By Jindal Haria

India Ratings and Research (Ind-Ra) has assigned Disha Microfin Limited’s (Disha) non-convertible debentures (NCDs) and Tier 2 subordinated debt ratings as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

NCDs

-

-

-

INR750

IND A-/Stable

Assigned

Subordinated debt

-

-

-

INR250

IND A-/Stable

Assigned

The ratings reflect Disha’s adequate geographical diversification, product diversity as a microfinance institution (MFI), moderately diverse funding profile, strong investor pedigree and management profile, and a 20-year track record of the promoters in microfinance. The ratings also reflect Disha’s access to a wide set of customers with diversified products as it converts to a small finance bank (SFB), licence for which was received in May 2017. The ratings also factor in the expected credit costs and the resultant capital erosion, its moderate size in the MFI industry and the high credit risk inherent in unsecured MFI lending.

KEY RATING DRIVERS

Capital Position Expected to be Moderate: Disha had INR4.5 billion of equity at end-March 2017 currently indicating Disha’s strong ability to bear the expected credit costs (and the resultant equity erosion) of about INR1 billion-1.5 billion. Ind-Ra expects Disha to arrange further equity infusion from most of its existing promoters, if required for loan growth beyond FY17 while maintaining reasonable leverage. The agency also factors in the potential equity sitting in other group companies that could be used to overcome the impact of credit costs. 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.

 

Adequate Liquidity in the Short Term: Despite the November 2016 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 the total assets. In addition, Disha had about INR3 billion of cash on balance sheet as of April 2017 and access to refinance lines (either sanctioned or under final stages of negotiation) up to INR5 billion-6 billion from National Bank for Agriculture and Rural Development (‘IND AAA’/Stable), Micro Units Development and Refinance Agency and Small Industries Development Board of India. Ind-Ra believes 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 promoters of Future Financial Services Private Limited (which was merged into Disha in FY17) and Disha (erstwhile standalone company). The management has a strong retail non-banking financial company and a banking background. The promoters and management have an experience of 15-20 years in the microfinance and retail finance business. Ind-Ra expects most of the promoters to support Disha on requirement of an equity infusion.

  

Lower Collections Likely to Increase Credit Costs: Disha registered cumulative collections of about 86% from November 2016 to April 2017. Almost all of its major states witnessed lower collections due to local politicians’ demand for loan waivers. It has halted disbursements in Maharashtra (where it expects low recoveries); Ind-Ra expects a moderate recovery in Madhya Pradesh and Gujarat. Disha’s portfolio delinquencies, although high (Portfolio at Risk (PAR) 0 in April 2017 remains steady at about 23% while PAR 90 is 15%) have stabilised; Ind-Ra expects final losses may be somewhat lower as the recoveries materialise. In its bank form, Disha may be required to provide for the entire PAR 90 portfolio and could entail credit costs of about INR1 billion-1.5 billion over the loan tenor and hence, warrants capital infusion to support loan growth beyond FY18 (March 17 Tier 1: 47.5%; adjusted for expected credit costs: 25-30%).

 

Systemic and Idiosyncratic Risks Remain: Microfinance borrowers, particularly group loans, are also susceptible to political manipulations which often appear at the time of elections. As a result, the systemic and idiosyncratic risk shall remain a part of microfinance sector, while operating entities would need to try and minimise the impact through operations, and stronger operating and financial buffers. The microfinance segment has witnessed immense competition, and hence, the build-up in borrower leverage which could have aggravated the impact of demonetisation. As per Ind-Ra’s analysis, unintentional defaulters who have missed more than three EMIs may be unable to turn regular in FY18 based on their debt servicing ability.

 

Business Strategy to Undergo a Structural Change: Ind-Ra believes that microfinance based on group loans have witnessed an overheating and SFBs like Disha would need to modify their business model while serving those with marginal access to formal financing. As an SFB, Disha also plans to offer secured retail and business loans. Disha expects to have over 50% loans assets secured over the medium-to-long term from 8% in FY17.


RATING SENSITIVITIES

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

 

Negative: A significant impact on the asset quality that could lower Disha’s capital levels than peers’ could lead to a negative rating action. Higher leverage (equity to loan assets under management) in Ind-Ra’s opinion under similar asset mix could also result in a negative rating action.


COMPANY PROFILE

Incorporated in 1995, Disha is a non-banking financial company registered with the Reserve Bank of India. It was acquired by Mr Nanavati along with other promoters in 2009 to start microfinance operations in Gujarat. It received an in-principle approval to start operations as an SFB in FY16.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Outstanding Limits (million)

Rating

13 February 2017

NCDs

Long-term

INR750

IND A-/Stable

-

Subordinated Debt

Long-term

INR250

IND A-/Stable

-

Bank loans

Long-term

INR2,360

IND A-/Stable

IND A-/Stable

Unallocated bank loans

Long-term

INR640

IND A-/Stable

IND A-/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please 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.

ABOUT INDIA RATINGS AND RESEARCH

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