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| Product | Quantum (Rs. Cr) | Long Term Rating | Short Term Rating |
| Bank Loan Ratings | 11.00 | ACUITE A | CE | Stable | Reaffirmed | - |
| Bank Loan Ratings | 200.00 | ACUITE A- | Stable | Assigned | - |
| Bank Loan Ratings | 325.00 | ACUITE A- | Stable | Reaffirmed | - |
| Non Convertible Debentures (NCD) | 60.00 | ACUITE A- | Stable | Reaffirmed | - |
| Total Outstanding | 596.00 | - | - |
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Rating Rationale |
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Acuité has assigned the long-term rating of ‘ACUITE A-’ (read as ACUITE A minus) on the Rs. 200.00 crore bank facilities (including proposed facilities) of Midland Microfin Limited (MML). The outlook is 'Stable'.
Acuité has reaffirmed its long-term rating at ‘ACUITE A (CE)’ (read as ACUITE A (Credit Enhancement)) on the Rs.11.00 Cr. partially credit enhanced term loan facility of Midland Microfin Limited (MML). The outlook is 'Stable'. Acuité has reaffirmed its long-term rating at ‘ACUITE A-’ (read as ACUITE A minus) on the Rs. 325.00 crore bank facilities (including proposed facilities) of Midland Microfin Limited (MML). The outlook is 'Stable'. Acuité has reaffirmed its long-term rating at 'ACUITE A- (read as ACUITE A minus) on the Rs. 60.00 crore Non-Convertible Debentures of Midland Microfin Limited (MML). The outlook is 'Stable'. Rationale for the rating The rating continues to factor in company’s established presence in the areas of operations, experienced management, and representation of institutional investors on the MML’s board. The rating further takes into account the improvement in company’s AUM and its improved capital structure supported by regular capital infusion by its promoters. Midland Microfin Limited’s AUM grew by ~57 percent from Rs. 1,137.41 crore as on March 31, 2022 to Rs.1753.96 crore as on June 30, 2023. (As on September 30, 2023, the AUM further grew to Rs. 2038.69 Cr.) During FY23 and 1QFY24, the company received a capital infusion of Rs. 41.57 crore from its existing investors Kitara Capital and ICICI Bank in the form of Compulsorily convertible preference shares resulting in improvement in its gearing levels at 3.80 times as on June 30, 2023 as against 4.50 times and 4.60 times as on March 31, 2023 and March 31, 2022 respectively. The ratings also considers the company’s adequate capitalization profile with capital adequacy ratio (CAR) at 29.14 percent as on September 30, 2023. Going forward, the company’s ability to maintain its capital structure through capital infusions will remain a key rating sensitivity. The above strengths are partially offset by the increased slippages and higher credit costs in FY23 coupled with the inherent risks in the micro finance segment and modest capital structure. The slippage ratio of the company has deteriorated to 6.45 percent as on March 31, 2023 as against 1.39 percent as on March 31, 2022. |
| About the company |
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Punjab based, Midland Microfin Limited (MML) is an NBFC-MFI engaged in providing microcredit to women borrowers via Joint Liability Group (JLG) model. The company is promoted by Mr. Amardeep Singh Samra who acquired an existing NBFC - Sajan Hire Purchase Private Limited in 2010 and re-named it to Midland Microfin Limited. The company commenced its operation in Jalandhar Punjab in 2011 and since then has expanded its presence in 11 states across the northern region. MML currently operates in 169 districts with a branch network of 329 branches as on March 31, 2023.
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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 high quality 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.
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| Unsupported Rating |
| ACUITE A-/ Stable |
| Analytical Approach |
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Acuité has considered the standalone business and financial risk profile of MML, the rating of MML (ACUITE A-/ Stable) and has further factored in the credit enhancement arising from the structure.
