Analyst Contacts Vibha Batra vibha@icraindia.com +91-124-4545 302 A M Karthik a.karthik@icraindia.com +91-44-4596 4308 Revathi Prasad revathi.prasad@icraindia.com +91-44-4596 4311 Relationship Contact Jayanta Chatterjee jayantac@icraindia.com +91-80-4332 6401 Grading ICRA has assigned the MFI grade of M2 (pronounced M two) to Madura Microfinance Private Limited (MMFL/”the company”).The grading indicates that in ICRA’s current opinion, the graded MFI's ability to manage its microfinance activities in a sustainable manner is high. The grading is valid till December 20151. Table 1: Key Financials Mar-13 5.6 61.2 150.0 Mar-14 5.6 72.1 227.4 Sep-14 5.6 79.1 269.3 145.2 36.8 22.4 4.0 3.2 13.2% 12.9% 181.6 34.0 19.7 8.5 5.8 12.0% 10.3% 261.7 49.5 32.5 16.8 10.9 14.6% 11.2% 316.9 33.7 21.1 10.4 6.9 14.5% 12.8% 7.6% 6.5% 6.3% 6.5% 5.8% 3.5% 7.9% 2.8% 8.6% 1.1% 8.0% 0.8% 2.3% 1.9% 5.8% 56.7% 1.5 5.2% 3.5% 10.0% 45.1% 1.9 7.5% 4.9% 16.4% 42.2% 2.4 7.2% 4.8% 18.3% 45.0% 2.7 1.0% 0.9% 1.7% 0.5% 0.4% 1.1% 0.2% 0.1% 0.3% 0.3% 0.2% 0.5% PBT: Profit before Tax; PAT: Profit after Tax; ATA: Average Total Assets Note: Amount in Rs. Crore Source: Company and ICRA Analysis Website: www.icra.in 1 For complete grading scale and definitions please refer to ICRA's website www.icra.in or other ICRA Rating Publications December 2014 Equity Capital Net Worth (Reported) Loans and Advances (On Book) Total Managed Assets Total Income Net Interest Income PBT (reported) PAT (reported) Net Interest Margin/ ATA Cost of average interest bearing funds Operating Expenses/ Average Managed Assets Operating Profit/ ATA Provisions & Charge offs / ATA PBT/ATA PAT / ATA PAT /Average Net Worth Cost to Income Ratio Total Debt/Net Worth (including assigned book) times Gross NPA % Net NPA % Net NPA/ Net worth Mar-12 5.6 55.4 104.7 ICRA MFI Grading Perspective-Confidential MADURA MICROFINANCE PRIVATE LIMITED ICRA MFI GRADING PERSPECTIVE MADURA MICROFINANCE PRIVATE LIMITED Grading Rationale The grading factors in MMFL’s ability to scale up operations (loan book grew by 52% in FY2014 and18% in H1FY2015, over March 2014 and stood at Rs 269 crore as on September 30, 2014) while maintaining good profitability indicators ((PBT/ATA of 7.5% in H1FY2015 (provisional) and 7.2% in FY2014)) supported by improved Net Interest Margin (NIM) and reduction in credit costs. The grading also factors in MMFL’s strong investor profile, experienced Board of Directors (BoD) and management team, adequate loan monitoring and collection mechanisms supported by strong Management Information Systems (MIS) and its ability to raise funds from about 18 lenders at competitive rates to fund its growth while maintaining a comfortable liquidity profile. The grading is however constrained by MMFL’s geographically concentrated nature of operations with around 97% of the portfolio being concentrated in the state of Tamil Nadu and relatively high expansion plans of the company (CAGR of 30-35%) over the next three years. Company Profile Madura Microfinance Limited (MMFL) is a non-banking finance company (NBFC) established in 2005 and started operations in early 2006. MMFL obtained a NBFC-MFI license in November 2013.The CMD of the company, Dr. Tara Thiagarajan has a 48% equity stake in MMFL, while one MFI-focused private equity investor – Elevar Equity – holds 22% stake. MMFL is engaged in providing credit to economically backward women through the Self Help Group (SHG) mechanism. MMFL had a loan portfolio of Rs. 269 crore in September 2014 (Rs.175 crore in September 2013), of which 97% of portfolio comprises of SHG loans and 3% accounted for asset backed retail loans. As in Sep-14, MMFL operates in 33 districts of Tamil Nadu, 2 districts of Karnataka and one district of Maharashtra across 217 branches and has over 2.47 lakh members. For the year ended March 31, 2014, MMFL reported a net profit of Rs. 10.9 crore on a total asset base of Rs. 262.7 crore compared to Rs. 5.8 crore net profits on an asset base of Rs. 182.1 crore in fiscal 2013. MMFL reported provisional profit before tax of Rs. 10.50 crore on a total asset base of Rs. 317.9 crore for H1FY2015. Table 2: Share Holding Pattern as on September 30, 2014 Ms. Tara Thiagarajan Mr. M. Narayanan Mr. Marti Subramaniam Mr. Ashok Mirza Mr. M.V. Subbiah Mr. M.R. Ramaraj Employees’ Welfare Trust Employees Elevar Unitus Trust Total ICRA Rating Services % of Paid up Capital 48.05% 5.76% 5.40% 3.60% 1.80% 1.80% 9.07% 2.79% 21.73% 100.0% Page 2 ICRA MFI GRADING PERSPECTIVE MADURA MICROFINANCE PRIVATE LIMITED Strengths Experienced board and management team. Good loan monitoring and control systems; IT system is based on mobile technology and data is updated on