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| Product | Quantum (Rs. Cr) | Long Term Rating | Short Term Rating |
| Bank Loan Ratings | 200.00 | ACUITE BBB+ | Positive | Reaffirmed | Stable to Positive | - |
| Bank Loan Ratings | 25.00 | ACUITE A | CE | Positive | Reaffirmed | Stable to Positive | - |
| Commercial Paper (CP) | 175.00 | - | ACUITE A2+ | Reaffirmed |
| Non Convertible Debentures (NCD) | 100.00 | ACUITE BBB+ | Positive | Assigned | - |
| Non Convertible Debentures (NCD) | 195.00 | ACUITE BBB+ | Positive | Reaffirmed | Stable to Positive | - |
| Non Convertible Debentures (NCD) | 50.00 | PP-MLD | ACUITE BBB+ | Positive | Reaffirmed | Stable to Positive | - |
| Non Convertible Debentures (NCD) | 75.00 | PP-MLD | ACUITE BBB+ | Positive | Assigned | - |
| Total Outstanding Quantum (Rs. Cr) | 820.00 | - | - |
| Total Withdrawn Quantum (Rs. Cr) | 0.00 | - | - |
| Rating Rationale |
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Acuité has assigned the long-term rating of ‘ACUITE BBB+’ (read as ACUITE triple B plus) on the Rs.100.00 Cr. proposed non-convertible debentures of Krazybee Services Private Limited (KSPL). The outlook is ‘Positive’.
Acuité has assigned the long-term rating of ‘ACUITE PP-MLD BBB+’ (read as ACUITE Principal Protected Market Linked Debentures triple B Plus) on the Rs.75.00 Cr. proposed principal protected market linked debentures of Krazybee Services Private Limited (KSPL). The outlook is ‘Positive’. Acuité has reaffirmed the long-term rating of ‘ACUITE BBB+’ (read as ACUITE triple B plus) on the Rs.200.00 Cr. bank loan facilities of Krazybee Services Private Limited (KSPL). The outlook is revised to ‘Positive’ from 'Stable'. Acuité has reaffirmed the long-term rating of ‘ACUITE A (CE)’ (read as ACUITE A (Credit Enhancement)) on the Rs.25.00 Cr. proposed partially credit enhanced term loan facility of Krazybee Services Private Limited (KSPL). The outlook is revised to ‘Positive’ from 'Stable'. Acuité has reaffirmed the short-term rating of ‘ACUITE A2+’ (read as ACUITE A two plus) on the Rs.175.00 Cr. of commercial paper programme of Krazybee Services Private Limited (KSPL). Acuité has reaffirmed the long-term rating of ‘ACUITE BBB+’ (read as ACUITE triple B plus) on the Rs.195.00 Cr. proposed non-convertible debentures of Krazybee Services Private Limited (KSPL). The outlook is revised to ‘Positive’ from 'Stable'. Acuité has reaffirmed the long-term rating of ‘ACUITE PP-MLD BBB+’ (read as ACUITE Principal Protected Market Linked Debentures triple B Plus) on the Rs.50.00 Cr. proposed principal protected market linked debentures of Krazybee Services Private Limited (KSPL). The outlook is revised to ‘Positive’ from 'Stable'. Reason for Revision in Outlook: The positive outlook takes into consideration the healthy growth in disbursement levels in own book and uptick in the offbook portfolio owing to co-lending arrangements. Acuite expects that this will have significant bearing in the earning profile of the company going forward. Accordingly, at a consolidated level, the company posted profits for last 3 consequtive quarters. Further, company is expected to raise capital by September 2022. This infusion will further aid the current growth momentum. The rating continues to take into account the healthy capitalization levels as a result of steady capital infusion from investors as well as comfortable liquidity buffers. Finnov Private Limited (FPL) has raised USD 190 million (primary and secondary) in multiple rounds of equity infusion till March 2021. As a result, the consolidated tangible networth increased to Rs.696.6 Cr. as on March 31, 2021 [P.Y.: Rs.477.0 Cr.]. The consolidated networth for the period ending March 31, 2022 stood at Rs.659.10 Cr. The rating also factors in experienced management and resourceful board that has helped to build scalable business model with robust risk management systems and technology driven digital lending platform. The company has adopted branchless lending practice by putting in place the credit risk management frameworks and processes which are largely end to end automated thereby requiring minimal human intervention. There are various rule-based scoring engines that are used to aid the decision-making process during the life cycle of the customer. The company leverages on the technology platform and compiles information through various sources which includes the bank statement, credit bureau score, KYC checks, social behavior etc. for