By Jindal Haria

India Ratings and Research (Ind-Ra) has assigned Disha Microfin Limited’s (Disha) bank loans the following ratings:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Bank loans

-

-

-

INR 2,360

IND A-/Stable

Assigned

Unallocated bank loans

-

-

-

INR 640

IND A-/Stable

Assigned

The ratings reflect Disha’s (including the merged business of Future Financial Services Private Limited) healthy loan growth potential, geographical diversification, product diversity as a microfinance institution (MFI), moderately diverse funding profile, healthy capitalisation, strong investor pedigree and management support, 20-year track record of promoter(s) in microfinance. The ratings also reflect that as a small finance bank (SFB) Disha can access a wider set of customers with diversified products from April-May 2017. Disha’s rating factors in its moderate size in the MFI industry, moderate participation in the securitisation/assignment market and the high credit risk inherent in unsecured MFI lending.

KEY RATING DRIVERS

Capital Position Expected to be Healthy: Disha is in the process of raising about INR1.5 billion-INR2 billion of equity from domestic and foreign investors. After the infusion, its Tier 1 capital would increase to 40%-45% in 1HFY18 from about 20% in 1HFY17. The company expects to maintain a minimum Tier 1 capital of about 13%-15% and capital adequacy ratio (CAR) of about 17%-20% before raising further equity in the medium to long term. Disha is backed by True North Managers (a USD2 billion India-focused fund), which had invested in Disha immediately after the Andhra Pradesh crisis in FY11. The fund currently owns a stake of about 76% in Disha, followed by Fincare Group (about 24%). Both shareholders have infused INR625 million in Disha until date.

Diversified Portfolio Compared with Those of Peers: Given the size of its portfolio, Disha is relatively well diversified compared with peers. The share of the three key states (Gujarat, Tamil Nadu and Karnataka) in its portfolio is almost same at 23%-26% each. Moreover, Disha is primarily a non-urban MFI and, hence, faces lower borrower overleverage than that faced by some peers. Its borrower rejection rate even in a state as well-penetrated as Tamil Nadu is 20%-25%. The management views borrower overleverage, as highlighted in the report Microfinance: Borrower Overleverage Warrants Course Correction, as a key concern for Disha, as well as for the industry.

Funding as SFB Likely to be Challenging but Manageable: In line with the findings of the report Liability Strategy to Differentiate SDFBs from other MFIs, Ind-Ra expects the transition to the complex funding regime of an SFB to be challenging for Disha. The company expects to mobilise wholesale deposits over two years after it transitions to an SFB and then replace them with granular deposits. The company plans to use various off-balance sheet funding means as securitisation, co-lend with banks and undertake other measures to match both growth aspirations and funding means available. Moreover, the company will attempt to raise certificates of deposit once it qualifies as a scheduled commercial bank, for which, according to the agency, investor appetite could develop gradually.

Healthy Liquidity in Short Term: Despite demonetisation, Disha’s short-term asset funding gap (short-term assets, excluding cash, less short-term liabilities) indicates a liquidity buffer of about 10% of total assets. In addition, Disha had about INR1.74 billion of cash on balance sheet as of November 2016 and has sanctioned but unavailed bank lines of about INR2.6 billion against repayments of about INR2.5 billion over January-March 2017. The average maturity of liabilities increased to 21 months in September 2016 from 17 months in March 2016, indicating an improvement in liquidity buffers. Disha’s ability to maintain a reasonable short-term asset funding gap in the medium to long term will be a key monitorable.

Promoters and Management Experience: Fincare Group comprises the promoters of Future Financial Services (which is merged into Disha) and Disha (a standalone company). The management has a strong retail non-banking financial company (NBFC) and banking background. The promoters and the management have an experience of 15-20 years in microfinance and retail finance.

Lower Collections Likely to Increase Credit Costs:
Disha registered cumulative collections at about 88% for November-December 2016. Some of its key states saw lower collections due to local politicians’ demand for loan waivers. Collections for January 2017 improved 10%-20% in some affected districts, and the management expects collections to normalise in Maharashtra and Gujarat by March 2017. According to Ind-Ra’s analysis, if credit costs exceed 7%-8% of the total portfolio, existing capital could fall below minimum regulatory levels (equity infusion expected in February-April 2017 mitigates this risk). Portfolio at risk (PAR) 0 declined to 1.3% in 1HFY17 from 1.6% in FY16(after excluding some districts Disha plans to exit, PAR 0 stands at about 0.5% in 1HFY17). Ind-Ra expects PAR 0 and PAR 30 to increase significantly in 3QFY17, albeit only a part of it could translate into credit costs.


RATING SENSITIVITIES

Positive: Maintenance of robust capital buffers and adequate liquidity in the short term, sustainable growth and management of the non-microfinance loan portfolio, and demonstrated ability to tap debt capital markets and banking operations could result in a positive rating action.

Negative: Inability to raise equity in CY17 and a significant impact on asset quality and capital buffers could result in a negative rating action.


COMPANY PROFILE

Incorporated in 1995, Disha is an NBFC registered with the RBI. It was acquired by Mr Nanavati and other promoters in CY2009 to start microfinance operations in Gujarat. It received in-principle approval to start operations as an SFB in FY16.



COMPLEXITY LEVEL OF INSTRUMENTS

Bank facilities are instruments with low complexity levels, where the relationship between the inherent risk factors and intrinsic return characteristics is straightforward.

For more information, visit
https://www.indiaratings.co.in/complexity-indicators.

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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India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

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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