By Jindal Haria

India Ratings and Research (Ind-Ra) has taken the following actions on Jana Holdings Limited’s (JHL) debt instruments:

Instrument

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Principle protected market linked debentures (PP-MLDs)

-

-

-

INR3

WD

Withdrawn (did not proceed with the instrument as originally envisaged)

Non-convertible* debentures (NCDs)

 

 

 

INR1.45

IND B+/Stable

Assigned

Non-convertible* debentures

-

 

-

INR1.55

IND B+/Stable

Assigned

*Details in the Annexure

Analytical Approach: The rated NCDs are held by Centrum Group and Manipal Health Systems Pvt Ltd (MHSPL) and are junior to JHL’s existing debt. The NCDs held by Centrum will mature before and those held by MHSPL will mature after the maturities of JHL’s existing NCDs (not rated by Ind-Ra) which are held by Caladium Investment Pte. Ltd (INR1 billion), Edelweiss Capital Limited (INR1.55 billion) and TPG Capital Asia (INR4.03 billion). Under the conditions of an initial public offering, any liquidity event or default on the NCDs from Caladium Investment and Edelweiss Capital will have a senior claim on JHL’s assets, or initial public offering or refinance proceeds. The claims of the rated NCDs would be pari passu to the NCDs raised from TPG Capital Asia.

The rating is based on the profiles of both JHL and Jana Small Finance Bank’s (JanaSFB). The two companies have limited financial strength. JHL is a non-operating financial holding company (NOFHC) of JanaSFB and the value of its investments is derived solely from its 45.37% shareholding in JanaSFB. The investment value is largely subject to the incremental performance of JanaSFB (banking operations commenced in July 2018) and the ability of the bank to manage the credit costs emanating out of its legacy portfolio.

KEY RATING DRIVERS

Holding Company of JanaSFB, Bank’s Legacy Asset Quality Overhang: JanaSFB commenced its banking operations in July 2018 and inherited significant asset quality issues from when it operated as a non-banking financial company (NBFC)-microfinance institution (Janalakshmi Financial Services Limited; JFSL). JFSL had grown its loan book to INR109.8 billion in FY16 from INR37.7 billion in FY15 and was among the largest microfinance NBFC in terms of its asset size. However, some of its growth had come from moderate controls on the lending system and conflicting targets for the field staff. These shortcomings were exposed by demonetisation and JFSL was more severely affected than its peers. Its 0 days past due (dpd) increased to 39% in FY17 (FY16: 1%). It had to focus on collections on priority and had to write-off/provide INR26.2 billion over FY17, FY18 and 1HFY19. However, the company managed to raise substantial capital (INR29.42 billion) over the same period, and this helped it survive. In addition, the management plans to raise INR6 billion of equity for JanaSFB - INR3 billion that JHL is raising through NCDs and another INR3 billion by other investors directly in the bank. 

In 1HFY19, the bank’s gross NPAs were about 35%, while net NPAs were about 13%. Based on the partial payment and recovery analysis, the agency expects a recovery of INR2 billion-3 billion during November 2018-March 2019. The credit costs in 2HFY19 could be significantly lower than that observed in 1HFY19 (INR10 billion, 13.8%). 

Bank to Face Medium-term Profitability Pressures:
In the agency’s assessment, the bank may not see significantly higher credit costs on the newly originated portfolio (post-December 2017 disbursement). However, it could face profitability issues in the medium term as there is a need to achieve a certain scale to cover operating costs out of gross income. Ind-Ra expects marginal profitability in FY21 under the business-as-usual scenario, i.e. 45% growth in the loans under management over FY20-FY21; most of the growth would be seen in the secured asset classes and other non-microfinance products. At net profit levels, the company had made a profit of INR1.7 billion in FY17, and had incurred losses of INR25.0 billion in FY18 and INR12.9 billion in 1HFY19. Ind-Ra expects the bank to suffer net losses in FY19 and FY20 as well. 

Setting up Governance and Monitoring Structures within Bank:
Post demonetisation, JanaSFB has attempted to set its house in order; tightening monitoring by setting up monitoring systems at various levels, an independent risk vertical, technology-based checkpoints at the front-end and limiting the operating geographies of the branches among others. The monthly reviews provide opportunities to various sub-committees of the Board Risk Committee to analyse and narrow down the problems. Almost the entire top management has changed over the last two years and the incumbents are strengthening the processes. Ind-Ra believes these systems have been put in place to avoid ‘growth at any cost’, given the growth compulsions to achieve profitability. 