the assessment. This has enabled FPL in achieving cumulative disbursements of over Rs. 19,000 Cr. and build a customer base of over 40 lac borrowers (including active customer base of KSPL of approximately 9 lac borrowers as on June 30, 2022). This in turn helped FPL to post profits in its early stage of operations. The group continuously monitors the collection efficiency with inhouse team of around 1,100 staff and tie up with third party agencies across product and segments which helps in fine tuning the model. These strengths are however partially offset by continued losses at consolidated levels on account of high opex and credit costs. While the group has demonstrated track record of disbursals and has been witnessing m-o-m profitability since October-21, its ability to sustain profitability while curtailing opex remains to be seen. Acuité take note of cautious approach adopted by the management to discontinue ultra-short tenor loan product and expand its relatively longer tenor loans which is expected to support growth in AUM. Nonetheless, the asset quality will remain a monitorable given unsecured nature of portfolio besides technology and regulatory risks. Additionally, Acuité believes the ability of KSPL to profitably scale up its portfolio while maintaining robustness of its technology platform/ security given the evolving nature of fintech model is also a monitorable. The Rs 25.00 Cr transaction has a PCE in the form of unconditional, irrevocable, payable on demand guarantee by Northern Arc covering 17 percent of the issue size of debentures. The level of guarantee as a percentage of the aggregate outstanding principal of the debentures is, however, capped at 23 percent. If due to the amortisation of the debentures, the credit enhancement percent exceeds 23 percent of the aggregate outstanding principal of the debentures, the Guarantee Cap shall be reduced to 23 percent of the aggregate outstanding principal of the debentures (Revised Guarantee Cap). The final rating is assigned based on the fulfilment of the structure, terms and covenants detailed in the executed trust deed, deed of guarantee, legal opinion, debenture trust agreement, deed of hypothecation and other documents relevant to the transaction. |
| About the Company |
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Krazybee Services Private Limited (KSPL) is a Bengaluru-based Systemtically Important NBFCND that operates in unsecured lending segment through a digital lending platform, “Kreditbee” owned by a group entity, Finnovation Tech Solutions Private Limited (FTSPL). KSPL is a subsidiary of FPL and has a board of six directors including three independent directors. The company commenced its operations in May 2017 and has leveraged the digital platform to expand its presence across India with Assets Under Management (AUM) of Rs.1383.12 Cr. as on June 30, 2022.
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| About the Group |
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Finnov Private Limited (FPL) is a Singapore based company that commenced its operations in May 2016 and is engaged in providing lending and lending platform through its subsidiaries, KSPL and Finnovation Tech Solutions Private Limited (FTSPL) respectively. FPL is promoted by Mr. Madhusudhan Ekambaram, Mr. Karthikeyan Krishnaswamy, and Mr. Vivek Veda who arepart of the board that also comprises four shareholder directors. FPL is backed by marquee investors like Premji Invest, Motilal Oswal, Mirae Asset and ICICI Bank Bahrain and has raised approximately USD 190 million (primary and secondary) through multiple rounds of equity infusion.
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| About the Guarantor |
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Northern Arc, previously known as IFMR Capital Finance Ltd., is a Non-Deposit taking NonBanking Financial Company (ND-NBFC) incorporated in 1989. It is involved in the placement (arranging funding for its clients via loan syndication, securitisation and assignment among others) and lending business. The company acts as a link between mainstream capital markets investors and highquality last mile lending institutions and businesses. The company’s business is categorized as finance sector exposure, i.e., microfinance, affordable housing finance, commercial vehicle finance, consumer finance, agri-finance and small business loans, and non-finance sector exposure, i.e., mid-market finance and corporates.