real-time basis. Capitalization levels presently comfortable; however, company would need external equity support for medium term growth Improvement in asset quality with significant reduction in delinquencies over past year; portfolio vulnerability however, remains high owing to weak credit profile of the customer segment Challenges Geographically concentrated nature of operations as the entire portfolio is restricted to Tamil Nadu with 66% of portfolio is concentrated in 5 districts To overcome competition from other MFIs given the relatively high MFI penetration in Tamil Nadu To diversify funding mix at competitive rates so as to be able to achieve the growth plans Ability to recruit and train personnel to meet the expansion plans and attrition rates especially at field level ICRA Rating Services Page 3 ICRA MFI GRADING PERSPECTIVE MADURA MICROFINANCE PRIVATE LIMITED Business Risk Profile Table 3: Highlights of MMFL’s Operations No. of States No. of Districts No. of Branches No. of Active Members (Lakhs) Credit Portfolio (Rs. Crore) Number of Field Officer Active Borrowers per field officer Active Borrowers per branch Portfolio per branch(Rs crore) Mar-12 1 29 212 2.13 142.20 656 324 1004 0.67 Sep-12 1 29 202 1.75 127.99 619 283 867 0.63 Mar-13 1 29 194 1.73 151.63 499 347 892 0.78 Sep-13 1 29 194 1.94 175.28 478 407 1002 0.90 Mar-14 3 33 201 2.09 230.11 453 461 1040 1.14 Sep-14 3 36 217 2.45 269.25 528 464 1129 1.24 Madura Microfinance Private Limited (MMFL) is involved in microfinance business, with presence in about 33 districts in Tamil Nadu, 2 districts in Karnataka and one district in Maharashtra. MMFL extends credit under the Self Help Group (SHG) model, wherein the group members undertake the responsibility of forming the group, joint liability, and repayments. The groups are formed and trained by the MMFL directly. The group size typically varies from 15 to 20.The borrowers, who are women, come from a weak economic background with very limited access to organised credit and credit history. While this makes the lending risky (the loans being unsecured), the group dynamics is expected to be effective in curtailing shortfall in collections from any borrower. The borrowers typically are involved in small trade, cottage industries, animal husbandry activities, and agricultural based activities. MMFL focuses only on rural and semi-urban areas and offers loans of various ticket sizes in the range from Rs. 14,000 to Rs. 42,000 for group loans In September 2014, the proportion of loans with ticket size more than Rs. 15,000 stood at about 60% as in September 2014. MMFL offers group loan products with interest rate of 25.6%.The tenure of loans varies from 16-36 months. The company also provides an individual loan product to the borrowers who are in the higher loan cycle and established a good repayment track record. The tenure of these loans is 2 years and same interest rate as group loans. In order to take advantage of the 15% bucket provided by the RBI Guidelines, the company has introduced asset backed micro enterprise loans to small retail traders and also. The sourcing for these loans is done through retail distributors like Pepsico, ITC etc. These loans would be on hypothecation of stocks. These loans are in the ticket size range of Rs.25K to Rs. 50K and can go up to Rs.1 lakh depending on the size of the borrower with an interest rate of 25.8%.The tenure for these loans are 6 months with weekly collections. Apart from loans, the company also offers Micro Business Education (MBE) service scheme wherein the company provides a mini MBA certificate program. Post completion of the course the certified individual is eligible to take an additional loan of Rs. 10,000. MMFL charges Rs. 500 for the above mentioned program. The course was developed in collaboration with Dr. Madhu Viswanathan of the Marketplace Literacy Project and University of Illinois at Urbana Champaign based on learning’s from over 100 case studies of subsistence marketplace entrepreneurs. MMFL registered a portfolio growth of about 51% to Rs. 227 crore during FY2014 owing to improved access to funding. The company’s portfolio as on September 2014(Portfolio of Rs.269 crore) comprised mostly (more than 97% of the total portfolio) of group loans with a member base of 2.5 lakh (1.7 lakh in March 2013) and 3% of portfolio comprises of retail loan products.As for borrower vintage, owing to the high business growth, first cycle loans accounted for about 36% of the total portfolio as on September 2014. This ratio is expected to remain high in the medium term, owing to the high growth plans of the company. MMFL intends to grow its portfolio by at least 