DIGAMBER CAPFIN LIMITED Rating Facilities Amount (Rs. crore) Rating 1 Remarks Long-term Bank Facilities 30 CARE BB (Double B) Assigned Rating Rationale The rating is primarily constrained by the small scale of operations of Digamber Capfin Limited (DCL) with high regional concentration, moderate earnings profile, concentrated resource profile and exposure to regulatory risk pertaining to the microfinance industry. The rating draws comfort from the experienced promoter and management, moderate capital adequacy position and overall gearing, strong asset quality and a well-developed portfolio management and Management Information System (MIS). The ability of the company to increase its scale of operations with regional diversification, improvement in its profitability, asset quality and capital adequacy and stable operating environment for micro-finance institutions (MFIs) are the key rating sensitivities. Background Incorporated in 1995, Digamber Capfin Ltd. (DCL) is a non-deposit-taking non-banking finance company-microfinance institution (NBFC-MFI), registered with the Reserve Bank of India (RBI). DCL started microfinance business in 2009, before which it was involved in two-wheeler financing and got registered with RBI as NBFC-MFI in September 2013. DCL is primarily engaged in providing microfinance loans based on the Joint Liability Group (JLG) model to poor women residents of urban, semi-urban and rural areas. DCL provides loans to individual members in the JLG with each group consisting of at least five members. DCL s area of operations is spread across 8 districts of Rajasthan covering 26 branches and 3 districts of Madhya Pradesh covering 6 branches. As on November 30, 2013, DCL had 40,500 active borrowers belonging to 7,150 groups. The company had outstanding loans of Rs.26.08 crore as on December 31, 2013 as against Rs.22.09 crore as on March 31, 2013. The company lends to JLGs with tenure ranging from 20 weeks to 2 years and loan size ranging from Rs.2,000 to Rs.50,000. DCL lends mainly for income generating activity covering a wide range of activities. Credit Risk Assessment Experience of the promoters and management in the financial sector DCL has been promoted by Mr Rajiv Jain (present Chairman & Managing Director) and Mr Amit Jain (present Executive Director). Both the promoters have 18 years of overall experience in the financial sector through DCL. The promoters have 4 years of experience in running micro-finance activities with DCL. They are supported by a team of professionals having good experience in the financial sector. While Mr Rajiv Jain looks after the overall management of the company, Mr Amit Jain looks after the operations, administration and business development functions of the company. Well-developed loan portfolio management and MIS system The company has well established structure to monitor the operations and increase transparency at different levels. Besides putting in place credit appraisal, collection and monitoring systems, it has also induced credit discipline amongst borrowers through group meetings at the branch level and proper documentation (including issue of loan cards) to ensure smooth functioning of its operations. The company has tied-up with different NGOs for providing training to the borrowers for their skill development. The company also provides compulsory training to its staff with respect to loan recovery procedures. The company has a separate internal audit team that conducts audit of the centers on regular basis as well as also conducts surprise audit, field audit and special audit at frequent intervals. The company uses Grameen Foundations s MIFOS software which is specialized web-based software for maintaining data of its microfinance activities through cloud computing. The branches are integrated to the head office through this software with updates happening on a real-time basis. The company has separate accounting package in which the data can be uploaded from this software. The company also has online payroll and HRMS system. 1 Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications 1
Moderate earnings profile The portfolio size increased by about 56% to Rs.22.09 crore as on March 31, 2013 from Rs.14.13 crore as on March 31, 2012. Disbursements grew by 56% during FY13 to Rs.28.85 crore from Rs.18.49 crore in FY12 mainly due to branch expansion as well as increase in ticket sizes of repeat customers. Majority of the growth in disbursements was primarily for agriculture and service purpose. The operating expenses to average total assets declined from 8.80% in FY12 to 7.63% in FY13 indicating improvement in operational efficiency. Despite this, Net Interest Margin (NIM) dropped to 9.78% in FY13 from 10.59% in FY12 on account of decline in IRR on microfinance loans. However, PAT margin improved to 6.46% in FY13 from 3.77% in FY12 due to improved profitability on account of better operating efficiency. Accordingly, ROTA also improved from 0.82% in FY12 to 1.36% in FY13. Moderate capital adequacy position and overall gearing Capital adequacy ratio (CAR) increased from 24.44% as on March 31, 2012 to 26.76% March 31, 2013 mainly due to equity infusion of Rs.2.26 crore during FY13 and is well above the statutory requirement of 15%. CAR as on December 31, 2013 stood at 26.35%. Due to equity infusion in