Northern Arc reported Assets Under Management (AUM) of Rs. 6874 Cr. as on March 31, 2022 as against Rs. 5,220.87 Cr. as on March 31, 2021. Northern Arc’s asset quality improved with GNPA (90+dpd) at 0.51% as on March 31, 2022 as against 2.23% as on March 31, 2021. The company’s Profit After Tax (PAT) stood at Rs. 163.73 Cr for the period ending FY2022 (Rs. 67.51 Cr as of FY2021). The company’s debt/equity ratio was 2.53 times as on March 31, 2021 as compared to 1.96 times as on March 31, 2020. However, the debt/equity ratio increased to 3.50 times as on March 31, 2022. |
Analytical Approach
| Extent of Consolidation |
| •Full Consolidation |
| Rationale for Consolidation or Parent / Group / Govt. Support |
| Acuité has considered the consolidated business and financial risk profile of the Finnov Private Limited (FPL) to arrive at this rating. This approach is in view of capital, operational and managerial support from the parent entity, FPL besides interlinkages between FTSPL (‘Kreditbee’ platform) and KSPL.
Standalone rating considered for the PCE transaction of Rs 25.00 Cr: ACUITE BBB+/Positive |
Key Rating Drivers
| Strength |
| Strength of underlying structure
The Rs 25.00 Cr transaction has a PCE in the form of unconditional, irrevocable, payable on demand guarantee by Northern Arc covering 17 percent of the issue size of debentures. The level of guarantee as a percentage of the aggregate outstanding principal of the debentures is, however, capped at 23 percent. If due to the amortisation of the debentures, the credit enhancement percent exceeds 23 percent of the aggregate outstanding principal of the debentures, the Guarantee Cap shall be reduced to 23 percent of the aggregate outstanding principal of the debentures (Revised Guarantee Cap). KSPL shall make payments of interest and principal amounts due along with all other obligations (if any) under the Transaction Document on T-5 business days. In the event of failure of the Issuer to comply, on T-4 Business Days, the Trustee shall invoke the PCE and the credit enhancement shall be dipped on T-1 Business days. The Debentures shall be secured by way of a first ranking, exclusive and continuing charge on identified receivables. The Hypothecated Receivables shall at all times be equal to the value of 1.1 times the outstanding amounts of the facility. In case of Issuer rating (as per Rating Agency’s view) downgrade to below BBB, the Borrower will ensure that the percentage of outstanding principal value of PAR > 0 loans in the hypothecated pool does not exceed 15 percent of the outstanding principal value of the hypothecated pool. Acuité believes that the structure provides adequate covenants to safeguard the interest of the investors. Experienced management team coupled with backing from marquee investors Finnov Private Limited (FPL), the holding company of KSPL, is promoted by Mr. Madhusudhan Ekambaram, CEO and Director having over 15 years of experience in various fields including product portfolio management, sales and business development,Mr. Karthikeyan Krishnaswamy, CTO and Director having over 12 years of experience in technology and products and Mr. Vivek Veda with over 14 years of experience dealing in multiple domains in Finance. The company provides lending through its NBFC arm, KSPL and offers data-driven lending platform (‘Kreditbee’) through FTSPL that facilitates lending via NBFCs and banks. FPL is backed by marquee investors like Premji Invest, Motilal Oswal, ICICI Bank Bahrain, NewQuest Capital and Mirae Asset and has completed multiple rounds of equity funding and raised approximately USD 190 million (primary and secondary) funding till March 2021, of which USD 147 million (primary and secondary) was raised in latest round in FY2021. The board of FPL comprises eight directors including promoter group and representation from four shareholder directors. Acuité believes the business risk profile of FPL will benefit from the support from the management and presence/backing of marquee investors. Comfortable capital position and gearing The multiple rounds of equity infusion since inception in 2016 has enabled FPL to maintain comfortable capital position and gearing levels. On a consolidated basis, FPL reported networth of Rs.659.10 Cr. as on March 31, 2022 (FY2021: Rs.696.6 Cr.) with gearing of 1.21 times as on March 31, 2022 (FY2021:0.67 times). CAR and Tier I of KSPL to 40.56% and 39.36% respectively as on March 31, 2022 (FY2021: 64.60 % and 63.48% respectively). Comfortable capitalization and gearing levels provide adequate headroom to KSPL to pursue its growth strategy and also adequate cushion to absorb asset quality shocks given the unsecured nature of portfolio. The company has demonstrated ability to raise capital, both equity and debt. On the debt front, the company has well diversified resources profile with healthy resources raising ability. Acuité expects FPL to maintain gearing of 2.5 times on a steady state basis in the near to medium term. Acuité expects the Group to continue to benefit from diversified funding mix across domestic banks, Institutional