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| Product | Quantum (Rs. Cr) | Long Term Rating | Short Term Rating |
| Bank Loan Ratings | 10.00 | ACUITE A- | CE | Stable | Assigned | Provisional To Final | - |
| Bank Loan Ratings | 10.00 | ACUITE A- | CE | Stable | Reaffirmed | - |
| Bank Loan Ratings | 250.00 | ACUITE BBB+ | Stable | Reaffirmed | - |
| Bank Loan Ratings | 50.00 | Provisional | ACUITE A | CE | Stable | Assigned | - |
| Non Convertible Debentures (NCD) | 170.00 | ACUITE BBB+ | Stable | Reaffirmed | - |
| Non Convertible Debentures (NCD) | 25.00 | PP-MLD | ACUITE BBB+ | Stable | Reaffirmed | - |
| Total Outstanding Quantum (Rs. Cr) | 515.00 | - | - |
| Total Withdrawn Quantum (Rs. Cr) | 0.00 | - | - |
| Rating Rationale |
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Acuite has assigned the long term rating of ACUITE Provisional A (CE)’ (read as ACUITE PROVISIONAL A (Credit Enhancement)) on the Rs.50.00 Cr. partially credit enhanced loan facilities of Sonata Finance Private Limited (SFPL). The outlook is ‘Stable’.
Acuité has converted the provisional rating to final long term rating of ‘ACUITE A- (CE)’ (read as ACUITE A minus (Credit Enhancement)) on the Rs.10.00 Cr. partially credit enhanced loan facilities of Sonata Finance Private Limited (SFPL). The outlook is ‘Stable’. Acuité has reaffirmed a long term rating of ‘ACUITE A- (CE)’ (read as ACUITE A minus (Credit Enhancement)) on the Rs.10.00 Cr. partially credit enhanced loan facilities of Sonata Finance Private Limited (SFPL). The outlook is ‘Stable’. Acuité has reaffirmed a long term rating of ‘ACUITE BBB+’ (read as ACUITE triple B plus) to Rs. 170.00 crore non-convertible debentures of Sonata Finance Private Limited. The outlook is ‘Stable’. Acuité has reaffirmed a long term rating of ‘ACUITE BBB+’ (read as ACUITE triple B plus) to Rs. 250.00 crore bank facilities of Sonata Finance Private Limited. The outlook is ‘Stable’. Acuité has reaffirmed the long term rating of ‘ACUITE PP-MLD BBB+’ (read as ACUITE Principal Protected Market Linked Debentures triple B plus) to the Rs. 25.00 cr. proposed principal protected market linked non-convertible debentures of Sonata Finance Private Limited. The outlook is ‘Stable’. The rating continues to factor in SFPL’s track record of operations, experienced management & institutional support. SFPL has a comfortable capital structure with Capital Adequacy Ratio (CAR) of 21.69 percent as on March 31, 2022 and gearing of 4.65 times as on March 31, 2022. The rating further factors in SFPL’s diverse lender base and demonstrated ability to attract funding from banks and financial institutions. Acuité understands that improvement in capitalization buffers is aided by healthy internal accruals coupled with moderation in AUM during the period. SFPL has reported uptick in disbursement in H2 FY2022 after slowdown on account of pandemic induced lockdowns in H1 FY2022. These strengths are partially offset by moderate asset quality with on-time portfolio at 65.75 percent and GNPA at 10.77 percent as on June 30, 2021 which have impacted the profitability metrics. While the company has reported improvement in monthly collection efficiencies since September 21, sustained collections and asset quality improvement in a key monitorable. On-time portfolio saw an improvement in the month of March 2022 at 86.57 percent vis a vis 65.75 percent as on June 30, 2021. The rating also considers the moderate geographical concentration in states of Uttar Pradesh, Bihar and Madhya Pradesh which comprised ~91 percent of the AUM as on March 31, 2022. Going forward, the ability of the company to scale up its operations and movement of delinquencies across different time buckets and resultant impact on profitability would remain key monitorables. The final rating on the Rs. 10.00 Cr. transaction with investor is assigned based on the fulfilment of the structure, terms and covenants detailed in the executed term loan agreement, deed of guarantee, master credit facility agreement, agreement for hypothecation of receivables, collection and payment agreement, legal opinion and other documents relevant to the transaction. The Rs 50.00 Cr transaction has a PCE in the form of unconditional, irrevocable, payable on demand guarantee by Northern Arc covering 20 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 35 percent. Additionally, the transaction structure is supported by a cash collateral of 2.5 percent of the outstanding loan amount. If due to the amortization of the debentures, the credit enhancement percent exceeds 35 percent of the aggregate outstanding principal of the debentures, the Guarantee Cap shall be reduced to 35 percent of the aggregate outstanding principal of the debentures (Revised Guarantee Cap). The rating on the Rs. 50.00 Cr proposed term loan (partial credit guarantee) is provisional and the final rating is subject to execution of following documents:
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| About SFPL |
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Uttar Pradesh based Sonata Finance Private Limited (SFPL) is an NBFC- MFI engaged in providing microcredit to women borrowers via Joint Liability Group (JLG) model. SFPL also provides individual, utility and sanitation financing. SFPL commenced its operations in 2006 and is promoted by Mr. Anup Kumar Singh. Mr. Anup Kumar Singh has over two decades of experience in micro finance segment. SFPL operates through its network of 450 branches spread across 9 states as on March 31, 2022.