50% in FY2015. While the company is currently adequately capitalized to achieve this growth target, however it would need equity infusions to meet its growth plans in the short to medium term (CAGR at 30-35% for next three years). The ability of the company to raise funds would be a key consideration to be able to achieve the target growth level. The company would also need to tap other debt market funding sources to diversify its resource profile. It would also be important for the company to recruit and train personnel going forward, in line with the planned expansion. In this context, the training procedures at MMFL are standardized and are provided by internal staff. The company also has a well planned calendar for training existing employees on a quarterly basis. In terms of geographical presence, almost 97% of the loan portfolio of MMFL remains concentrated in the state of Tamil Nadu (TN) and Karnataka (2%) and Maharashtra (1%) as on September 14, ICRA takes note of the initiatives taken by the company to geographically diversify their operations; the same however are still at early stages. The company commenced operations in the state of Karnataka and Maharashtra in the current financial year and proposes to expand into Madhya Pradesh, in the measured manner, by the end of the current financial year.Going forward company continues to expand its presence in TN and along with the prudent expansion in the other states. ICRA Rating Services Page 4 ICRA MFI GRADING PERSPECTIVE MADURA MICROFINANCE PRIVATE LIMITED Operating Environment MFIs reported over 40% annualized growth during the two years ended March 2014 after the period of stress post-AP crisis when funding sources had dried up. The growth was supported by better availability of funds, strong branch expansion, and increase in ticket size. Significantly, even after the impressive growth during the last two years, the untapped potential remains large. This, along with the expansion plans of MFIs and the expected fund availability, is likely to enable a 30-35% annualized rate of growth over the next three years. Further, the RBI, in June 2014, has allowed non deposit accepting NBFC-ND to be business correspondents (BC), which is likely to provide a fillip to financial inclusion and to the business prospects of MFIs. However, while the growth prospects for MFIs are favourable, recruitment, employee-training and employee-retention are likely to remain critical performance-determining factors, given that the employee attrition rate in the industry remains high at an annual 30-40% even as most MFIs are into a significant expansion drive. MMFL’s operations are largely concentrated in the state of Tamil Nadu (TN). MFI penetration in TN is quite high with presence of about 20 MFIs. The above is expected to result in high competitive pressures for the players with TN concentrated portfolio profile, including MMFL. As for the regulatory environment, RBI has put in interest rate caps as well as interest margin caps in place, which have forced MFIs to take several initiatives to cut operating costs including optimization of branch costs and manpower, increase in loan sizes and automation of processes, among others. Managing costs has become even more important as the net interest margins for MFIs has been capped from April 2014 at 10% for MFIs with a loan portfolio of more than Rs. 100 crore and at 12% for MFIs with a loan portfolio of less than Rs. 100 crore. Further mandatory use of credit bureaus and debt ceilings have restricted overleveraging for borrowers and are a positive for the sector in the long term. Since these regulatory changes were introduced, almost all the NBFCMFIs have started contributing data to the credit bureaus. This has helped in checking the number of loans, quantum of loans and credit track record of a borrower. These checks have helped in reducing incidence of overleveraging as well as filtering of delinquent borrowers-these measures are likely to have a good long term impact on credit quality of the MFIs. However some banks which have ventured into microfinance and most of the SHGs still donot contribute the data to credit bureaus. Though the overall operating environment is improving, some MFIs are venturing into relatively riskier individual loans and other secured and unsecured loan products, while remaining focused on politically and communally sensitive borrower groups. The external factors such as occurrence of political or communal issues may also have a long-term impact if they affect the credit culture of the borrowers at large. Though the potential remains huge, maintaining control over asset quality by building strong systems without