By Jindal Haria

India Ratings and Research (Ind-Ra) has affirmed MAS Financial Services Ltd’s (MAS) bank loans as follows:

Instrument Type

Date of issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Bank loans

-

-

-

INR240

IND A/Stable

Affirmed

Bank loans*

-

-

-

INR29,760

WD

Withdrawn

*INR5,640 million bank loans have been paid in full and for the balance INR24,120 million, Ind-Ra is no longer required to maintain the ratings, as the agency has received a no objection certificate from the lead banker of the consortium. This is consistent with the Securities and Exchange Board of India’s circular dated 31 March 2017 for credit rating agencies.

The rating reflects MAS’s established business model in financing microfinance institutions (MFIs), small non-banking financial companies (NBFCs), and micro, small and medium enterprises (MSME). The rating factors in its above average capital and operating buffers, reasonably managed overall asset quality, and geographically diversified loan portfolios of its NBFC-MFI borrowers. The rating, however, is constrained by MAS’s borrower and sector concentration, the general lack of credit and liquidity of lower rated NBFCs (that forms a large segment of MAS’s borrowers), scope of improvement in operational processes and technological systems and the underlying credit quality of institutional borrowers. The rating also factors in the evolving second line of management.
 

KEY RATING DRIVERS

Profitability and Capital Buffers Adequate in Mid-Term: MAS’s tier 1 capital decreased marginally to 27.4% in FY19 from 29.46% in FY18, although is substantially higher than its peers. This, combined with its internal accruals (FY19: 19.5%) provides adequate capital for about 30% of annual loan growth in the medium term while maintaining sufficient capital buffers. Ind-Ra expects MAS to witness modest pressure on its profitability, given the stress that most of its borrower segments are facing; although stress is not visible on MAS’s portfolio at present. The return on average managed assets is expected to remain at 2.5%-3% in the medium term (FY19: 3.2%, FY18: 2.8%).

 

Asset Quality Overhang as NBFC, MSME Borrowers Face Credit & Liquidity Challenges: In FY19, about 60% of MAS’s assets under management (AUM) are to NBFCs and other forms of lending entities; these would be on book as well as assigned to banks. This set of entities is facing slow credit and liquidity availability, and hence there is a risk of default especially in cases where borrowing from MAS constitutes high proportion of the borrower’s funding profile and where the borrower is unable to refinance its existing debt. Ind-Ra expects this segment to result into at least modest credit cost over the next two-to-three quarters (nil credit cost till date). In addition, the MSME and SME segments are also witnessing similar stresses and facing the prospect of declining demand for their production. Ind-Ra also expects the management to continue to be hands-on, be in constant touch with the borrowers and assess their financial profile on an ongoing basis. MAS, given its extensive experience in lending and its borrower network, also shares best practices with its institutional borrowers.

 

MAS’s gross stage 3 ratio (FY19: 2.04%, FY18: 1.89%) is on the lower side in the Ind-Ra-rated NBFC universe, owing to nil delinquencies in the MFI/NBFC portfolio (till end-June 2019), decades of business experience in Gujarat and loss sharing arrangements with third parties on a portion of their portfolio. Gross stage 3 on direct retail advances has remained at about 5% in the past and is comparable with retail peers’. The company plans to maintain its retail-non-retail mix of the portfolio, while the share of SME in its retail portfolio would increase in the medium term.

 

Adequate Liquidity: Banks have been the predominant source of funding for MAS, with a share of 72.5% in non-equity balance sheet funding mix while security deposits form 18.3% at end-March 2019 (FY18: 22.7%). The company’s surplus balance sheet liquidity for the short (excess of short-term assets over short-term liabilities) at 6.2% of the total advances at end-March 2019. As the share of longer tenor SME assets increases, the company plans to borrow long term to balance the assets and liabilities. Moreover, the company maintains two months of disbursements in the form of unutilised bank lines. The unutilised lines amount to about INR8.4 billion. MAS also maintains assignment pipeline with banks and could be considered a significant source of liquidity, given the banks provide them a sanction letter accordingly. This pipeline is about INR10 billion for FY20. The sum of unavailed lines and assignment sanctions was about INR 16 billion at FYE18.

 

Product Portfolio Change Likely to Test Retail Capabilities: MAS’s strong pre-provision operating profit of 6.1% of the total managed assets in FY19 (FY18: 5.4%, FY17: 4.2%) is supported by its exposure to the high-yield, low-price-sensitive retail customer segment and ‘BBB+’ and lower rated or unrated NBFCs/MFIs. Over the past three years, MAS has articulated a higher share of non-retail AUM (FY19: 60% FY18: 58%). However, the share of institutional advances has only increased as the institutional portfolio has not seen any delinquencies, and hence MAS does not see the need to change course. If the proportion of self-originated retail loans increases, then growth in the retail segments (including housing) has to be much higher than the overall portfolio growth of 30% expected by the company. This could increase operating and credit costs while providing higher yields; but it would also require a larger operational engine and evolved systems and processes supported by technology to manage the loan life cycles.

 

Concentration Risk Inherent but Declining: A high proportion of refinance to NBFCs, and NBFC-MFIs and booking retail loans originated by its partner NBFCs (FY19: 60% of loans under management, FY18: 58%, FY17: 55%) in MAS’s loan book exposes it to high borrower concentration. The top 20 borrowers to total managed loans decreased to 27% in FY19 (FY18: 31%, FY17: 24%) as its overall loans under management increased. Also, the dominant share of NBFC-MFIs (FY19: 24% of AUM, FY18: 29%; FY17: 32%) in its portfolio poses risks arising from the MFI borrower category. However, MAS’s MFI portfolio is well diversified in terms of geography and is expected to carry adequate equity buffers to mitigate at least a part of the concentration risk.

Delegation and Technology Adaption Gain Importance with Growth:
MAS’s lending process includes frequent customer contact, even if a loan is regular, which results in strong relationships with SME borrowers. However, in Ind-Ra’s opinion, as MAS grows over the medium term, 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 and provide faster access to data through dashboards. In addition, Ind-Ra expects MAS to have a strong second line of management and delegation of responsibilities over the medium term.  


RATING SENSITIVITIES

Positive: Diversification of its funding profile, led by a higher proportion of long-term funding and continued lower borrower and sector concentration, while maintaining asset quality, and building a strong second line of management could lead to a positive rating action.

Negative:
Asset quality shocks leading to the weakening of profitability and capital buffers could lead to a rating 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 provides funding for the purchase of two-wheelers and commercial vehicles.

 

At end-June 2019, MAS had a network of 93 branches and INR55.8 billion worth of AUM, 60% of which were loans to MFIs/NBFCs. It has a housing finance subsidiary that provides funding to affordable housing developers in semi-urban and rural areas with AUM of about INR2.7 billion.


FINANCIAL SUMMARY

Particulars

FY19

FY18

Total assets (INR million)

37,030.0

26,961.0

Total equity (INR million)

9,097.8

7,139.2

Net income (INR million)

1,534.3

1,033.7

Return on average managed assets (%)

3.2

2.8

Tier 1 capital (%)

27.4

29.1

Source: Company


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

13 August 2018

28 November 2017

29 March 2016

Bank loans

Long-term

INR240.0

IND A/Stable

IND A/Stable

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

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 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

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121