The rating reflects Suryoday's healthy loan growth potential, diverse funding profile, strong capitalisation and stable asset quality. The rating also reflects the company’s geographical presence in the under-penetrated and under-leveraged regions, its measured expansion strategy, technology adaptation for systems and processes and higher-than-peers’ profitability. Suryoday’s rating factors in its moderate size in the microfinance industry (MFI), its low participation in the securitisation/assignment market and the high credit risk inherent in unsecured MFI lending.
KEY RATING DRIVERS
Suryoday has received in-principle approval from the Reserve Bank of India to set up small finance banks (SFBs). Although this is in recognition of its potential to serve the underbanked, Suryoday, as an SFB, could face challenges such as lower loan growth, funding constraints and lower profitability than in its current form. Able execution by the company according to its business plan (that could be finalised by FYE16) as an SFB, a sustainable build-up in its liability franchise, and delivering on its asset side strategy will be key rating drivers.
According to Microfinance Institutions Network, while Suryoday is the largest non-banking finance company-MFI (NBFC-MFI) based in western India on a managed asset basis (on book and off book portfolio), its market share in the country is low (1QFY16: 1.8%). However, it has a moderate share in its key markets of Maharashtra (1QFY16: 6.6%) and Tamil Nadu (2.8%). The company is present mostly in urban and semi-urban pockets in Maharashtra, Tamil Nadu, Madhya Pradesh, Karnataka, Gujarat and Rajasthan. Most of these are underpenetrated states with low income households and hence have high micro-credit growth potential. However, MFIs need to be watchful of asset quality as some of these states display underdeveloped credit behaviour as reflected in the non-performing assets reported by banks under self-help group lending. Suryoday remains exposed to regional risks, given its declining but still high portfolio concentration in Maharashtra (1QFY16: 40%, FY14: 51%) and Tamil Nadu (25%, 27%).
Suryoday’s return on average managed assets (balance sheet assets and securitised or assigned assets) was steady at 2.6% over FY14-FY15, higher than the peers’ median returns (1.9%). The benefit of operating leverage in FY16 and FY17 due to the back-ended branch expansion in FY15 could partially be offset by additional operational expenses on IT systems and talent acquisition to begin banking operations in April 2017. Its pre-provisioning operating profit buffers/managed assets is also likely to remain in the range of 4%-4.5% till FY17 and higher than peers’ 1.9%-4.6%.
Term loans from banks and financial institutions accounted for 70% (FY14: 96%) of Suryoday’s funding in FY15 (banks (FY15: 48%, FY14: 56%) and other financial institutions’ (22%, 40%)). The average cost of borrowings improved to 12.3% in FY15 from 13.3% in FY14 and is lower than some peers’ 12.5%-13.5%. The borrowing cost could further decline by 0.25%-0.75% due to the increasing share of lower cost non-convertible debentures, decreasing share of NBFCs in the funding profile and declining interest rate scenario. This could enable it to pass on the benefit to end borrowers.
Suryoday’s short-term liquidity is comfortable and better than most peers’; 77% of its assets and 45% of its liabilities are short term in nature (the gap is narrower for most peers), giving it the ability to withstand temporary liquidity shocks. As asset tenors increase with higher loan ticket sizes, the company’s ability to attract long-term funds while maintaining short-term liquidity will be key for establishing a matched asset-liability profile.
Suryoday’s capital adequacy ratio declined to 25.9% in FY15 from 27.6% in FY14 and Tier 1 declined to 21.45% from 26.7%, but both are still higher than most peers’. In 1HFY16, the company raised INR322m through a rights issue and INR150m through subordinate debt. It could require INR350m-INR500m additionally to maintain the capital levels in FY16. In Ind-Ra’s stress case analysis, Suryoday fares well due to its higher-than-peers’ capitalisation and higher diversification than some of its peers’.
The company’s credit policies and operational processes are adequate; its branches are computerised and branch level updates are available on management dashboards the next day. It mitigates the risk of fraud/cheating by having one branch audit officer each branch (most have one officer for three branches) and by frequent supervision by area and regional managers.
The nature of the microfinance business, i.e. unsecured lending, exposes asset quality to external events such as religious or political disturbances, resulting in the spread of willful delinquent borrower behaviour. However, a large-scale Andhra-Pradesh-like event seems unlikely due to the Reserve Bank of India’s monitoring of NBFC-MFIs and pending passage of MUDRA bill in Indian Parliament which could include the provisions of the earlier proposed Microfinance Bill.
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