compromise on internal audit and controls and building adequate cushions to absorb event risks would be important for NBFC-MFI’s credit profile. ICRA Rating Services Page 5 ICRA MFI GRADING PERSPECTIVE MADURA MICROFINANCE PRIVATE LIMITED Governance Structure, Management and Systems Ownership and Board Structure Table 4: Shareholding pattern as in September 2014 Shareholder Name % Share Ms. Tara Thiagarajan Mr. M. Narayanan Mr. Marti Subramaniam Mr. Ashok Mirza Mr. M.V. Subbiah Mr. M.R. Ramaraj Employees’ Welfare Trust Employees Elevar Unitus Trust Total 48.05% 5.76% 5.40% 3.60% 1.80% 1.80% 9.07% 2.79% 21.73% 100.00% The CMD of the company, Dr. Tara Thiagarajan has a 48% equity stake in MMFL, while one MFI-focused private equity investor – Elevar Equity – holds 22% stake. The company is currently comfortable on capitalization and considering its growth outlook the management is willing to dilute the stake as and when required. Table 5: Board of Director as in September 2014 Shareholder Name Dr. Tara Thiagarajan R. Ramaraj Ashok Mirza N C Sarabeswaran Rahul Verma Sandeep Farias Vipul Rawal % Share Chairman and Managing Director Independent Director Independent Director Independent Director Independent Director Nominee Director (Elevar Equity) Nominee Director (Elevar Equity) The Board consists of 7 directors; of which one whole time director, two independent directors, one investor director and 3 promoter directors which are people with vast industry experience. The company’s managing director and chairperson, Ms. Tara Thiagarajan, has adequate experience in microfinance and rural sectors. The board is supported by a three-member advisory committee, which comprises Mr. Karti Sandilya, Mr. M.V. Subbiah, and Dr. Marti G Subramanyam Elevar Equity has two nominee directors on the board of directors. All the board members have a rich experience from diverse fields including retail banking and accounting, IT & microfinance. The composition if the Board has remained stable and there have not been any resignations at least in the past 2-3 years. The board meets on a quarterly basis and if required it may meet more often. The Board is involved to a large extent in strategy, policies and areas of improvement. An annual strategy meet is held to discuss in detail the strategy for the forthcoming year. The operational performance is discussed with the Board in every meeting. Management The Chairman and Managing Director of the company, Dr. Tara Thiagarajan is primarily involved in strategic decision making; the senior management has vast experience in the lending business – mainly retail products in state of Tamil Nadu – target market of MMFL. While the Board takes strategic decisions, the operational management is handled by the Branch Managers and office staffs of MMFL. The Board members have a good experience in various fields of business including banking, financial services, human resources etc. The Board has been associated with the company for a considerable time period and has developed expertise in the microfinance sector over this period. Systems and Processes MMFL’s overall systems and processes compare well with its peers. All collections and attendance pertaining to the centers are updated on a real-time basis through a mobile application. There is an online portal developed, “Shakthi Sangamam”, which provides a database of the transaction summary of all the borrowers within each SHG across clusters. The company has an established system to perform pre-disbursal checks with Credit Bureau in a centralized fashion. Disbursements are made at the branch only by a Cluster Manager and house verification is done for all borrowers prior to disbursal by the field officer and mentors. The cluster manager also verifies the residence of the borrowers on a sample basis. A Credit Bureau (Hi-mark) check is carried out of all the borrowers prior to disbursement and ICRA Rating Services Page 6 ICRA MFI GRADING PERSPECTIVE MADURA MICROFINANCE PRIVATE LIMITED only compliant borrowers are considered for credit. A post-disbursement end-use verification is carried out by the mentor and cluster Manager. The loan utilization document is kept along with loan papers. Cluster offices are computerized and all data entry and records are maintained at the cluster office. All cluster offices are connected to the Head Office. The mentor centers are provided with cashiers with mobile phone with GPRS connection and a printer, where the groups remit their collections. The Cashiers enter the details in the mobile and prepare a receipt and handed over to the group members while collecting the money. The data is transferred to the corporate office Server