Bank’s Liquidity Management Challenging; Deposits See Traction:
In a bank form, liquidity management is more complex; especially when the access to certificates of deposits is restricted either by the credit rating of the bank or it is awaiting ‘scheduled’ status. At end-September 2018, the asset funding gap of the bank was in a modest surplus in the short term (0.1% of total assets). However, the bank would need to continue to operate with a surplus, given that microfinance is likely to constitute bulk of its loans under management over the medium term. The bank has excess statutory liquidity reserves of about INR2.3 billion in addition to the cash reserves that it needs to maintain. It has also intensely focused on the marketing of longer tenor deposits which has been successful; in the five months of bank’s operations since July 2018, it has mobilised INR21 billion of deposits, of which 46% are of tenor more than one year. 

Bank’s Asset Diversification Positive; but Segments are Competitive and Yields Could be Lower:
The bank expects to grow largely in non-microfinance loan products. Although these are capital-conserving products, there is reasonable competition among them as the number and size of NBFCs and banks serving this segment has increased in the last few years. As a result, the bank could see a decline in yields; depending on the asset mix, the bank would have to grow at a faster pace and at lower yields to achieve profitability. Early delinquencies for the bank in these products would be a key monitorable.

 

Bank Capital Constrained: Ind-Ra is of the view that microfinance heavy institutions should operate at low leverage (advances to net worth). JanaSFB’s net worth was INR5.4 billion in 1HFY19 with advances of INR50 billion, indicating a leverage ratio of 10x, which is higher than most other SFBs. Divestment ability is limited as JHL has to hold at least 40% in the bank for a minimum of five years. Also, the bank may have substantial accruals only by FY22, and hence, leverage may only increase. A significant increase in leverage without a commensurate improvement in the asset quality could result in a negative rating action. 

High Refinance and Valuation Risk: The three-year NCDs held by Centrum face refinance risks; there are limitations to JHL regarding the dilution of its shareholding in the bank on account of regulatory requirements and share pledges (5.37% pledged to existing lenders). The NCDs would have to be refinanced to the extent of principal and the rate of return promised to the investors. The NOFHC is required to hold at least 40% of the bank for a minimum of five years. Any increase in JHL’s shareholding on account of a proposed infusion may not be enough to pay off the existing obligations, and hence, the valuation risk is significant.


RATING SENSITIVITIES

Positive: A significant improvement in the bank’s asset quality, the capitalisation and leverage (advances to equity) and achievement of material profitability earlier than expected could result in a positive rating action. 

Negative:
A significant increase in the bank’s leverage ratio without a commensurate improvement in the asset quality, its inability to raise equity as per plans, capital levels close to the regulatory minimum or a breach of the regulatory conditions if any and large funding gaps that in the agency’s opinion prove challenging for the bank to meet repayment obligations could result in a negative rating action. Any unrelated diversification by the holding company could also result in a downgrade. 


COMPANY PROFILE

JHL is registered as an NOFHC according to the regulatory guidelines, and is promoted by Jana Capital Ltd, to hold the promoter stake in JanaSFB. JanaSFB commenced banking operations in July 2018 and microfinance loans (small group loan, individual loan and agri-loans) constituted 76% of its assets under management at end-September 2018. The other loan products offered by the bank are small business loans, affordable housing, gold loans etc.

FINANCIAL SUMMARY

Parameters

FY18

FY17

Total assets (INR billion)

18.9

12.3

Total equity (INR billion)

11.9

12.3

Net income (INR billion)

-0.4

0.1

Return on average assets (%)

-2.7

NA

Tier 1 capital (%)

13.0

17.1

 Source: JHL


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

4 January 2019

30 November 2018

PP-MLD

Long-term

INR3.0

WD

IND PP-MLD emr B+/Stable

IND PP-MLD emr B+/Stable

NCDs

Long-term

INR3.0

IND B+/Stable

-

-

ANNEXURE

Instrument

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

 NCDs

INE682V07093

30 November 2018

5%

30 November 2023

INR1.45

IND B+/Stable

NCDs

INE682V07119

21 December 2018

0%

21 December 2021

INR0.5

IND B+/Stable

NCDs

INE682V07101

27 December 2018

0%

27 December 2021

INR0.4

IND B+/Stable

NCDs

INE682V07127

4 January 2019

0%

4 January 2022

INR0.4

IND B+/Stable

NCDs

INE682V07135

17 January 2019

0%

17 January 2022

INR0.15

IND B+/Stable

NCDs

INE682V07143

1 February 2019

0%

1 February 2022

INR0.1

IND B+/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.

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Analyst Names

  • Primary Analyst

    Jindal Haria

    Associate 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

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121