By Saurabh Singh

India Ratings and Research (Ind-Ra) has taken the following rating actions on Fincare Small Finance Bank Limited’s (Fincare, erstwhile Disha Microfin Limited) instruments:

Instrument Type

ISIN

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Bank loans

 

-

-

-

INR3,000

IND A-/Stable

Affirmed

NCDs*

 

-

-

-

INR750

IND A-/Stable

Affirmed

Subordinated debt

INE519Q08020

29 May 2017

12.60

29 November 2022

INR250

IND A-/Stable

Affirmed

Tier 2 debt#

 

 

 

 

INR750

IND A-/Stable

Assigned

*Details in annexure
#Unutilised

KEY RATING DRIVERS

Demonetisation Overhang Clears on Microfinance Assets: Fincare’s cumulative collections, which dropped significantly post demonetisation are normalising. For disbursements post March 2017, the cumulative collections are healthy at above 99.5%. Maharashtra, one of the most affected states in terms of collection efficiencies due to demonetisation-led political interference, constituted 23.2% of Fincare’s loan portfolio in 1HFY17. Cumulative collection efficiency (defined as cumulative collection against cumulative demand) during November 2016 to November 2017 for the microfinance loans originated till end-October 2016 (before demonetisation) was 80%-81%. The bank has written off about INR880 million in 2QFY18. Ind-Ra estimates the bank may need to write off another INR400 million-500 million in 2HFY18. Ind-Ra expects the bank to raise additional capital in 1H19 to cover the expected credit costs. 


Experienced Promoters and Management:
Fincare Group comprises promoters of Future Financial Services Private Limited (which was merged into Disha Microfin in FY17) and Disha Microfin (erstwhile standalone company). The management has secured equity funding from investors within a few months of demonetisation. The management has a strong retail non-banking financial company and banking backgrounds. The promoters and management have an experience of 15-20 years in the microfinance and retail finance businesses. Ind-Ra expects most of the investors and promoter entities to support Fincare in case of equity or liquidity requirements. 

New Loan Products in Initial Stages of Roll-Out:
Joint liability group loans contributed 88.4% to the overall loan portfolio as of December 2017. Fincare had two individual loan products when it was a non-banking financial company (Disha Microfin): rural micro enterprise loans and micro enterprise loans, both of which constituted 6.1% of the total assets under management (AUM) of INR16,533.7 million as of December 2017. Rural micro enterprise loans did not fare well, especially post demonetisation, and hence this product will be discontinued post its run down, according to the company.

The bank has introduced new products such as loans against property (including micro enterprise loans), gold loans (agri and non- agri), institutional finance and affordable housing loans. Fincare aims to have an equal proportion of secured and unsecured products by FY21-FY22. It also introduced institutional finance and gold loans in 3QFY18 and had gross loan portfolio of 4.8% and 0.6% of the total AUM, respectively at end-December 2017. However most of these products are new segments for the bank and thus the loan pools are unseasoned. Ind-Ra expects the gross non-performing assets and steady state credit costs to be higher than reflected in non-microfinance products. 

Traction in
Retail Deposits Key to Successful Liability Structure Transitioning: Roughly into six months of banking operations as of December 2017, Fincare has gathered a deposit base of close to INR5,186.7 million (1HFY18: INR3,005 million), which is 30.1% of liabilities (1HFY18: 18.8%); current account saving account and retail deposits’ contribution is on a lower side. Ind-Ra expects, like most small finance banks, Fincare to build up its deposit base by mobilising wholesale deposits for the first few years; by then the retail deposit engine would catch steam. Fincare’s ability to garner a higher portion of retail deposits will be a key monitorable in the near to medium term.

Comfortable Liquidity; Key Monitorable:
The bank’s asset funding gap (short-term assets less short-term liabilities as a percentage of total assets) was in a surplus position at 29.7% of the total assets at end-December 2017. The company had INR4.8 billion in cash as of 9MFY18 (11.6% of total assets). Given the dominance of microfinance in the portfolio mix and increasing asset tenors, Fincare’s short-term liquidity will be a key monitorable in the near to medium term as the bank forays into new product segments (with higher tenors) and increases the share of deposits within the liability structure. The bank also has access to lines from refinancing agencies and call money markets, and the Reserve Bank of India as a lender of last resort. Ind-Ra also expects the bank to develop its liquidity policy over 2019 that covers these and other aspects of liquidity management.