through GPRS immediately after the transaction is over. Cluster Manager would report to Regional Manager at Head Office the day’s transactions (EOD status) in a daily report. The company however faced some delinquencies in the past owing to misappropriation of funds by Member Development Associate (MDA) who are responsible for group formation for the loan originated in FY2011. Since FY2011 company has gradually removed the MDA layer in the employee hierarchy due to deterioration in the credit culture in SHG group formed by MDA. Presently, Member Welfare Associates (field officers) are responsible for even group formation and training. Having the MDA layer have been removed currently, the company has been able to minimize the delinquencies to the extent. The management indicated that above change has minimized the delinquencies and helps in filtering the bad credit. Internal Audit Systems The internal audit processes of the company are strong wherein a comprehensive audit is conducted for every branch on a quarterly basis covering the key business aspects. The company’s operational audits are being done by an external audit team comprising of 7 members with experience in banking and financial services industry. Apart from the above, the company has a 12 personnel borrower-quality audit team to verify the quality of the members/borrowers enrolled before the disbursal of the entry level loan and, to verify the process implementation at the group level, of the groups which are in the repeat cycle. ICRA takes note of the initiatives takes by the company to augment its internal audit processes by adding the borrower-quality audit team, however believes that the scope of overall operational audit could be enhanced further. The company has also formalized training procedures and manuals at all levels. MMFL has also put in a formal grievance redressal mechanism in place. Accounting Policies MMFL’s accounting policies are generally in-line with the accepted accounting norms for microfinance companies. The company has a conservative provisioning policy and, the aggregate provisions held by the company are higher than those mandated by RBI for NBFC-MFIs. Scalability Largely dependent on bank funding; however company is expected to diversify the same over in the near to medium term Table 6: MMFL’s Capitalisation Indicators Rs. Crore Mar-12 Net worth 55.4 Borrowings Term Loan from banks Term Loan from FI Total Borrowings Gearing 73.8 8.5 82.3 1.5 % Mar-13 % 61.2 90% 10% 100% 105.5 11.8 117.3 1.9 Mar-14 % Sep-14 provisional 79.1 % 81% 19% 100% 150.9 64.7 215.6 2.7 70% 30% 100% 72.1 90% 10% 100% 141.9 33.4 175.3 2.4 MMFL demonstrated a healthy growth in the business, with disbursements of about Rs.223 crore in FY2014 and Rs.138 crore in H1FY2015 as compared to Rs.141 crore in FY2013. During FY2014, the company was able to secure fresh funds of about Rs.107 crore from the banks which supported healthy business growth in the previous year at an incremental cost of 14-14.5%.MMFL has access to large number of lenders, although primarily banks/NBFCs for meeting its funding requirements. As on September 2014, its borrowings comprised loans from fourteen banks (70% of total borrowings), one financial institution (7%), and loans from three NBFC (23%).The company is taking initiatives to diversify its funding profile, by securing funds via NCD and the ECB route. Going forward, MMFL’s ability to consistently raise funds from diverse sources and at competitive rates as the business expands would be important from a grading perspective. Based on the current sanctions in hand, the company would be able to meet incremental planned disbursements for about 3 months, however regular flow of funds would be crucial to maintain as well as grow business operations over longer term ICRA Rating Services Page 7 ICRA MFI GRADING PERSPECTIVE MADURA MICROFINANCE PRIVATE LIMITED Capitalization profile moderated due to sharp business growth; Table 7: MMFL’s Capitalisation Indicators Rs. Crore Tier I Capital (%) Tier II Capital (%) Total Capital (%) Gearing (on managed assets basis2) (times) Mar-12 46.5% 0.0% 46.5% 1.5 Mar-13 34.1% 0.0% 34.1% 1.9 Mar-14 27.8% 0.0% 27.8% 2.4 Sep-14 26.2% 0.0% 26.2% 2.7 Capitalisation levels were comfortable (Net Worth of Rs 82.5 crore, gearing including off balance sheet book of 2.6 times as on September 30, 2014) supported by healthy internal generation of about 15-16% .However capitalization profile was moderated during FY2014, as the company grew its portfolio at a very strong pace of about 52% during the year, although the internal generation was good at about 16%. Consequently, the gearing of the company increased to 2.6 