CRISIL has downgraded its rating on Asmitha Microfin Ltd’s (Asmitha’s) proposed long term non-convertible debenture issue and bank facilities to ‘BBB–’ from ‘BBB’; the rating continues to be on ‘Rating Watch with Negative Implications’.
The rating downgrade reflects significant deterioration in Asmitha’s business and financial risk profiles because of restricted access to bank funding and considerable decline in collection from Andhra Pradesh (AP; the state accounted for around 48 per cent of Asmitha’s portfolio outstanding as on September 30, 2010) following the promulgation of ordinance on microfinance institutions (MFIs) by the Government of Andhra Pradesh (GoAP).
Asmitha Microfin CRISIL Ratings
CRISIL, in its release dated November 22, 2010, had placed its outstanding ratings on the debt instruments of 12 MFIs, including Asmitha, on ‘Rating Watch with Negative Implications’ (refer to release, CRISIL places ratings of MFIs on ‘Rating Watch with Negative Implications’).
This rating action followed CRISIL’s belief that the implementation of the GoAP ordinance has triggered a chain of events that can permanently damage the business models of MFIs, by impairing their growth, asset quality, profitability, and capital-raising ability.
Furthermore, the flow of funding to the entire sector from the banking system has been severely constrained. Consequently, liquidity and growth prospects of MFIs have been adversely affected. Structurally, the regulatory jurisdiction and framework for MFIs remains unclear. CRISIL had highlighted in its rating release that it will continue to actively monitor developments in the MFI sector and take appropriate rating actions. The impact on the creditworthiness of individual MFIs could differ depending on their exposure to AP, their liquidity, and their ability to raise capital from alternative sources.
CRISIL believes that given Asmitha’s significant exposure to AP, its business and financial profiles will take a hit over the medium term. Since CRISIL’s release dated November 22, there has been no improvement in Asmitha’s collection from AP; the collection for the state continues to be significantly low at around 15 per cent, against nearly 99 per cent prior to the promulgation of the GoAP ordinance. The steep fall in collections is likely to severely impact Asmitha’s asset quality, profitability, and capitalisation over the medium term because of a significant increase in non-performing loans and, consequently, in credit costs.
Furthermore, for AP-based MFIs, Asmitha’s access to bank financing continues to be constrained; the company has been able to raise only a very small quantum of funds from banks since the ordinance. Therefore, Asmitha has significantly scaled down its disbursements in other states to around 40 per cent of its total collections to meet its near-term debt repayments. CRISIL believes that could lead to Asmitha significantly scaling down its operations. CRISIL also believes a significant slowdown in disbursements made outside of AP could also result in a gradual drop in collections from those states, thereby leading to a further weakening in the company’s asset quality and profitability.
CRISIL believes Asmitha will be able to meet its contractual obligations in the near-term, given its current cash balances and expected collections. However, Asmitha will require funding support to adequately manage its liquidity over the medium term.
CRSIIL will continue to monitor the regulatory developments in AP and Asmitha’s ability to raise funds in the near term. Further rating actions may be taken in the absence of any positive development on the regulatory front or if there is no improvement in Asmitha’s liquidity. A further decline in collections, resulting in increased pressure on asset quality and profitability, will also have a bearing on the rating.
About Asmitha Microfin
Asmitha was established in 2002 as a non-banking financial company. The company follows the micro-credit model of Grameen Bank, Bangladesh. As on March 31, 2010, Asmitha had loans outstanding (including assigned portfolio) of Rs. 14.2 billion.
For 2009-10 (refers to financial year, April 1 to March 31), Asmitha reported a profit after tax (PAT) of Rs.588.0 million on a total income of Rs.2.9 billion, against a PAT of Rs.230.0 million on a total income of Rs.1.4 billion for 2008-09.