CRISIL has upgraded its rating on Equitas Micro Finance India Pvt Ltd’s (Equitas’s) long-term debt instruments to ’BBB/Stable’ from ’BBB-/Stable’.
The upgrade reflects CRISIL’s belief that Equitas’s competitive position in the microfinance industry will improve on the back of benefits derived from its management’s experience in the financial services industry, and implementation of sound systems and processes. CRISIL also believes that the company will meet all the targets outlined in its three-year business plan, without any significant deterioration in its asset quality and capitalisation.
The company has successfully scaled up its operations; during 2009-10 (refers to financial year, April 1 to March 31), Equitas disbursed Rs.6.12 billion, compared with Rs.3.30 billion in 2008-09. The upgrade also reflects continued improvement in Equitas’s earnings profile, primarily driven by its ability to control operating expenses through extensive use of technology. Equitas’s net profitability margin (NPM) was 4.38 per cent for 2009-10; the NPM is expected to improve to 4.5 to 5 per cent over the short to medium term. The company is also expected to benefit from economies of scale as it grows in size.
In addition, Equitas’s capitalisation has improved post infusion of equity capital of Rs.1.4 billion during 2009-10. Though the current capitalisation is sufficient to meet the growth requirements of the company in the short-term, regular capital infusions will be required to achieve its ambitious growth plans for the medium to long term. The company had a comfortable gearing of 1.6 times (adjusted for the securitised portfolio) as on March 31, 2010.
Although the gearing is expected to increase as the company expands its operations, the ratio will remain comfortable, at around 5 times, over the medium term. Equitas also derives significant benefit from the experienced professionals from the financial services businesses on its board of directors. Robust processes and systems implemented by the management have enabled the company to significantly scale up operations in a short time frame of two years since commencement of operations. CRISIL believes that Equitas will continue to benefit from its competent management and strong systems and procedures, over the medium term.
Equitas’s asset quality, however, remains unseasoned. The company had an on-time re-payment rate of 99.86 per cent for the year ended March 31, 2010. However, as the portfolio is unseasoned, the current delinquency levels may not completely reflect the true asset quality in the portfolio. Furthermore, Equitas’s operations are primarily confined to Tamil Nadu (86.9 per cent of loans outstanding as on March 31, 2010), exposing the company to geographical concentration. CRISIL expects Equitas’s market presence to remain geographically concentrated over the near term.
Equitas, like other microfinance institutions (MFIs), is also exposed to risks inherent in the micro-credit business, mainly weak credit risk profiles of borrowers. Microfinance services involve delivery of financial services to the underprivileged and economically weaker sections of society. The micro-credit business (which accounts for the bulk of all microfinance activities) is fraught with risks of non-repayment. Most rural borrowers are highly dependent on the agrarian sector, which is exposed to the vagaries of the monsoon.
Also, unlike other models of retail credit, microfinance requires repeat lending; therefore, any delay in raising funds will expose the lenders to the risk of losing borrowers’ confidence, which, in turn, translates into non-repayment of loans. Given its borrower profile and geographical concentration, CRISIL believes that Equitas’s delinquency levels could rise over the medium term. Besides, MFIs’ lending rates are higher than those of banks and government schemes. This exposes these institutions, including Equitas, to political opposition in view of the social sensitivity towards charging high interest rates to the poor.
CRISIL believes that Equitas will maintain its steady growth in business and revenues, and its adequate capitalisation, over the medium term, backed by its management’s experience in the financial services industry. The outlook may be revised to ‘Positive’ if the company improves its competitive position significantly, without compromising its asset quality and profitability. Conversely, the outlook may be revised to ‘Negative’ in case of an increase in delinquencies or deterioration in Equitas’s capitalisation.
About the Company
Set up in 2007 by Mr. P N Vasudevan, Mr. M Anandan, and Mr. V P Nandakumar, Equitas (formerly UPDB Micro Finance Pvt Ltd) is a non-deposit-taking non-banking financial company registered with the Reserve Bank of India. The company is an MFI, lending to women organised into joint liability groups. Equitas had cumulative disbursements of Rs.9.6 billion until March 31, 2010.
It had 163 branches, with more than 888,600 borrowers and a portfolio outstanding (based on assets under management) of Rs.6.05 billion as on March 31, 2010. As on this date, the promoter – Mr. P N Vasudevan, and his relatives and associates, together held 15.5 per cent stake in Equitas; the stake has come down from 53 per cent in October 2008 because the company has issued shares to new institutional investors and also because the existing institutional investors have converted their preference shares into equity.
Equitas reported a profit after tax (PAT) of Rs.228.7 million on a total income Rs.1.24 billion for 2009-10, compared with a PAT Rs.22.1 million on a total income of Rs.349.7 million for the previous year.