investors and lenders, foreign investors and domestic retail investors amongst others. Scalable business model with robust risk management systems KSPL has lending presence across India enabled by its digital lending model (through “Kreditbee”, owned by Group entity, FTSPL) with majority of credit underwriting process right from sourcing of loans to collections and recoveries performed digitally over in -house technology platform. This enables the company to achieve scalability in business at a faster pace with well-defined risk and rule engines continuously monitoring asset quality metrics. With app based lending and turnaround time (TAT) (from application to disbursal) of around 20 minutes, the company has garnered a large borrower base comprising predominantly of younger borrowers (~28 years). |
| Weakness |
| Moderation in profitability indicators
The company has moderate profitability characterized by losses during FY21 and FY22 on consolidated levels. For FY2021, the consolidated earnings profile was impacted due to pandemic stress with losses of Rs.100.6 Cr. on account of sharp decline in processing and service fees (Kreditbee Platform) to Rs.162.8 Cr. from Rs.560.2 Cr. on the back of lower disbursements of Rs.2133.6 Cr., partially offset by cost saving measures undertaken which led to reduction in operating expenses. Despite pickup in disbursements since Q2FY22 and m-o-m profitability since October 21, the company continued to report losses of Rs. -48.23 Cr. during FY22 on account of high opex and credit costs. Acuité believes that the group's (consolidated) ability to sustain profitability on m-o-m basis coupled with the intense competition in the unsecured loan segment will be key rating monitorable. Moderate asset quality KSPL commenced its operations in May 2017 in unsecured personal loan segment and currently caters to salaried and self-employed individuals. The AUM stood at Rs.1162 Cr. as on March 31, 2022 (Rs.652.4 Cr. as on March 31, 2021 and Rs.957.5Cr. as on March 31, 2020). The portfolio increased in Q2 & Q3FY2022 on account of uptick in disbursals since Q2FY22 and approach adopted by the management to discontinue ultra-short tenor loan product and expand its relatively longer tenor loans which is expected to support growth in AUM. KSPL asset quality had witnessed deterioration with GNPA at 7.22% as on March 2021 (FY2020: 3.59%) owing to pandemic-related stress and niche customer profile. Further, write offs as percentage of disbursements for FY2021 had jumped to 7.7% (FY2020: 2.8%). As on June 30, 2022, the GNPA and NNPA stood at 4.44% and 1.63% respectively. Acuité notes that collection capabilities built over time with in-house team of around 1,100 staff and tie up with third party agencies is expected to further strengthen collections mechanism. Nonetheless, the company’s business is yet to stabilize given its moderate scale of operations; its scalability and the asset quality needs to be monitored given unsecured nature of portfolio and inherent vulnerability of the borrower segment. Evolving nature of fintech business model Given that the digital lending particularly in B2C segment is evolving and company is still in the early stage of operations, it is yet to be seen how the companies achieve the scalability and sustained profitability. Though the experience of the management and the strong board composition has successfully led the group to become PAT positive in just over 2 years and reserve positive in 2.5 years of commencing operations, owing to the Covid-19 pandemic induced stress, the disbursements sharply declined and credit costs were high in FY21, leading to losses for the group in FY 2021 and also for Q1 FY2022. Hence the sustained performance and stability of the business model remains to be seen. Technology and regulatory risks Given that innovative technology is the backbone of fintech business model, the company is exposed to technology risks encompassing data security, privacy and technology failure. Since all the business functions including data storage, disbursals and collections mechanism is done digitally, any breach shall expose the company to cyber events and liabilities arising thereon. Acuité understands that the company is frequently conducting tech audit to keep a track of any potential risk. Furthermore, the company has availed a cyber-insurance policy to meet any unforeseen liability arising on the tech front. Additionally, the company is also exposed to evolving regulatory developments given that the fintech business model is at nascent stage. |
| Assessment of Adequacy of Credit Enhancement |
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KSPL has significant experience in the unsecured loan financing sector, and its moderate capital position has been bolstered by recent capital infusions in FY21. Thus, even after considering risks such as possible asset quality deterioration during the pandemic, Acuité believes that the credit enhancement will stand adequate in all scenarios and in the event of any requirement, Northern Arc will provide the necessary support.
