By Jindal Haria

India Ratings and Research (Ind-Ra) has assigned Cashpor Micro Credit’s (Cashpor) bank loans up to INR5,200m an ‘IND BBB’ rating with a Stable Outlook.

The rating reflects Cashpor's long operational history and vintage of over 13 years, the management’s experience in running microfinance business, strong operational processes and deepening presence in the underpenetrated states in the microfinance sector. The rating, however, is constrained by the company’s non-profit stature, geographical concentration, modest capital buffers and the high idiosyncratic risk inherent in unsecured microfinance institutions (MFI) lending.
 

KEY RATING DRIVERS

Share in Key Markets Higher: Cashpor is a Section-25 company (non-profit company set up to meet social objectives), owned and controlled by Cashpor Trust. Unlike many of its peers, it is not regulated by the Reserve Bank of India. It is the oldest MFI operating in north India and some of its earlier senior management have moved on to start other non-banking finance companies (NBFCs)-MFIs such as SV Creditline Private Limited (IND BBB/Stable) and Sonata Finance Private Limited and imported many of their processes from Cashpor. While Cashpor is a mid-sized Indian MFI relative to its peers with a low market share (FY16: 1.9%; INR10.1bn) on a managed asset basis, it has a higher share (excluding Bandhan Bank) in its key operational territories of Uttar Pradesh (UP; 10%) and Bihar (18%). 

Cashpor remains exposed to significant regional risks, given its declining but still high portfolio concentration in UP (1QFY17: 61%, FY14: 71%). Its granular concentration is better than peers’; its top 5% branches constitute 10% of loan portfolio in FY16 while it is 10%-15% for some of its peers. 

Equity a Challenge; Business Correspondent Lines to Enable Growth:
In its non-profit form, Ind-Ra does not expect Cashpor to be able to raise equity. It has tied up INR6.5bn of business correspondent lines with ICICI Bank, Kotak Mahindra Bank, IndusInd Bank (‘IND AA+’/Stable), IDBI Bank (‘IND AA+’/Stable) and plans to increase this to 50% of its planned loans under management in FY19 of INR19bn. It has relationships with about 21 banks, which amounted to 85% of its borrowings in FY16. Balance funding is availed from NBFCs and non-convertible debentures. It raised bank loans in 4QFY16 at 11.5%-12.5% annually. Cashpor also has been the beneficiary of some development institutional investors which invests in sub-debt at zero-coupon rates, but the share of such funds is low. 

Cashpor is weaker than some of its peers in Ind-Ra’s stress case analysis, due to lower capital buffers (Tier 1: FY16: 13.7%) and high concentration in a single state. Cashpor expects to continue to decrease its concentration in UP over the next three years. 

Borrower Selection Based on Established Tools:
The company selects below poverty line women (usually not targeted by NBFC-MFIs), forms a joint liability group, and provides them small ticket loans. It selects households by using Cashpor Housing Index and Progress out of Poverty Index - tools developed by itself. It plans to achieve its loan growth of about CAGR 25% over FY16-FY19, by increasing its customer base to 1 million from 0.9 million in FY16 and increasing the average ticket size of its disbursements to about INR21,000 from INR11,500 (for peers, this can go up to INR30,000). Also, the company’s strategy is to expand in the remote areas of Jharkhand and Chhattisgarh where MFI penetration is low and reduce exposure in urban areas. Of the 72 new branches opened by MFIs in FY16, 80% have less than three MFIs operating in the same regions. The interest rates and fees charged by Cashpor to end-borrowers are among the lowest; any potential increase in its net profits beyond 15% of the gross income has to be passed to its borrowers in form of lower lending rates. 

As a Section-25 company, Internal Accruals are Limited:
Although Cashpor’s PAR (>0) increased to 0.28% in FY16 from 0.08% in FY14, it is significantly lower than peers’ and reflects its different clientele and the strength of its operations. Cashpor expects that its return on average managed loan assets will increase marginally in mid-term (FY16: 1.15%) because of the costs incurred in FY16 for expansion outside UP and latent operating leverage due to low ticket sizes. However, the company would receive income tax exemptions only if its net surplus does not exceed 15% of its gross income. The company also incurs expenditure on its social initiatives in education and healthcare (the core objectives of the company). Given that Cashpor is a section-25 company which limits its accruals, Ind-Ra  expects its profitability to remain inferior to peer  NBFC-MFIs. 

The nature of the microfinance business, i.e. unsecured lending, exposes asset quality to external events such as religious or political disturbances, resulting in the spread of wilful delinquent borrower behaviour. Furthermore, impending elections in UP could lead to the materialisation of some of the idiosyncratic risks that the industry is subject to. However, a large-scale Andhra-Pradesh-like event seems unlikely due to the Reserve Bank of India’s monitoring of NBFC-MFIs and pending passage of MUDRA bill in Indian Parliament which could include the provisions of the earlier proposed Microfinance Bill. 


RATING SENSITIVITIES

Positive: Significantly higher capital buffers and ability to raise equity, following the accounting norms at par with NBFC-MFIs, and continuation of the growth strategy to underpenetrated regions could lead to a positive rating action. 

Negative:
Capitalisation falling below or close to minimum regulatory requirements for NBFC-MFIs, any state-wide overleveraging / socio-political event that could have a significant impact on its asset quality, and regulatory changes leading to severe restrictions that could impact internal accruals could lead to a negative rating action.




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

    Secondary Analyst

    Prakash Agarwal

    Director and Head Financial Institutions
    +91 22 40001753

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121