mar-2024

24-Nov-2025

9.65%

Highly complex

CRISIL AA (SO)

4.12

1 crore = 10 million

# Indicates door to door tenure. Actual tenure will depend on the level of prepayments in the pool, and exercise of the clean-up call option

Annexure - Rating History for last 3 Years
  Current 2024 (History) 2023  2022  2021  Start of 2021
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Series A1 PTCs LT 74.43 CRISIL AA (SO) 19-04-24 Provisional CRISIL AA (SO)   --   --   -- --
All amounts are in Rs.Cr.
Criteria Details
Links to related criteria
Meaning and applicability of SO and CE symbol
Evaluating risks in securitisation transactions - A primer
CRISILs rating methodology for ABS transactions

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