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| About Northern Arc Capital Limited (“Northern Arc”) |
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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 percent as on March 31, 2022 as against 2.23 percent 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 |
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Acuité has considered the standalone business and financial risk profile of SFPL, the rating of SFPL (ACUITE BBB+/ Stable), and has further factored in the credit enhancement arising from the structure.
For the Rs 10.00 Cr. transactions: 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 facility to ACUITE 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 proposed loan facility incorporates the PCE in the form of guarantee by Northern Arc Capital Limited (“Northern Arc”), acting as the Credit Enhancer/ Guarantor. For the Rs 50.00 Cr. transaction: The suffix (CE) indicates credit enhancement arising from the PCE in the form of unconditional, irrevocable, payable on demand guarantee covering 20% 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 facility to ACUITE 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 proposed loan facility incorporates the PCE in the form of guarantee by Northern Arc Capital Limited (“Northern Arc”), acting as the Credit Enhancer/ Guarantor. Standalone/Unsupported rating – (SFPL) ACUITE BBB+/ Stable |
Key Rating Drivers
| Strength |
| Strength of underlying structure
For the Rs. 10.00 Cr. transactions: The Rs 10.00 Cr transactions have a PCE in the form of unconditional, irrevocable, payable on demand guarantee by Northern Arc covering 18 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 24 percent. If due to the amortization of the debentures, the credit enhancement percent exceeds 24 percent of the aggregate outstanding principal of the debentures, the Guarantee Cap shall be reduced to 24 percent of the aggregate outstanding principal of the debentures (Revised Guarantee Cap). SFPL 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 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. For the Rs. 50.00 Cr. transaction: The Rs 50.00 Cr transaction has a PCE in the form of unconditional, irrevocable, payable on demand guarantee by Northern Arc covering 20 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 35 percent. If due to the amortization of the debentures, the credit enhancement percent exceeds 35 percent of the aggregate outstanding principal of the debentures, the Guarantee Cap shall be reduced to 35 percent of the aggregate outstanding principal of the debentures (Revised Guarantee Cap). Additionally, the transaction structure is supported by a cash collateral of 2.5 percent of the outstanding loan amount. SFPL shall make payments of interest and principal amounts due along with all other obligations (if any) under the Transaction Document on T-4 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 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 1.075 times the outstanding amounts of the facility. In case of Issuer rating (as per Rating Agency’s view) downgrade to below BBB-, non-maintenance of security cover, non-payment by Borrower, and cross default of the borrower, the Borrower and Guarantors shall be jointly and severally liable to also transfer the collections from the security pool to the Lender on T-4 Business Days. Acuité believes that the structure provides adequate covenants to safeguard the interest of the investors. Experienced management supported by diverse and reputed investors SFPL commenced its microfinance operations in 2006, extending micro-credit to women borrowers engaged in income generating activities under Joint Liability Group (JLG) model. SFPL commenced its operations in Uttar Pradesh and over the years has expanded its presence in other states namely Bihar, Madhya Pradesh, Haryana, Rajasthan, Uttarakhand, Punjab, Maharashtra and Jharkhand. The company has a presence in 132 districts with a network of 450 branches with an asset under management (AUM) of Rs. 1,773.37 Cr. as on March 31, 2022.