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| ESG Factors Relevant for Rating |
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KSPL belongs to the NBFC sector which continues to complement the efforts of banks in enhancing small ticket retail lending in India. Some of the material governance issues for the financial services sector are policies and practices with regard to business ethics, board diversity and independence, compensation structure for board and KMPs, role of the audit committee and shareholders’ rights. On the social aspect, some of the critical issues for the sector are the contributions to financial inclusion and community development, responsible financing including environmentally friendly projects and policies around data privacy. The industry, by nature has a low exposure to environmental risks. The entity has made adequate disclosures regarding its policies on related party transactions, vigil mechanism and whistle blowing. It also adheres to Reserve Bank of India’s Fair Practices Code and has the necessary interest rate and grievance redressal policies. The board of directors consist of 3 independent directors out of a total of 6 directors. All the three members of the Audit Committee are NonExecutive Directors with majority of them being Independent Directors. KSPL does not, however have a woman director on its board. In accordance with the guidelines issued by RBI, the entity has constituted a Risk Management Committee that is responsible for identification, evaluation and mitigation of operational, strategic and external environment risks. Further, KSPL has also constituted an IT strategy committee to ensure adequate control over issues like cyber security and data privacy. KSPL provides personal loan, salary advance loan and online purchase loans with a focus on the young working class of India. KSPL aims at making credit highly accessible to the salaried and self-employed segment through adoptionof technology. Till date, KSPL has upgraded more than 1 million customers from NTC (New to Credit) to a bureau score, thereby making them bankable customers. KSPL supports community development through CSR projects mainly aimed at promotion of education, eradication of hunger, environmental sustainability, protection of national heritage and culture among other causes.
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| Rating Sensitivity |
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| Material Covenants |
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KSPL is subject to covenants stipulated by its lenders/investors in respect of various parameters like capital structure, asset quality among others.
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| Liquidity Position |
| Adequate |
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KSPL’s liquidity profile as on June 30, 2022 is well matched with no negative cumulative mismatches up to one-year bucket. As on June 2022, cash and liquid investments for the company stood at Rs. 134 Cr. At consolidated level, cash and liquid investments stood at Rs. 306 Cr for the period ending June 30, 2022.
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| Outlook : Positive |
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Acuité believes that FPL's credit profile will benefit from the expected capital infusion which would further aid in the current growth momentum. The rating could be upgraded if the company is able to demonstrate improvement in its financial risk profile and asset quality metrics. Conversely, the outlook may be revised to ‘Stable’ in case the company faces higher then expected asset quality pressures or deterioration in profitability parameters.
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| Other Factors affecting Rating |
| Not applicable |
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*Total income equals to Net Interest Income plus other income.
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| Status of non-cooperation with previous CRA (if applicable) |
| None |
| Any Other Information |
| None |
| Applicable Criteria |
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| Note on Complexity Levels of the Rated Instrument |
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