FY13, the overall gearing improved from 3.31x as on March 31, 2012 to 2.92x as on March 31, 2013. Concentrated resource profile The company s major source of funding is bank borrowings which constituted around 73% of the total liabilities as on March 31, 2013. The company has got cash credit limit of Rs.22.50 crore from SBI and has applied for enhancement in these limits by Rs.7.50 crore. Apart from this, the promoters have been regularly infusing equity in the company to fund the disbursements. The company at present relies largely on bank financing to support its growth and its ability to garner funds from additional sources in future remains crucial. Small size of operation with high regional concentration The company was operating only in Rajasthan and has ventured into Madhya Pradesh in FY14. The entire business was generated from Rajasthan region alone in FY13. Presently, the company is operating in two states of Rajasthan and Madhya Pradesh, covering 11 districts with 32 branches. As on December 31, 2013, the company had an outstanding portfolio of Rs.3.87 crore in Madhya Pradesh out of total outstanding portfolio of Rs.26.08 crore with Rajasthan region constituting the balance. Although strong presence in a particular region helps the company to understand the dynamics of the region, it is exposed to geographical concentration risk. The company plans to expand its operations in Rajasthan and Madhya Pradesh besides venturing into the states of Haryana and Punjab in the near future. Even as portfolio grew strongly in the last two years, company s scale of operations continued to remain small. As on March 31, 2013, the company had 28,350 active customers with loan outstanding at Rs.22.09 crore comprising micro-finance loans of Rs.21.87 crore, personal loans of Rs.0.11 crore and two-wheeler loans of Rs.0.12 crore. Strong asset quality Despite being an Asset Finance company, the company was following the policy of recognizing more than 90 day overdues as NPA as against RBI stipulated norm of more than 180 days overdues prior to getting the status of NBFC-MFI in September 2013. As per the over 180 days overdues norm, the company s NPA levels are very low with Gross NPA% and Net NPA% being 0.16% and 0.10% respectively with Net NPA to Net worth being 0.36% as on March 31, 2013. However, as per 90 days norm, Gross NPA% and Net NPA% stood at 0.63% and 0.57% respectively as on March 31, 2013 which deteriorated from 0.09% and zero Net NPAs respectively as on March 31, 2012 mainly due to one-time classification of standard two-wheeler as well as personal loans, which the company has stopped financing since 2009, to NPA category. Net NPA to Net worth also deteriorated from zero net NPA as on March 31, 2012 to 2.08% as on March 31, 2013 due to the same reason. Gross NPA% and Net NPA% have improved to 0.51% and 0.25% as on December 31, 2013 with Net NPA to Net Worth being 0.95% as per over 90 days overdues norm. Regulatory uncertainty and socio-political intervention risks in the microfinance industry On the regulatory front, the key development was implementation of Malegam Committee recommendations by RBI for creating separate category for NBFC MFIs and retaining the priority sector status for NBFC MFIs. The regulations are for both operational and financial aspects of an MFI and provide comprehensive framework across the country and bring more clarity on the regulatory framework for the sector. 2
Central Government has also recently released draft (to be tabled in the parliament) MFI bill (The Microfinance Institutions Development and Regulation Bill 2011) intending to provide formal statutory framework for the microfinance sector. Post this, though regulatory uncertainty has reduced, evolving regulatory environment and socio-political risk remains. With a reasonable track record of operations and established branch network, DCL is well placed among its competitors. Financial Performance (Rs. Cr) For the Year Ended On / As At 31-03-2011 31-03-2012 31-03-2013 (12 m, A) (12 m, A) (12 m, A) Working Results Interest income 1.57 2.57 4.15 Total Income 1.57 2.62 4.15 Operating expenses 0.21 0.34 0.25 Provisions & Write offs 0.03 0.10 0.04 Depreciation 0.05 0.05 0.06 Interest 0.67 1.30 2.21 PBT 0.10 0.16 0.39 PAT 0.05 0.10 0.27 Financial Position Tangible Net Worth 2.43 3.53 6.05 Total Debt 5.94 11.68 17.67 Total Loan Portfolio 7.97 14.13 22.09 Total Assets 8.48 15.45 24.08 Key Ratios Solvency(times) Overall Gearing (times) 2.45 3.31 2.92 Interest coverage (times) 1.14 1.13 1.18 Capital Adequacy Ratio (%) 29.91 24.44 26.76 Profitability (%) Net Interest Margin 13.16 10.59 9.78 PAT/Total Income (PAT margin) 3.16 3.77 6.46 Return on Total Assets 0.73 0.82 1.36 Asset Quality (%) Gross NPA Ratio* 0.08 0.05 0.16 Net NPA Ratio* 0.00 N.M. 0.10 Net NPA to Net worth* 0.00 N.M. 0.36 A Audited; N.M.-Not Meaningful *NPAs are as per over 180 days overdues norm upto March 31, 2013 Note: Ratios have been computed based on average of annual opening and closing balances NIM has been calculated as net interest income/ average annual total assets Analyst Contact Name: Harsh Raj Sankhla Tel: 0141-4020213/214 Mobile: 9413969100 Email: harshraj.sankhla@careratings.com (This follows our brief rational for entity published on 18 February, 2014) 3
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