times as in September 2014, as compared to about 1.9 times in March 2013 While the company is currently adequately capitalized (capital adequacy ratio (CAR) of 26.18% as in September 2014) to meet its growth plans in the medium term. ICRA envisages the company to have moderate internal accruals of 9%-12% and given its significant growth plan (30-35% CAGR for the next 3 years), they would require equity infusion of Rs. 40-50 crore in this period, to meet their growth targets in line with their business plan, while maintaining adequate capitalization levels. Human resources With the scaling up of business, the company would also require trained employees to support its operations. At the field officer level, the basic skills required are that they should have passed Class 10, with knowledge of the local language. The training procedures are standardised. Every employee goes through 5 days of classroom training, followed by a test and 15 days of field training, post which the loan officer can independently conduct group meetings. The company has a well planned training calendar for the existing employees for training the employees on soft skills as well as products. All the training provided is internal and the company has not tied up with any external agency for any training. Field officers are part time employees with no fixed pay component. On an average, a MWA (field officer) is expected to handle around 800 borrowers and paid a salary of about Rs. 2,000-5,000 per month which is relatively lesser than other MFI’s salary payout. Salary depends on the number of SHG borrowers, groups formed and quality of SHG borrowers. The company continues to follow part time employee structure in TN since the most of the field officers are women’s who are erstwhile members of the company. Field officers have been deployed in the location where they belong to. The company has employed filed officers as full time employees in newer geographies i.e. Karnataka and Maharashtra. While a part time employee structure enables the company to keep its employee expenses at relatively lower levels vis-à-vis peers, ability to maintain control over the employees would be important to maintain its asset quality indicators. At the field level, the field officers report to the mentors who in turn report to the Cluster Managers. Each cluster manager handles 3-4 cluster centers and reports to a regional manager who. The regional manager reports to the reports to the Head of Operations. The attrition rate of the company is 8%-10% as a whole. For the trainee field officers, the attrition rate is higher about 10%-12%, while at the level of confirmed field officers it is relatively lower and that at the senior level is very low at about 2-5%. Going forward, ability of the company to manage the growth, recruit and train personnel in line with the planned branch and geographical expansion plans, while maintaining the asset quality indicators in the newer geographies would be important from a grading perspective. Asset Quality Though the company faced with high delinquencies in the past (originations in FY2011 and FY2012) on account of misappropriation of funds by field officer, however initiatives taken by the company to reduce the delinquencies through strengthening of control mechanisms which has led to stabilization of asset quality between Mar-13 till Sep-14(90+ dpd stood at 0.19% as on Sep-14 as compared to 0.38% as on Mar-13). Loan originations over the last two years have demonstrated good collection efficiency Nevertheless, the company remains exposed to asset quality related risks, as its operations are concentrated in the 33 districts of Tamil Nadu,2 districts of Karnataka and one district of Maharashtra and ability of the company to diversify operations while maintaining asset quality indicators remains to be seen. ICRA Rating Services Page 8 ICRA MFI GRADING PERSPECTIVE MADURA MICROFINANCE PRIVATE LIMITED Financial Performance Profitability Table 8: Trend in MMFL’s Profitability indicators Effective Yield on Average Advances2 Effective Yield on Average Earning Assets1 (A) Cost of interest bearing funds (B) Gross Interest Spread (A – B) Net Interest Margin3 Operating Expense/ Average Managed Assets Cost-Income Ratio Credit Provisions/ Average Assets Net Profit / Average Assets Return on Average Net Worth Mar-12 12M 25.2% 21.3% 12.9% 9.3% 13.2% 7.6% 56.7% 3.5% 1.9% 5.8% Mar-13 12M 22.5% 18.4% 10.3% 9.1% 12.0% 6.5% 45.1% 2.8% 3.5% 10.0% Mar-14 12M 25.4% 22.4% 11.2% 12.3% 14.6% 6.3% 42.2% 1.1% 4.9% 16.4% Sep-14* 6M 27.1% 24.6% 12.8% 13.2% 14.5% 6.5% 45.0% 0.8% 4.8% 18.3% *Provisional numbers As for earning profile, the profitability indicators (PAT/ATA) of MMFL improved from 3.5% in FY2013 to 4.9% in FY2014 and 4.8% (provisional) in H1FY2015 on account of a steady portfolio growth during the year, which resulted in the improvement in the company’s NIM and, due to the moderation in the credit costs. MMFL’s NIMs improved from about 14.6% for FY2014 and H1FY2015 as compared to 12% in FY2013. The company’s credit costs moderated to about 1.1% in FY2014 (0.8%, provisional, in H1FY2015) as compared to 2.8% in FY2013, as the write-offs moderated and the company was also able to make recovery from the earlier written-off accounts. Going forward, ICRA expects the company’s overall credit cost to moderate and stabilize at about 0.6-0.7% levels as incremental write-offs are expected to be lower, than observed in the past, supported by good average collections of over 99%. MMFL’s operating expenses after moderating from about 6.5 % in FY2013 to about 6.3% FY2014 increased to about 6.6% (provisional) in H1FY2015 as the company is expanding operations to newer geographies. ICRA however expects the operating costs to not exceed 7% due to the low cost of its operations in Tamil Nadu and its measured expansion strategy in the newer geographies. The company reported a RoE of 16.4% for FY2014. Going forward, also ICRA expects the company to maintain a RoE of about 15-16% supported by moderation in the overall credit cost although the operating cost could witness some increase. 2 Ratios are computed on managed assets basis – i.e., including assigned / securitized portfolio 3 Net interest margin = Net Interest Income / Average managed assets ICRA Rating Services Page 9 ICRA MFI GRADING PERSPECTIVE MADURA MICROFINANCE PRIVATE LIMITED COMPANY PROFILE—MADURA MICROFINANCE PRIVATE LIMITED Name of the Company Constitution Year of Incorporation Registered office Number of branches (Sep-14) Number of active borrowers (Sep-14) Balance Sheet size (Sep-14) Share Capital Issued (Sep-14)-Provisional Net worth (Sep-14) -Provisional Capital Adequacy Ratio (Sep-14) Managing Director Auditors Madura Microfinance Private Limited Private Limited Company 2005 36, 2nd Main Road, Kasturba Nagar, Adyar , Chennai- 600 020 217 Rs.2.5 Lakhs Rs.317.9 crore Rs. 5.6 crore Rs.79.1 crore 26.2% Ms.Tara Thiagarajan S.N.S Associates Shareholding Pattern (September 30,2014) Ms. Tara Thiagarajan Mr. M. Narayanan Mr. Marti Subramaniam Mr. Ashok Mirza Mr. M.V. Subbiah Mr. M.R. Ramaraj Employees’ Welfare Trust Employees Elevar Unitus Trust Total 48.05% 5.76% 5.40% 3.60% 1.80% 1.80% 9.07% 2.79% 21.73% 100.00% Board of Directors (September 30,2014) Dr. Tara Thiagarajan Mr. R. Ramaraj Mr. Ashok Mirza Mr. Rahul Varma Mr. N C Sarabeswaran Mr. Sandeep Farias ICRA Rating Services Chairman and Managing Director, MMFL Advisor Sequoia Capital Chairman Apcom Group Chief Learning Officer, Accenture Senior Partner Jagannath and Sarabeswaran Managing Director Elevar Equity Page 10 ICRA MFI GRADING PERSPECTIVE MADURA MICROFINANCE PRIVATE LIMITED KEY FINANCIALS PROFIT & LOSS ACCOUNT Interest Income (Net of Business Origination Costs and incl. processing fees) Interest Expenses (including Preference Dividend) Net Interest Income Non Interest Income Operating Income Operating expenses Operating Profits Provisions including NPA provisions Income from Securitization / Assignment Net profit on sale of securities and assets Profit Before Tax (before extraordinary items) Extraordinary Items Profit Before Tax (PBT) Tax Profit After Tax (PAT) PAT (Reported) Equity dividend Accretion to reserves SUMMARY ASSETS Net Hire Purchase/ Loan/ Lease Assets Investments - Strategic Investments - Short Term Surpluses Cash & Bank Balances Collaterals for Securitization Advance Tax paid Other Current Assets Net Fixed Assets Total Assets Off-balance sheet receivables Total Managed Assets SUMMARY LIABILITIES Equity Share Capital Reserves Net Worth Total Borrowings (including Preference Shares) Interest Accrued but not due Provisions for Tax Other Current Liabilities & Provisions Deferred Tax Liability Total Liabilities ICRA Rating Services Mar-13 Mar-14 Sep-14 30.0 10.3 19.7 3.9 23.7 10.7 13.0 4.5 0.0 0.0 8.5 0.0 8.5 2.6 5.8 5.8 0.0 5.8 48.8 16.4 32.5 0.7 33.1 14.0 19.1 2.4 0.0 0.0 16.8 0.0 16.8 5.8 10.9 10.9 0.0 10.9 33.7 12.6 21.1 0.0 21.1 9.5 11.6 1.2 0.0 0.0 10.4 0.0 10.4 3.5 6.9 6.9 0.0 6.9 150.0 0.2 4.0 20.6 0.0 0.0 2.8 4.0 181.6 0.0 181.6 227.4 1.7 10.3 18.2 0.0 0.0 2.2 1.9 261.7 0.0 261.7 269.3 9.9 21.0 2.9 0.0 4.2 4.7 5.1 316.9 0.0 316.9 5.6 55.6 61.2 117.3 0.0 0.0 3.7 5.6 66.6 72.1 175.3 0.0 0.0 15.3 5.6 73.5 79.1 215.6 0.0 6.4 16.9 (0.6) 181.6 (1.0) 261.7 (1.0) 316.9 Page 11 ICRA MFI GRADING PERSPECTIVE COMMON SIZE STATEMENTS PROFIT & LOSS ACCOUNT (% of Operating Income) Net Interest Income Non Interest Income Operating Income Operating expenses Operating Profits Provisions including NPA provisions Income from Securitization / Assignment Net profit on sale of securities and assets Profit Before Tax (before extraordinary items) Extraordinary Items Profit Before Tax (PBT) Tax Profit After Tax (PAT) PAT (Reported) Equity dividend Accretion to reserves SUMMARY ASSETS (% of Total Assets) Net Hire Purchase/ Loan/ Lease Assets Investments - Strategic Investments - Short Term Surpluses Cash & Bank Balances Collaterals for Securitization Advance Tax paid Other Current Assets Net Fixed Assets Total Assets Off-balance sheet receivables Total Managed Assets SUMMARY LIABILITIES (% of Total Liabilities) Equity Share Capital Reserves Net Worth Total Borrowings (including Preference Shares) Interest Accrued but not due Provisions for Tax Other Current Liabilities & Provisions Deferred Tax Liability Total Liabilities ICRA Rating Services MADURA MICROFINANCE PRIVATE LIMITED Mar-13 Mar-14 Sep-14 83.3% 16.7% 100.0% 45.1% 54.9% 19.1% 0.0% 0.0% 35.7% 0.0% 35.7% 11.2% 24.6% 24.6% 0.0% 24.6% 98.0% 2.0% 100.0% 42.2% 57.8% 7.2% 0.0% 0.0% 50.6% 0.0% 50.6% 17.6% 33.0% 33.0% 0.0% 33.0% 100.0% 0.0% 100.0% 45.0% 55.0% 5.8% 0.0% 0.0% 49.2% 0.0% 49.2% 16.4% 32.8% 32.8% 0.0% 32.8% 82.6% 0.1% 2.2% 11.3% 0.0% 0.0% 1.5% 2.2% 100.0% 0.0% 100.0% 86.9% 0.6% 3.9% 7.0% 0.0% 0.0% 0.8% 0.7% 100.0% 0.0% 100.0% 85.0% 3.1% 6.6% 0.9% 0.0% 1.3% 1.5% 1.6% 100.0% 0.0% 100.0% 3.1% 30.6% 33.7% 64.6% 0.0% 0.0% 2.0% -0.3% 100.0% 2.1% 25.4% 27.6% 67.0% 0.0% 0.0% 5.9% -0.4% 100.0% 1.8% 23.2% 24.9% 68.0% 0.0% 2.0% 5.3% -0.3% 100.0% Page 12 ICRA MFI GRADING PERSPECTIVE MADURA MICROFINANCE PRIVATE LIMITED Mar-13 Mar-14 Sep-14 22.5% 5.0% 19.4% 10.3% 9.1% 25.4% 4.7% 23.5% 11.2% 12.3% 27.1% 0.0% 26.0% 12.8% 13.2% Net profit on sale of securities and assets / Average Assets Profit Before Tax (before extraordinary items)/ Average Assets Tax / Profit Before Tax Profit After Tax / Average Assets Profit After Tax / Average Managed Assets Equity Dividend / Profit After Tax Profit After Tax / Average Net worth 18.3% 6.3% 12.0% 2.4% 6.5% 7.9% 0.0% 2.8% 0.0% 0.0% 5.2% 31.3% 3.5% 3.5% 0.0% 10.0% 22.0% 7.4% 14.6% 0.3% 6.3% 8.6% 0.0% 1.1% 0.0% 0.0% 7.5% 34.7% 4.9% 4.9% 0.0% 16.4% 23.2% 8.6% 14.5% 0.0% 6.5% 8.0% 0.0% 0.8% 0.0% 0.0% 7.2% 33.3% 4.8% 4.8% 0.0% 18.3% EFFICIENCY RATIOS Fee Based Income/Operating Expenses Operating Cost/Operating Income 50.5% 45.1% 20.8% 42.2% 19.2% 45.0% CAPITALISATION RATIOS Net Worth/ Total Assets 33.6% 27.4% 24.9% Total Debt / Net worth Net NPA/Net worth Capital to Risk Weighted Assets Ratio Tier I Capital to Risk Weighted Assets Ratio Capital to Risk Weighted Managed Assets Ratio Tier I Capital to Risk Weighted Managed Assets Ratio 1.92 1.1% 34.1% 34.1% 34.1% 34.1% 2.43 0.4% 27.8% 27.8% 27.8% 27.8% 2.73 0.5% 26.2% 26.2% 26.2% 26.2% ASSET QUALITY Gross NPA/Gross Advances Net NPA/Net Advances 0.5% 0.4% 0.3% 0.1% 0.3% 0.2% 182.1% 202.3% 182.8% KEY FINANCIAL RATIOS OPERATING RATIOS Yield on Average Loans (Net of BO Costs) Yield on Average Investments Yield on Average Earning Assets (Net of BO Costs) Cost of Average Interest Bearing Funds Gross Interest Spread PROFITABILITY RATIOS Interest Earned / Average Assets Interest Expenses / Average Assets Net Interest Margin/Average Assets Fee based Income/Average Assets Operating Expenses /Average Managed Assets Operating Profit / Average Assets Write offs & Repo losses (net of recoveries)/Average Managed Assets Provisions /Average Managed Assets Income from securitization & assignment/ Average Assets COVERAGE RATIOS PBIT/ Total Interest ICRA Rating Services Page 13 ICRA MFI GRADING PERSPECTIVE MADURA MICROFINANCE PRIVATE LIMITED ICRA Limited CORPORATE OFFICE Building No. 8, 2nd Floor, Tower A; DLF Cyber City, Phase II; Gurgaon 122 002 Tel: +91 124 4545300; Fax: +91 124 4545350 Email: info@icraindia.com, Website: www.icra.in REGISTERED OFFICE 1105, Kailash Building, 11th Floor; 26 Kasturba Gandhi Marg; New Delhi 110001 Tel: +91 11 23357940-50; Fax: +91 11 23357014 Branches: Mumbai: Tel.: + (91 22) 24331046/53/62/74/86/87, Fax: + (91 22) 2433 1390 Chennai: Tel + (91 44) 2434 0043/9659/8080, 2433 0724/ 3293/3294, Fax + (91 44) 2434 3663 Kolkata: Tel + (91 33) 2287 8839 /2287 6617/ 2283 1411/ 2280 0008, Fax + (91 33) 2287 0728 Bangalore: Tel + (91 80) 2559 7401/4049 Fax + (91 80) 559 4065 Ahmedabad: Tel + (91 79) 2658 4924/5049/2008, Fax + (91 79) 2658 4924 Hyderabad: Tel +(91 40) 2373 5061/7251, Fax + (91 40) 2373 5152 Pune: Tel + (91 20) 2552 0194/95/96, Fax + (91 20) 553 9231 © Copyright, 2015, ICRA Limited. 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