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| Product | Quantum (Rs. Cr) | Long Term Rating | Short Term Rating |
| Bank Loan Ratings | 250.00 | ACUITE BBB | Reaffirmed & Withdrawn | - |
| Total Outstanding Quantum (Rs. Cr) | 0.00 | - | - |
| Total Withdrawn Quantum (Rs. Cr) | 250.00 | - | - |
| Rating Rationale |
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Acuité has reaffirmed and withdrawn the long-term rating of ‘ACUITE BBB’ (read as ACUITE triple B) on the Rs. 250 Cr. Bank facilities of S.M.I.L.E. Microfinance Limited (SMFL). This rating is being withdrawn on account of the request received by the client along with No Objection Certificate received from the bank and in accordance with Acuite’s policy on withdrawal of ratings.
Rationale for the rating The rating factors that the company has sold the microfinance business to Northern ARC Capital Ltd by way of slump Sale Transactions and has exited the business. All microfinance business related assets and liabilities have been sold to Northern ARC Capital Ltd. The deal was closed on April 12, 2022. |
| About the company |
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About the company;
S.M.I.L.E. Microfinance Limited (SMFL) is a Tamil Nadu based Systemically Important Micro Finance Institution. Incorporated on 21st March 1995, it obtained license from the Reserve Bank of India as ‘Non-Banking Finance Company – Non-Deposit Taking Microfinance Institution (NBFC-MFI-ND) in May 2015. SMFL was engaged in extending of microfinance services to women in rural and urban areas for income generation purposes under the Joint Liability Group Model. The company’s operations were spread across 6 States and 1 Union Territory, namely, Tamil Nadu, Kerala, Chhattisgarh, Karnataka, Jharkhand, Madhya Pradesh, and Puducherry. It had a network of 144 branches across 49 Districts as of March 31, 2022.
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| Analytical Approach |
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Acuité has considered the standalone financial and business risk profile of SMFL to arrive at the rating.
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Key Rating Drivers
| Strength |
| Established Track Record of Operations
SMFL commenced its microfinance activities since 2006. The company was founded by Dr. N. Sethuraman, a medical practitioner with an established practice in Madurai region of Tamil Nadu. Dr. Sethuraman initially commenced microfinance activities under the Mahasemam Trust, a not for profit organization in the 90’s, thereafter in 2004, most of the operations of the trust were transferred to SMFL. In FY2010, Developing World Markets (DWM), a US based, social impact fund, invested Rs. 50 Cr for a 66.64 percent stake in the company and since then has been managing the operations of the company. Presently, the shareholding pattern constitute of DWM ~66.64 percent, Dr. S. Gurushankar (Son of Dr. N Sethuraman) having 15.59 percent stake while the remaining shareholders include ~11,000 women members of the public who were earlier associated with Mahasemam Trust. At present, the company’s operations a r e spread across 6 States and 1 Union Territory, namely, Tamil Nadu, Kerala, Chhattisgarh, Karnataka, Jharkhand, Madhya Pradesh, and Puducherry. It has a network of 144 branches across 49 Districts in these six States and one Union Territory. At the helm of company affairs i s Mr. Murali Srinivas, who is the Managing Director & CEO of the company. He has 20 years of experience in Corporate & Development Sector including Microfinance. The other board members who overseetheoperations of the company time to time include two representative directors from DWM Investments (Cyprus) Limited and Mr. V. S. Padmanaban director representing promoter. Adequate Capital adequacy: SMFL’s networth stood at Rs. 115.14 Cr. as on March 31, 2022 (Provisional) and reported adequate capital adequacy ratio (CAR) of 37.34 percent as on March 31, 2022, as against 27.61 percent as on March 31, 2021. Improvement in capitalization levels has been partially on account of decline in AUM during FY22. AUM has reduced to Rs 326.86 Crs as on March 31,2022 as against Rs 475.80 Crs as on March 31,2021. |
| Weakness |
| Moderate Asset Quality and Pressure on Profitability metrics.
The rating also factors higher than anticipated deterioration in asset quality metrics with GNPA weakening to 17.07 percent as on March 31, 2022. SMFL reported sharp increase in delinquencies across different time buckets and the on-time portfolio has declined from 81.0 percent as on March 31, 2021, to 79.40 percent as on March 31, 2022. Acuite takes cognizance of asset quality stress in the MFI sector due to pandemic, some MFIs have been more affected due to intrinsic factors like geographic presence, customer profile etc. This in turn has impacted the financial performance; the company reported losses of Rs.21.40 crore during FY22 (Provisional).
Susceptibility of near-term operating performance to the current challenging environment; geographically concentrated portfolio adds to the challenges:
The MFI lending segment entails providing loans to the lower economic strata of the society. 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 to enforce collections, etc will have an impact on its operational performance. SMFL’s portfolio is concentrated in the State of Tamil Nadu constituting more than 80.77 percent of AUM as on March 31, 2022. Besides the regulatory risks, the inherent nature of the business renders the portfolios vulnerable to event risks such as natural calamities in operations. |
| Rating Sensitivity |
| None |
| Material Covenants |
| None |
| Liquidity Position |
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SMILE has sold the microfinance business undertaking to Northern ARC Capital Ltd by way of slump sale transaction and the deal was closed on 12 th April 2022. SMILE is not continuing in Microfinance business after 12th April 2022. SMILE Microfinance Limited has reported losses amounting to Rs 21.40 Crs as on March 31,2022 (Provisional).
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| Outlook: |
| None |
| Other Factors affecting Rating |
| None |
| Key Financials - Standalone / Originator | ||||||||||||||||||||||||||||||||||||||||
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| Status of non-cooperation with previous CRA (if applicable): |
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None
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| 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 • Default Recognition: https://www.acuite.in/view-rating-criteria-52.htm • Non-Banking Financing Entities: https://www.acuite.in/view-rating-criteria-44.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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