CRISIL upgrades rating on long-term bank loan facility of Asmitha Microfin

Microfinance Focus, Dec. 29, 2009 : CRISIL, India’s leading Ratings, Research, Risk and Policy Advisory company, has upgraded its rating on Asmitha Microfin Ltd’s (AML) long-term bank loan facility to ‘BBB/Stable’ from ‘BBB-/Stable’, as per a release. It has assigned its ‘BBB/Stable’ rating to the company’s proposed long-term non-convertible debenture programme. The rating upgrade reflects improvement in AML’s capitalisation, with the company’s absolute net worth increasing to Rs.1.6 billion as on October 31, 2009, from Rs.860 million as on March 31, 2009.

Set up in 2002 as a non-banking financial company, AML is one of the top five microfinance institutions in India, in terms of loans outstanding. The company follows the micro-credit model of Grameen Bank, Bangladesh. In 2008-09, the company’s loan disbursement more than doubled to Rs.12.5 billion. As on September 30, 2009, AML had loans outstanding of Rs.8.3 billion (including managed loans) and presence in 14 states. In August 2009, Blue Orchard infused Rs.500 million in AML, thereby increasing its stake in AML to 18.1 per cent. For the half year ended September 30, 2009, AML reported a PAT of Rs.226 million on total income of Rs.1.2 billion, against a PAT of Rs.95 million on a total income of Rs.547 million for the corresponding period of the previous year.

AML’s capitalisation improved because of infusion of fresh equity capital of Rs.0.5 billion in August 2009 and healthy accretions to net worth between April and October 2009. The recent capital infusion resulted in an increase in AML’s capital adequacy ratio to 19.5 per cent as on September 30, 2009 (18.6 per cent after adjustment for direct assignments), from 15.5 per cent as on March 31, 2009 (11.7 per cent after adjustment for direct assignments). CRISIL believes that AML will maintain its capitalisation at the improved level on the back of healthy cash accruals and flexibility to infuse additional capital; the company is likely to maintain a comfortable capital adequacy ratio (16 to 18 per cent after factoring in direct assignments) while pursuing its high growth plans.

AML’s net profit margin (NPM) was high at 4.1 per cent for 2008-09 (refers to financial year, April 1 to March 31), on the back of upward revisions in its lending rate during 2007-08 and 2008-09. CRISIL believes that AML’s NPM will be around 3.5 per cent over the medium term, largely driven by the company’s healthy interest spreads, expectation of improving operating efficiency through economies of scale, and manageable credit costs.

CRISIL has given a ‘Stable’ outlook to the organization believing that AML will maintain its adequate asset quality and sufficient capitalisation over the medium term, on the back of healthy internal accruals and timely equity infusions. However, AML’s operations are expected to remain geographically concentrated over the medium term. The outlook may be revised to ‘Positive’ if AML significantly improves its market position without compromising its asset quality, and maintains its capitalisation. Conversely, the outlook may be revised to ‘Negative’ if AML’s asset quality deteriorates, affecting its capitalisation and earnings profile, or if its market position weakens significantly.

AML’s asset quality is adequate, because of its group-based lending approach, sound credit-monitoring and collection systems, and the practice of regular internal audits. AML’s portfolio at risk (PAR) overdue by more than 90 days, increased to 0.96 per cent as on September 30, 2009, from 0.1 per cent as on March 31, 2009. This decline in asset quality was mainly because of borrowers defaulting on loan repayments in a few districts of Karnataka, and is in line with the trend in the microfinance industry. Nonetheless, CRISIL does not expect AML’s asset quality to deteriorate from current levels; AML’s asset quality is expected to remain adequate over the medium term, backed by the company’s effective credit monitoring and collection mechanism.

Despite AML expanding its operations to 10 new states between April 2008 and October 2009, its portfolio remains concentrated in specific districts of Andhra Pradesh (AP; 50 per cent as on October 31, 2009) and Orissa (19 per cent). Furthermore, AML has depended only on borrowings from banks and financial institutions. While AML has diversified its wholesale funding profile, its top four lenders accounted for over 40 per cent of its overall borrowings as on September 30, 2009. Given AML’s heavy reliance on wholesale funding, CRISIL believes that AML’s cost of borrowing will remain susceptible to volatility in interest rate movements over the medium term.

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