By Jindal Haria

India Ratings and Research (Ind-Ra) has undertaken the following ration action on MAS Financial Services Ltd’s (MAS) bank loans:

Instrument Type

Date of issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Bank loans

-

-

-

INR24,000

IND A/Stable

Affirmed

The rating reflects MAS’s established business model in the space for micro, small and medium enterprise (MSME) financing, well-managed asset quality and above-average operating buffers. The rating factors in the geographically diversification of the loan portfolios of its non-banking financial company-microfinance institution (NBFC-MFI) borrowers. The rating considers MAS’s plans to raise fresh equity of INR1.5 billion-2.0 billion in FY18. The rating is constrained by borrower and sector concentration, scope of improvement in operational processes and technological systems and underlying credit quality of institutional borrowers. The rating factors in the evolving second line of management. 
 

KEY RATING DRIVERS

Profitability and Capital Buffers Adequate in Mid-Term: MAS’s internal accruals (FY17: 23%) are sufficient to support loan growth in the medium term; however, the company historically has thin capital buffers. In FY17, MAS raised INR1.04 billion and, thus, its resultant Tier 1 capital in FY17 is 16.9%. It also raised INR0.35 billion of equity in 1QFY18. Moreover, fresh equity infusion, as planned, would support growth plans, primarily in the SME and MSME segments, in addition to new segments such as agriculture value chain financing and affordable housing. MAS plans to maintain a Tier 1 capital of 150-200bp, above the regulatory minimum in the long term. Maintaining consistent and adequate capital buffers will be a key rating sensitivity. 

Superior Asset Quality:
MAS’s gross NPL ratio (FYE17: 1.6%) is on the lower side in the Ind-Ra-rated NBFC universe owing to zero delinquencies in the MFI/NBFC portfolio, decades of business experience in Gujarat and loss sharing arrangements with third parties on a portion of their portfolio. GNPA on direct retail advances of about 2.7% is comparable with the peers’.  The shift to the 90 days past due provision norm is likely to have a minimal impact on profitability, given only 0.5% of the loan portfolio was in the 90-120 day bucket at end-March 2017. At the same time, any sharp slippages in the NBFC-MFI portfolio could have a disproportionate impact on profitability. 

Adequate Liquidity:
Banks have been the predominant source of funding for MAS, with a share of 80% in borrowings at end-December 2016. Meanwhile, 59% of the borrowings are short-term against 61% of assets that are short term, indicating marginal short-term asset funding gap (excess of short-term assets over short-term liabilities). The company has a matched asset liability maturity profile across various tenors, supported by the low maturity profile of its assets (18-20 months). Moreover, the company typically maintains two months of disbursements in the form of unutilised bank lines. At end-December 2016, MAS had unutilised bank loans of INR2.8 billion and an assignment pipeline of INR16 billion to support any contingent obligations. 

Product Portfolio Change Likely to Test Retail Capabilities:
MAS’ strong pre-provision operating profit of 4.2% of total managed assets in FY17 (FY16: 4%) is supported by its exposure to the high-yield, low-price-sensitive retail customer segment and BBB+ and lower rated NBFCs/MFIs. 32% of MAS’ NBFC/MFI exposure is to entities either unrated or rated in the sub-investment category. Although Ind-Ra expects the informal segment to be large enough for many lenders, MAS could face competition in the MSME and SME segments, which it has identified as growth segments. Furthermore, MAS’s affordable housing push (through its housing subsidiary) has slowed down, partly due to demonetisation. In case of a slowdown in microfinance, MAS needs its retail and housing segments to grow at a substantially higher pace while still maintaining credit costs. As the company increases the share of SME loans in its portfolio and the share of NBFCs decrease to about 30% in the long term, credit and operating costs could rise in the medium term. Nevertheless, high yields in this segment are likely to sustain the buffers at current levels.

High Concentration Risk:
A high proportion of refinance to NBFCs and NBFC-MFIs (53% of assets under management at end-December 2016) in MAS’s loan book exposes it to high borrower concentration (top 20 borrowers to total managed loans: 24% in FY17). Furthermore, MAS’s institutional advances were 10% of the top 20 borrowers’ loan books at 9MFYE17, indicating a high exposure to these borrowers. Also, the dominant share of NBFC-MFIs (32% of FY17 assets under management) in its portfolio poses risks arising from the MFI borrower category. Some of its MFI borrowers with exposure to Uttar Pradesh, Madhya Pradesh and Maharashtra have been facing asset quality headwinds and are likely to witness capital erosion. However, MAS’s MFI portfolio is well diversified in terms of geography. Thus, regional concentration risks are partially mitigated.

Delegation and Technology Adaption Gains Importance with Growth:
MAS’s process includes frequent customer contact, even if loan is regular, which results in tighter relationships with SME borrowers. However, in Ind-Ra’s opinion, as MAS grows over the next two-three years, it is likely to invest in systems and processes and technological solutions across the loan cycle to bring them at par with some of its peers and enable it to manage the scale of operations. In addition, Ind-Ra expects MAS to have a strong second line of management and delegation of responsibilities over the next two-three years.
 


RATING SENSITIVITIES

Positive: Diversification of its funding profile, led by a higher proportion of long-term funding and lower borrower and sector concentration, while maintaining asset quality and consistently improving capital buffers could lead to a positive rating action. 

Negative:
Asset quality shocks leading to the weakening of profitability and capital buffers could lead to a downgrade.


COMPANY PROFILE

MAS is a systemically important non-deposit-taking NBFC registered with the Reserve Bank of India since 1995. Based in Ahmedabad, Gujarat, MAS provides refinance to MFIs, finances MSME enterprises and provide funding for two-wheelers and commercial vehicles. 

At end-December 2016, MAS had a network of 72 branches, 34 of which were based in Gujarat,
 and INR27 billion worth of assets under management, 52% of which were loans to MFIs/NBFCs. It has a housing finance subsidiary that provides affordable housing in semi-urban and rural areas. The subsidiary had about INR1.7 billion worth of assets under management at end-December 2016.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

29 March 2016

Bank loans

Long-term

INR24,000

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. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies, structured finance and project finance companies. 

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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