For Rs. 11.00 Cr. PCE transaction: The suffix (CE) indicates credit enhancement arising from the PCE in the form of unconditional, irrevocable, payable on demand guarantee covering 18% of the initial principal value of the facility amount. The strength of the underlying structure and continued adherence to the same is central to the rating. Accounting for the Partial Credit Enhancement, the agency has enhanced the rating of the Rs. 11.00 Cr facility to ACUITE Provisional A (CE)/ Stable. The Credit Enhancement (CE) in the rating is solely for the rated issue and its terms and structure. The notched up rating of the loan facility incorporates the PCE in the form of guarantee by Northern Arc Capital Limited (“Northern Arc”), acting as the Credit Enhancer/ Guarantor. |
| Key Rating Drivers |
| Strength |
| Strength of underlying structure
The Rs. 11.00 Cr. transaction has a PCE in the form of unconditional, irrevocable, payable on demand guarantee by Northern Arc covering 18 percent of the issue size of facilities. The level of guarantee as a percentage of the aggregate outstanding principal of the issuance is, however, capped at 24 percent. If due to the amortization of the facilities, the credit enhancement percent exceeds 24 percent of the aggregate outstanding principal of the facilities, the Guarantee Cap shall be reduced to 24 percent of the aggregate outstanding principal of the facilities (Revised Guarantee Cap). MML shall make payments of interest and principal amounts due along with all other obligations (if any) under the Transaction Document on T-3 business days. In the event of failure of the Issuer to comply, on T-3 Business Days, the Trustee shall invoke the PCE and the credit enhancement shall be dipped on T-1 Business days. The issuances 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. Established presence in the areas of operations MML commenced its microfinance operations in 2011, extending micro-credit to women borrowers engaged in income generating activities under Joint Liability Group (JLG) model. The company caters to rural and semi-urban areas where the borrowers are mainly engaged in agri and agri allied activities and providing essential services. MML commenced its operations in Punjab and over the years has expanded its presence in other states namely Bihar, Rajasthan, Haryana, Uttar Pradesh, Jharkhand, Himachal Pradesh, Gujarat, Madhya Pradesh, Uttarakhand and West Bengal. The company has presence in 187 districts with a network of 376 branches with an asset under management (AUM) of Rs. 2038.69 Cr. as on September 30, 2023. MML is promoted by Mr. Amardeep Singh Samra (Managing Director) who has been previously engaged in asset financing, hire-purchase and leasing businesses. Mr. Samra purchased an existing NBFC - Sajan Hire Purchase Private Limited in 2010 and renamed it to Midland Microfin Limited. The company is led by Mr. Samra who is supported by other members on the board which comprise Mr. Vijay Kumar Bhandari, ex- GM Central Bank of India, having around three decades of experience in banking, Mrs. Kamna Aggarwalla, ex Chairperson of the Confederation of Indian Industry (CII), Punjab amongst others. Private equity investor Kitara Capital have board representation and MML benefits from their expertise. Mr. Sachin Kamath founder member of Kitara Capital International Limited is on the board of MML. The company has on-boarded Mr. Praveen Kumar Gupta as an Independent Director who has over 3 decades in the banking sector to further strengthen their management board. Acuité believes that MML will continue to benefit from its established presence and experience of the promoters in micro finance segment. Demonstrated fund raising ability MML’s networth stood at Rs. 383.48 Cr. as on September 30, 2023 (Prov.), as compared to Rs. 347.57 Cr. as on March 31, 2023 and Rs. 270.85 crore as on March 31, 2022. The company has demonstrated fund raising ability by raising funds from private equity investor and promoter group. Over the last four years the company has raised ~180 crore of capital from its investors in the form of equity or Compulsorily convertible preference shares (CCPS). Further, during FY23 and 1QFY24, MML received a capital infusion of Rs. 41.57 crore from its existing investors Kitara Capital and ICICI Bank in the form of Compulsorily convertible preference shares. MML received sanctions totalling to ~Rs. 1,900 Cr. during FY2023 in the form of term loans from Banks & NBFC/FI’s throughout the year. MML has demonstrated its fund raising ability with access to funds from Banks, NBFC/FI’s, External commercial borrowings, NCD’s and also securitization. Acuité believes that the company’s growth prospectus will be supported by promoter’s experience in the industry along with their demonstrated track record of resource raising ability. Sustained growth in AUM and profitability MML’s AUM has seen a Y-o-Y growth of 57.32 percent during FY23 led by expansion in newer geographies and thereby also reducing its overall geographical concentration. The company has expanded its overall network to 376 branches in 187 districts as on June 30, 2023. The AUM of the company stood at Rs. 2,038.69 crore as on September 30, 2023 (Prov.) as against 1,789.45 crore as on March 31, 2023 and 1,137 crore as on March 31, 2022. The company’s AUM comprises of a mix of on-book and off book exposure. MML takes off book exposure through securitized transactions like Pass through Certificates (PTC) and Direct Assignments. As a result of the increased scale, the profitability of the company has improved reflected by improvement in Return on Average Assets (RoAA) and Net Interest Margins (NIM). The ROAA for FY23 stood at 2.64 percent as against 1.68 percent for FY22. The Net interest Margins of the company improved at 15.67 percent for FY23 as against 11.84 percent for FY22. The profit after tax for FY23 has doubled at Rs. 46.83 crore for FY23 as against Rs. 22.28 crore for FY22. |
| Weakness |
| Modest albeit improving capital structure
