Ujjivan Surges on Improved Ratings from ICRA

ICRA has assigned a rating of [ICRA]A+ with a stable outlook to the Rs 275 crore Non-Convertible Debenture Programme (NCD) of Ujjivan Financial Services Limited. ICRA also has outstanding rating of [ICRA]A+(Stable) on the Rs 527.5 crore NCD program of the company and a rating of [ICRA]A1+ on the Rs 100 crore Commercial Paper programme of the company.

An Insight to the Rating:

The ratings factor in Ujjivan’s strong capitalization profile pursuant to the equity infusion of about Rs. 650 crore received by the company in Q1 FY16 and the anticipated improvement in Ujjivan’s business risk profile post conversion into a small finance bank (SFB).

Ujjivan has acquired the final SFB license in November 2016 and has made advancement towards the transition into a SFB and is working towards hiring and training its employee base, improving existing branch infrastructure and setting up new branch locations and, upgradation of its IT systems and processes.

ICRA’s Outlook:

In ICRA’s outlook, Ujjivan would be able to present additional loan products, increase fee-based income as well as develop a rational retail deposit franchise over the medium term given its large active customer base, which could support its liability profile going forward. However, in the short term, Ujjivan’s funding necessities would increase by around 20-25% owing to CRR and SLR requirements and, the company would have to depend on wholesale funding sources such as interbank lending/certificates of deposits, securitization, and capital market instruments for meeting its funding requirements.

On the whole, the ability of the company to branch out its product mix, develop a good retail deposit franchise and maintain asset quality indicators while managing the projected growth would have a bearing on the credit profile of the company. Furthermore, the company’s ability to fully meet the transition-related challenges to a SFB is a key development to be observed. The rating continues to contribute in Ujjivan’s sound management and diverse Board composition, good IT systems, prudent lending practices and, adequate internal control and monitoring processes, which have facilitated it to scale-up its operations significantly while maintaining a low credit risk profile in spite of lending to marginal borrower profile customers and growing across geographies.

ICRA takes note of Ujjivan’s ability to grow its portfolio which stands at Rs 6,486 crore as on September 30, 2016 while keeping asset quality indicators under, and maintaining good profitability indicators. It also takes note of the geographical diversity of Ujjivan’s operations which is at present in 24 states in India, with the top 3 states comprising 44% of portfolio as in September 2016. While increase in ticket sizes may lead to overleveraging of the end borrowers of Mutual Fund Investors, including those of Ujjivan, compulsory use of credit bureaus and adopting lower ticket sizes (less than Rs one lakh) should contain the overleveraging concerns; but, the company’s ability to manage the credit quality while increasing share of individual loans going ahead, where the ticket size is also likely to be higher, will be an important monitorable.

ICRA also takes note of the plunge in the attendance level of members during centre meetings, mainly in the urban locations, but there is no noticeable impact on the asset quality, yet it would be important for the company to closely observe the credit discipline of its borrowers so as to continue to maintain a strong joint liability concept.

Overall, the rating stays constrained on account of monoline nature of its business, marginal borrower profile, high operational risk inherent in the business, lack of diversification in earnings so far and challenges linked with high pace of growth. However, the conversion to SFB should attend to some of these issues including more diversified sources of earnings, reduced political risk with better regulatory supervision and, liquidity support from the RBI.

Lending, Leverages and Liquidity:

Though Ujjivan has funding lines from about 40 lenders, its dependence on term loans from banks and other financial institutions continues to remain high i.e. 76% as in September 2016. The cost of funds for the company persists to be amongst the lowest in its peer group. Given that the spreads have been fixed by the RBI at 10%, the company has been able to offer relatively lower rates, 21.25% on group loans, relatively low compared to most peers, due to its low cost of funds. Going forward, the capability of the company to replace the bank borrowings in their liability mix through mobilization of deposits and other borrowing sources remains to be observed.

However, as a result of modification in asset and liability mix, Net Interest Margin (NIM) of the company could slip from the current levels, at the same time leveraging levels are expected to increase. At present, the leveraging of the company is well-off at about 3.1 times, in September 2016, which should be sufficient to meet their growth plans in the near term. However, the company would need an ample increase in funding lines as well as large scale recruitment and training of employees to fulfil its growth plans.

The liquidity position remains at ease given that the residual tenure of liabilities is around 2-3 years, while that of the assets is around 1-2 year, resulting in a favorable ALM (Asset Liability management) position; nevertheless, the affect on the same owing to reduced collections post demonetization in 8 November 2016 is to be seen. The company’s capacity to manage good liquidity while being able to tap funds from alternate sources, in view of the transition to an SFB, while registering optimal business growth would remain a key rating sensitivity.

Concluding:

Going ahead, while Ujjivan would gain from growing its portfolio by leveraging on its branch network, it may require to improve the management bandwidth, upgrade their existing branch infrastructure, MIS systems as well as recruit and train personnel to deal with multiple products, in line with the Small Finance Bank requirements, which is likely to drive up the overall cost operations and have an influence on the near term profitability indicators of the company.

Ujjivan, given the good growth projection and established relationships with investors and lenders, should be able to carry on mobilizing funding and capital commensurate with the predicted growth. In ICRA’s opinion, ability of the company to raise retail deposits at competitive rates would have an important bearing on its liquidity profile, even as stronger liquidity support post conversion to a bank from the central bank would be a positive. On the improved rating from ICRA, Ujjivan share price gained 6.6 per cent in trade today.

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