By Jindal Haria

India Ratings and Research (Ind-Ra) has assigned Cashpor Micro Credit’s (Cashpor) additional bank loans up to INR1,139m an ‘IND BBB’ rating with a Stable Outlook. Ind-Ra has maintained an ‘IND BBB’ rating with a Stable Outlook on Cashpor’s INR5,200m bank loans.

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

Higher Share in Key States: 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. While Cashpor is a mid-sized Indian MFI relative to its peers with a low market share (1QFY17: 1.95%; INR11.8bn) 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%). 

Equity a Challenge:
In its non-profit form, Ind-Ra does not expect Cashpor to be able to raise equity (Tier 1: FY16: 13.7%). 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. 

Borrower Selection Based on Established Tools:
The company selects below poverty line women (usually not targeted by NBFC-MFIs) using its established tools, forms a joint liability group and provides them small ticket loans. It plans to achieve loan growth of about CAGR 25% over FY16-FY19, by increasing its customer and increasing the average ticket size of its disbursements. Also, the company’s strategy is to expand in remote areas of Jharkhand and Chhattisgarh where MFI penetration is low and reduce exposure in urban areas. 

As a Section-25 company, Internal Accruals are Limited:
Although Cashpor’s PAR (>0) increased to 0.29% at 1QFY17 from 0.08% in FY14, it is significantly lower than peers’ and reflects its different clientele and the strength of its operations. 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 willful delinquent borrower behavior. 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, follow 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, 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 have an impact on internal accruals could lead to a negative rating action.


COMPANY PROFILE

Cashpor is a Section-25 company (non-profit company set up to meet social objectives), owned and controlled by Cashpor Trust. The company provides microfinance exclusively to below poverty line women in eastern UP and Bihar.
 



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