MML is engaged in microfinance lending providing short term loans up to 12-24 months. The company extends micro-credit through the Joint Liability Group (JLG) model. The company’s networth stood at Rs. 383.48 Cr. and total debt stood at Rs. 1,685.05 Cr. as on September 30, 2023 which translates into a gearing of 4.32 times. While the gearing has seen a sequential improvement the capital structure of the company continues to remain modest. The improvement seen in the capital structure is supported by regular capital infusions by the promoters and investors and increased accretion of profits to reserves. To support the growth momentum MML would require further debt and in order to maintain the capital structure the promoters might be required to infuse additional equity to support any future business growth. Acuité believes that company’s ability to manage its gearing will be a key monitorable. Profits susceptible to higher credit cost MML’s asset quality continues to remains sound marked by its low NPA levels. The GNPA of the company stood at 1.73 percent as on June 30, 2023 as against 0.06 and 3.07 percent as on March 31, 2023 and March 31, 2022 respectively. However, on account of slippages, the GNPA moderated to 2.16 percent with an NNPA of 1.06 percent as on September 30, 2023. The GNPA level of the company as on March 31, 2023 has primarily improved on account of a sale of stressed assets of Rs. 155 crore to an ARC. The company has however seen additional slippages and provisioning during FY23. The slippage ratio of the company has deteriorated to 6.45 percent as on March 31, 2023 as against 1.39 percent as on March 31, 2022. Further, the credit costs as a percentage of its loan book stood at 3.38 percent for FY23 as against 0.89 percent for FY22. Acuite believes that the ability of the company to profitably scale-up its operations while maintaining healthy asset quality will be key monitorable. Inherent risk in microfinance segment MML primarily extends unsecured loans to economically challenged borrowers who have limited ability to absorb income shocks and it majorly focusses on the rural areas. Since financial assistance to economic challenged borrowers is a sensitive issue, from government standpoint the regulatory dispensation in respect of the policies becomes relevant. Any changes in the regulatory environment impeding the ability of entities like MML to enforce collections, etc will have an impact on its operational performance. Besides the regulatory risks, the inherent nature of the business renders the portfolios vulnerable to event risks such as natural calamities in the area of operations. Acuité believes that containing additional slippages while maintaining the growth in the loan portfolio will be crucial. |
| Assessment of Adequacy of Credit Enhancement |
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MML has significant experience in the MFI segment, and its adequate capital position has been bolstered by capital infusions. Thus, even after considering risks such as geographical concentration and possible asset quality deterioration, Acuité believes that the CE 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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Midland Microfin Limited (MML) belongs to the NBFC-MFI sector which facilitates lending to the unbanked population. 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 maintains adequate transparency in its business ethics practices as can be inferred from the entity’s disclosures regarding related party transactions, vigil mechanism and whistle blower policy. The board of directors of the company comprise of 7 directors out of which 3 are independent directors and 1 nominee director. The audit committee is with the objective to monitor and provide an unbiased supervision of the management’s financial reporting process. MML also maintains transparency in terms of disclosures pertaining to interest rate policy and its adherence to Fair Practice Code as disseminated by Reserve Bank of India's circular. MML aims to empower women by providing micro loans to help them generate additional income opportunities, hence making an economic contribution by way of financial inclusion. It continues to work on several community development initiatives and has also worked on empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centers and such other facilities for senior citizen and measures for reducing inequalities faced by socially and economically backward groups.
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| Rating Sensitivity |
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| All Covenants |
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Financial Covenants
Financial Covenants of Credit Enhancer |
| Liquidity Position |
| Adequate |
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MML’s overall liquidity profile remains adequate with no negative cumulative mis-matches in near to medium term as per ALM dated September 30, 2023. The company’s liquidity is supported by capital infusion by investors in FY2023. The company has maintained cash and bank balances of Rs. 181.05 Cr. as on September 30, 2023. The borrowings of MML have an average maturity of 24 to 48 months for its term loans. While, the average lending tenure of ~12 to 24 months. Hence, there is inherent financial flexibility in the company. Acuité believes that the liquidity profile will continue to benefit from funding support from its promoters.
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| Outlook: Stable |
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Acuité has revised the outlook from 'Positive' to 'Stable' as MML’s credit profile will benefit from the buoyancy in the environment once the economic revival is demonstrated on sustainable basis. The outlook may be revised to ‘Positive’ in case of higher than envisaged growth in loan portfolio while maintaining profitability and asset quality metrics. Conversely, the outlook may be revised to ‘Negative’ in case of any deterioration in asset quality or profitability metrics or in case of headwinds faced by promoters in raising resources in a timely and profitable manner or in case of any deterioration in capital structure or capitalization levels.
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| Other Factors affecting Rating |
| None |
| Key Financials - Standalone / Originator | ||||||||||||||||||||||||||||||||||||||||
*Total income equals to Net Interest Income plus other income
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| Status of non-cooperation with previous CRA (if applicable): |
| Not applicable |
| Any other information |
| None |
| Applicable Criteria |
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• Application Of Financial Ratios And Adjustments: https://www.acuite.in/view-rating-criteria-53.htm • Banks And Financial Institutions: https://www.acuite.in/view-rating-criteria-45.htm • Complexity Level Of Financial Instruments: https://www.acuite.in/view-rating-criteria-55.htm • Default Recognition: https://www.acuite.in/view-rating-criteria-52.htm • Explicit Credit Enhancements: https://www.acuite.in/view-rating-criteria-49.htm |
| Note on complexity levels of the rated instrument |
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In order to inform the investors about complexity of instruments, Acuité has categorized such instruments in three levels: Simple, Complex and Highly Complex. Acuite’ s categorisation of the instruments across the three categories is based on factors like variability of the returns to the investors, uncertainty in cash flow patterns, number of counterparties and general understanding of the instrument by the market. It has to be understood that complexity is different from credit risk and even an instrument categorized as 'Simple' can carry high levels of risk. For more details, please refer Rating Criteria “Complexity Level Of Financial Instruments” on www.acuite.in.
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