By Jindal Haria

India Ratings and Research (Ind-Ra) has assigned SV Creditline Private Limited’s (SVCL) bank loans up to INR500m an ‘IND BBB’ rating with a Stable Outlook.

KEY RATING DRIVERS

The rating reflects SVCL's presence in underpenetrated states such as Uttar Pradesh (UP) and Madhya Pradesh (MP), improving funding profile, investor pedigree and management experience in the microfinance sector. The rating also reflects the company’s geographical concentration, higher profitability than peers’, modest capitalisation, moderate scale of operations and the high credit risk inherent in unsecured microfinance (MFI) lending.

While SVCL is a mid-sized Indian non-banking finance company-MFI (NBFC-MFI) with a low market share (3QFY16: 1.2%; INR5.8bn) on a managed-asset basis,
it has a relatively higher share in its operational territories (1HFY16 - UP: 7.5%; Rajasthan: 6.8% and MP: 5.6%. SVCL also is exposed to regional risks, given its high portfolio concentration in UP (3QFY16: 49%; FY13: 51%).

The company plans to achieve loan portfolio growth by increasing its customer base to 1 million by FY17 (3QFY16:  0.5 million) and the average ticket size of its disbursements to about INR22,000 (INR18,800). It also plans to introduce small business loans (for e-rickshaws) as well as home improvement loans in FY17, for which it is setting up the required systems and processes.
SVCL also plans to remain capital light by utilising about INR3.8bn of business correspondent (BC) lines available with IndusInd Bank (IND AAA/Stable), Kotak Bank (IND AAA/Stable) and Edelweiss Housing for microfinance loans. These would form 35%-40% of its loan assets under management (AUM) by 1QFY17. It plans to assign 39% of branches of the planned 200 to the BC lines by FYE16. Additionally, SVCL expects to grow its loan AUM to about INR13bn in FY17 (CAGR of 90%) from INR5.8bn in 3QFY16.

Ind-Ra expects SVCL’s return on average managed loan assets to remain steady after declining to 1.8% in FY15 from 3.2% in FY14 (on the lack of minimum alternative tax benefits that were available in FY14); it was comparable to its peers’ median returns at 1.9% over FY14-FY15. The company follows a fortnightly repayment system, while most competitors follow a monthly repayment system, and Ind-Ra views this favourably as it is a better reflection of rural income patterns.

SVCL’s portfolio at risk (PAR) 0 (with at least 1 day past due) increased to 0.52% in 9MFY16 from 0.18% in FY15. Its PAR 90 increased to 0.29% from 0.11% over the same period primarily due to its portfolio in one branch of Amroha district in UP, where repayment was halted due to political disturbances. It expects to write off about INR4m out of a total loan AUM of about INR79m in that branch. PAR 0 adjusted for Amroha (Joya branch) is 0.38% for 9MFY16, and comparable to peers’. Although such disturbances are not common, Ind-Ra believes the MFIs, including SVCL, could face significant asset quality issues if they cannot limit such problems to a few districts.

In FY15, term loans from banks accounted for 55% (FY14: 55%) of SVCL’s funding, while other financial institutions constituted 33% (30%). The finance cost on loans raised in 3QFY16 ranged from 13.1% to 13.8%. Ind-Ra believes a potential decline in interest costs could be partially offset by Tier 2 capital and loans of a higher tenor.

SVCL’s short-term liquidity is adequate, but asset funding surplus (short-term assets less short-term liabilities as a percentage of total assets) is higher than peers’. 80% of its assets and 48% of its liabilities are short term in nature, giving it higher ability to withstand temporary liquidity shocks. In terms of liquidity risk, the company maintains cash on the balance sheet required to fulfil about 60 days of liability, in addition to sanctioned but undisbursed loans of INR0.25bn-INR0.4bn. As asset tenors increase with higher loan ticket sizes, the company’s ability to attract long-term funds while maintaining short-term liquidity will be the key to establish a matched asset-liability profile.

SVCL’s capital adequacy ratio increased to about 23% in 3QFY16 from 17.66% in FY15. Of the total capital in 3QFY16, Tier 2 constituted 10%. The promoters have periodically infused equity into the company and subscribed to Tier 2 capital. Given the promoters’ commitment and plans to list the entity in FY18, Ind-Ra believes the promoters could infuse equity as and when required. Due to lower capital buffers and high concentration in a single state, SVCL is weaker than peers in Ind-Ra’s stress case analysis. SVCL plans to decrease its concentration in UP by expanding in other contiguous states. However, on the capital front, the promoters plan Tier 1 capital to be marginally higher than regulatory requirements.

The nature of the microfinance business (unsecured lending) exposes asset quality to external events such as religious or political disturbances, resulting in the spread of wilful delinquent borrower behaviour. However, a large-scale event, such as the one in Andhra Pradesh, seems unlikely due to the Reserve Bank of India’s monitoring of NBFC-MFIs and the pending passage of the MUDRA bill in the Indian Parliament, which could include the provisions of the earlier proposed Microfinance Bill. 


RATING SENSITIVITIES

Positive: The rating could be upgraded on the back of increased and diverse funding access, ability to raise longer tenor debt while maintaining adequate short-term liquidity, and sustained asset quality while the company scales up its operations and develops capability in other credit products.

Negative:
Signs of significant deterioration in the company’s profitability and capital impairment, arising from a possible increase in NPLs that significantly impact asset quality and inability to raise sufficient capital as and when required, could result in a rating downgrade. 


COMPANY PROFILE

SVCL is a Delhi-based NBFC-MFI with a loan portfolio size of INR5.8bn as at end-Q3FY16 (a market share of about 1.2%). Its operations are primarily concentrated in Northern and Central India (UP, MP and Rajasthan). 



SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in.The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings.

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.


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Analyst Names

  • Primary Analyst

    Jindal Haria

    Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001750

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121