CRISIL has assigned its ‘BBB-/Stable’ rating to the non-convertible debentures of Equitas Micro Finance India Pvt Ltd (Equitas) and reaffirmed its rating on the other debt instruments. The rating reflects Equitas’s adequate capitalisation and the extensive industry experience of the company’s board and senior management. These rating strengths are partially offset by Equitas’s relatively unseasoned loan book and regional concentration, exposure to increased regulatory and legislative risks associated with the microfinance institutions (MFI) sector, and constrained funding environment across the MFI sector.
CRISIL believes that Equitas’s operations, profitability, and capitalisation will not be adversely affected because of the recent Reserve Bank of India (RBI) guidelines on microfinance institutions (MFIs), given Equitas’s ability to comply with these guidelines. Equitas’s capitalisation and profitability are also better shielded from the impact of loan provisioning compared to the other MFIs that have significant exposure to Andhra Pradesh (AP).
Equitas continues to have comfortable liquidity and an adequate funding profile. Equitas has slowed down the disbursements during the past few months awaiting clarity to emerge in the MFI sector post the implementation of the Malegam committee’s recommendations. Also, the company would prefer to complete the ongoing corporate restructuring exercise before stepping up the microfinance business. With the improvement in the funding scenario, Equitas’s management intends to maintain, at a minimum, a lower level of liquidity at Rs.0.5 billion as unencumbered cash and investments compared to Rs.1 .0 billion maintained so far.
Equitas’s capitalisation has improved in the past two years on the back of increasing internal accruals and regular capital infusions. As on March 31, 2011, the net worth (after adjustment of deferred tax assets) of the company was Rs.2.99 billion, compared to Rs.2.69 billion as on March 31, 2010.
The current capitalisation is sufficient to meet the projected growth requirements of the company over the medium term. However, additional capital infusion will be required to achieve its proposed growth in the housing and vehicle finance businesses. CRISIL believes that the initial contribution for Equitas’s new businesses will not exceed Rs.750 million for the medium term. Any additional equity is likely to come from external investors.
Equitas also derives significant benefits from experienced professionals from the financial services sector on its board of directors and top management. Robust processes and systems implemented by the management have enabled the company to significantly scale up its operations within two years since its commencement.
Equitas’s asset book, however, remains unseasoned. As on March 31, 2011, its portfolio at risk (PAR) of greater than 30 days, 60 days, and 90 days on a six-month lagged basis were 0.23 per cent, 0.78 per cent, and 0.17 per cent respectively, compared with 0.23 per cent, 0.09 per cent, and 0.05 per cent respectively as on March 31, 2010.
The increase in delinquency has been primarily because of gradual seasoning of the portfolio. The company has fully written off its exposure in AP, though a small one. Equitas’s operations are primarily confined to Tamil Nadu (70.3 per cent of loans outstanding as on March 31, 2011). CRISIL believes that though Equitas will increase its geographical diversity over the medium term—its share of portfolio in Tamil Nadu is expected to be around 60 per cent over the medium term. The ability of the company to manage its asset quality will remain a rating sensitivity factor.
The promulgation of ordinance on MFIs by the Government of AP (GoAP) demonstrated the vulnerability of MFIs to regulatory and legislative risks. Equitas continues to rely on funding primarily from banks and financial institutions. Since the implementation of the GoAP ordinance, the flow of funding to the MFI sector from the banking system has been severely constrained. The instances of MFIs operating outside AP, including Equitas, being able to raise additional funding from banks and other sources have been selective and at much lower levels than before the implementation of the ordinance.
CRISIL believes that although Equitas’ growth and profitability will be considerably lower than previously projected, the company will remain well-positioned to gain access to bank financing to support its revised business plans. Furthermore, the funding position for the MFI sector, especially for the ones operating outside AP, is expected to improve following the issue of guidelines by the RBI for NBFC – MFIs.