By Jindal Haria

India Ratings and Research (Ind-Ra) has placed Satin Creditcare Network Limited’s (Satin) INR270 million non-convertible debentures (NCDs) on Rating Watch Evolving (RWE). The Outlook was Stable.

Satin’s ratings are constrained by the impact of demonetization and the subsequent events, its portfolio concentration in Uttar Pradesh (UP) (1HFY17: 35%, FY16: 41.6%), and the high credit risk inherent in unsecured microfinance lending. Ind-Ra, in its rating commentary, highlighted the unseasoned credit behaviours in non-South states and concentration in UP amongst key risk factors. The rating watch on Satin’s NCD is evolving as in  the agency’s opinion, additional clarity is required on the implication of evolving political situation in some regions of Satin’s operations on its credit costs. Ind-Ra expects to resolve the rating watch by May 2017 by either reinstating the rating (IND BBB+/Stable), or with a negative rating action.

The ratings also reflect Satin’s healthy capitalisation, loan growth potential, diverse funding profile, large size in the microfinance space, geographical presence in under-penetrated and under-leveraged regions and higher promoter shareholding (33% in 1HFY17) than other microfinance institutions’(MFIs). 

KEY RATING DRIVERS

Lower Collections could Increase Credit Costs: Satin’s average monthly collections improved to 69% in December (till 21 December 2016) from about 55% in November 2016 The microfinance industry is seeing the impact of the political situation in UP (especially western UP), Maharashtra (Mah) (due to impending state / local elections), Madhya Pradesh (MP) and Uttarakhand (UK). State-wise share as at end-September 2016 and collection in December 2016 (till 21 December) for key states such as UP (35%, 46%) and MP (16%, 76%) indicate that in case the political situation doesn’t normalise and collections do not return back to normal, the provisions or write offs in quarter ending March 2017 could be significant (Satin’s loan portfolio in such states was at 56% at 1HFY17). According to Ind-Ra’s analysis, if  credit costs exceed 20% of portfolio in UP and MP (adjusting for off-book portfolio), the equity could be below minimum regulatory levels. Portfolio at risk (PAR) 30 and write-off increased to 0.61% in 1HFY17 from 0.48% in FY16; Ind-Ra expects PAR 30 to increase significantly in 3QFY17.

Liquidity Healthy in Short-term:
Satin had completed a qualified institutional placement of INR 2.5 billion in October 2016; its Tier 1 capital increased to 20% in October 2016 from 11.3% in FY16 while the capital adequacy ratio increased to 26.7% from 16.8% in the same period. The company expects to maintain its debt to equity ratio at about 6x over medium-term with the current asset mix. Satin’s debt profile also has higher proportion of NCDs (FY14: 12%, FY15: 17%, FY16: 19%) indicating moderate investor interest in the company. It has about 68% collections in December 2016 (till 21 December)  and it also had INR 14 billion cash at hand on 1 December 2016 against the short-term borrowing (including current maturity of long-term debt) on 30 September 2016 of about INR 17 billion. Some banks have continued to fund Satin even post demonetisation and hence the agency expects the company’s healthy liquidity to cover obligations till 1HFY18 even in case of business disruptions.

Initiated Technological Transformation:
Satin’s operations at branches were mostly on a paper-based decentralised recording and reporting system. In FY16, the company initiated projects to bring its paper-based recording and reporting system onto a centralised platform under the first phase of its digital transformation. In the subsequent phases, the transformation would include digitization of most processes capable of handling the company’s multiple products. Satin has also been able to manage cashless collections to the extent of 30% as at end-October 2016 in partnership with ITZ Cash points.

Operating Costs to Remain Elevated in Short-term:
Satin’s return on average managed assets improved to 1.7% in FY16 from 1.56% in FY15, despite expansion related operating costs, setting up of cashless collection mechanism, and hiring more professionals for various roles, investment in digital transformation, breaking up larger branches for operational ease and setting up more decentralised regional offices. Since these would continue in FY17 and 1HFY18, Ind-Ra does not expect the operating costs to decline in the short-term.  


RATING SENSITIVITIES

Successful management of the crisis without significant impact on asset quality and capital buffers, maintenance of robust capital buffers and adequate liquidity in short-term could result in positive rating action. This would also resolve the rating watch.

Significant deterioration in the company’s profitability and capital impairment, arising from a possible increase in NPLs that significantly impact asset quality, could result in a negative rating action.


COMPANY PROFILE

Satin is the largest MFI based in North India with 527 branches in 1HFY17 spread in 200 districts. It has a loan portfolio of about INR 37.3 billion and market cap of INR 12 billion as on 27 December 2016. 



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