Bank Could Require Growth Capital Over Next Two Years
: The bank’s net worth in December 2017 was about INR3,665.0 million, after an equity infusion of INR2,000 million in 4QFY17 and write-offs of INR880.0 million in 2QFY18. The promoters had committed an equity infusion (either by themselves or other investors) as a proportion of demonetisation losses and hence the bank expects an INR700 million equity infusion by 1HFY19. Thus, the bank would be adequately capitalised to finance two-year growth plans. It expects Tier 1 capital to remain above 15% and total capital at 19%-20% at steady state. Ind-Ra expects the bank to maintain its leverage (advances to total equity) below 6x over the medium term. The capital buffers and leverage (advances to total equity) shall remain key monitorables.


RATING SENSITIVITIES

Positive: A sustained increase in the operating scale, portfolio size, product and geographical diversification, franchise and share of secured loans without significant deterioration in the asset quality, along with successful execution of small finance bank operations, ability to raise longer tenor debt and deposits (particularly low-cost retail deposits) while maintaining adequate short-term liquidity and robust capital buffers, which in Ind-Ra’s opinion increases Fincare’s tolerance for asset quality deterioration, could lead to a positive rating action. 

Negative:
Inability to manage asset quality in the existing and new loan products, leading to a sharp rise in credit costs, failure to mobilise sufficient deposits, capitalisation falling below projected levels, inability to raise capital in 2018, consistently high asset funding gaps that in the agency’s opinion could increase refinance pressure, or deterioration of leverage relative to the product mix and peers, could lead to a negative rating action.


COMPANY PROFILE

Incorporated in 1995, Fincare, started its small finance bank operations in July 2017. As of December 2017, Fincare operated in eight states with 309 branches, covering over 900,000 active borrowers with gross loan portfolio of INR16,533.7 million.

FINANCIAL SUMMARY 


Particulars

FY17*

Total assets (INR million)

11,963.8

Total AUM (INR million)

17,044.5

Total equity (INR million)

4,351.0

Net income (INR million)

86.8

Return on average assets (%)

0.6

Tier 1 capital (%)

48.4

Source: Annual Report

*The financials pertains to Disha Microfin

As of September 2017, Fincare’s total assets stood at INR17,571.6 million and total equity at INR3,552.7 million.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

26 May 2017

13 February 2017

Bank Loans

Long-term

INR3,000

IND A-/Stable

IND A-/Stable

IND A-/Stable

NCDs

Long-term

INR750

IND A-/Stable

IND A-/Stable

-

Subordinated debt

Long-term

INR250

IND A-/Stable

IND A-/Stable

-

Tier 2 debt

Long-term

INR750

IND A-/Stable

-

-

ANNEXURE

Instrument Type

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Rated Amount (million)

Rating/Outlook

NCD

INE519Q08012

3 January 2017

10.90

13 January 2020

INR350

IND A-/Stable

NCD

INE519Q08053

31 May 2017

10.75

28 February 2018

INR25

IND A-/Stable

NCD

INE519Q08061

31 May 2017

10.75

31 May 2018

INR25

IND A-/Stable

NCD

INE519Q08079

31 May 2017

10.75

31 August 2018

INR25

IND A-/Stable

NCD

INE519Q08087

31 May 2017

10.75

30 November 2018

INR25

IND A-/Stable

NCD

INE519Q08095

31 May 2017

10.75

28 February 2019

INR25

IND A-/Stable

NCD

INE519Q08103

31 May 2017

10.75

31 May 2019

INR25

IND A-/Stable

NCD

INE519Q08111

31 May 2017

10.75

31 August 2019

INR25

IND A-/Stable

NCD

INE519Q08129

31 May 2017

10.75

30 November 2019

INR25

IND A-/Stable

 

 

Total

 

 

INR550

 

 

 

Unutilised NCDs

 

 

INR200

 

 

 

Grand Total

 

 

INR750

 


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels 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

    Saurabh Singh

    Analyst
    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 40001779

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121