SFPL is promoted by Mr. Anup Kumar Singh (MD & CEO), who has an experience of over two decades in micro finance segment. Mr. Anup Kumar Singh has been instrumental in raising funds from marquee institutional investors like Caspian Impact Investment, SIDBI, Creation Investments Social Ventures, India Financial Inclusion Fund, Michael & Susan Dell Foundation, Societe De Promotion Et De Participation Pour La Cooperation Economique, Triodos amongst others with representation on the board. Mr. Anup Kumar Singh is supported by seasoned and experienced professionals in managing the operations of the company. SFPL’s AUM as on March 31, 2022 stood at Rs. 1,773.37 Cr. (Rs. 1,494.19 Cr. as March 31, 2021 and Rs. 1,768.06 Cr. as on March 31, 2020) The AUM comprised of owned portfolio of Rs. 1,297.13 Cr. (~73 percent of AUM) and off-book exposure of Rs. 476.24 Cr. (~27 percent of AUM) as on March 31, 2022. The company takes offbook exposure through Business Correspondence model and Direct Assignment. Acuite believes that SFPL’s business and credit profile will be supported by an established presence in its area of operations and expectation of continued support from the existing investors over the near term. Comfortable capital structure with diversified funding mix SFPL’s networth stood at Rs. 298.80 Cr. as on March 31, 2022. The company’s leverage indicators stood at 4.65 times as on March 31, 2022 (4.23 times as on March 31, 2021 and 4.49 times as on March 31, 2020). SFPL’s capital adequacy ratio (CAR) reduced to 20.22 percent as on June 30, 2022 as compared to 21.69 percent as on March 31, 2022 on account of increase in AUM. The company has a strong lender profile comprising Banks and Financial Institutions, with total debt of Rs. 1,388.19 Cr. as on March 31, 2022. SFPL’s borrowing profile comprised Term loans (~55 percent), Sub-debt (~3 percent), ECB’s (~11 percent) and NCD’s (~30 percent) as on March 31, 2022. The ability to raise debt by microfinance companies remains challenging due to a very selective and cautious approach adopted by Banks and NBFC/FIs. However, SFPL has demonstrated access to funding from both Banks and large NBFC/FIs. Acuité believes, going forward, the ability of the company to mobilise additional lower cost funding through debt/ sub debt and its ability to deploy the funds profitably will be a key rating monitorable. |
| Weakness |
| Moderate geographic concentration; susceptibility to risks inherent to microfinance segment
The MFI lending segment entails providing loans to the lower economic strata of the society. The inherent risks of microfinance industry including exposure to marginalised borrowers have been exacerbated by localised lockdowns and economic disruptions in the wake of second wave of Covid-19. The intermittent lockdowns and relaxations had resulted in volatility in collection efficiency SFPL’s operations are moderately concentrated with Uttar Pradesh accounting for ~46 per cent of its AUM as on March 31, 2022 followed by Bihar at ~26 percent and Madhya Pradesh at ~19 percent. While the company is gradually expanding into other neighbouring states, there is an overall concentration of the lending business with the above three states comprising ~91 percent of AUM. Generally, the risk profile of a microfinance company with a geographically diversified portfolio is more resilient compared to that of an entity with a geographically concentrated portfolio. The company's performance is expected to remain exposed to the occurrence of events such as natural calamities, which may adversely impact the credit profile of the borrowers. Besides geography, the company will be exposed to any changes in the regulatory framework. Acuité believes that containing additional slippages while maintaining the growth in the loan portfolio will be key rating sensitivity. Moderation in asset quality and profitability metrics While SFPL has demonstrated healthy asset quality in the past with low Gross Non-Performing Assets (GNPA), the company’s asset quality has deteriorated on account of Covid-19 induced lockdowns and disruptions. During FY2021 and Q1FY2022 SFPL has witnessed significant deterioration in asset quality with on-time portfolio declining to 65.75 percent and GNPA at 10.77 percent as on June 30, 2021 as compared to ontime portfolio of 86.15 percent and GNPA of 6.30 percent as on March 31, 2021. While Acuite takes cognizance of asset quality stress in the MFI sector due to ongoing pandemic, some MFIs have been more affected due to diverse factors like geographic presence and disruption in economic activities therein, customer profile, rural urban mix etc. With the lifting of lockdowns, the ontime portfolio saw an improvement in March 2022 with 86.57 percent vis a vis 65.75 percent as on June 30, 2021. SFPL’s collection efficiency for current month due also improved to ~99 percent for the month of February and March 2022 from 68.67 percent as on May 31, 2021. The lockdowns and economic disruptions had slowed down the process of scaling up of operations, thereby, affecting the return metrics. SPFL’s profitability metrices were subdued marked by Return on Average Assets (RoAA) at 0.29 percent as on March 31, 2021 (0.94 percent as on March 31, 2020). Decline in Net Interest Margin (NIM) was also seen at 7.81 percent as on March 31, 2021 as compared to 11.80 percent as on March 31, 2020. However, as on March 31, 2022 the company reported a PAT of Rs. 13.62 Cr. as compared to Rs. 4.39 Cr. in FY21. Acuité believes that SFPL’s ability to improve its overall collection efficiency while containing elevated stress in asset quality along with sustaining profitability will be key monitorable. |
| Assessment of Adequacy of Credit Enhancement |
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SFPL 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 during the pandemic, 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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Sonata Finance Private Limited (SFPL) 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 9 directors out of which 3 are independent directors and 5 are nominee directors. The audit committee is with the objective to monitor and provide an unbiased supervision of the management’s financial reporting process. SFPL 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. SFPL 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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| Material Covenants |
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SFPL is subject to covenants stipulated by its lenders/investors in respect of various parameters like capital structure, asset quality, among others. As per confirmation received from the client the company is adhering to all terms and conditions stipulated as covenants by all its lenders/investors.
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| Liquidity Position |
| Adequate |
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SFPL’s overall liquidity profile remains adequate with no negative cumulative mismatches in near to medium term as per ALM dated March 31, 2022. The company has maintained unencumbered cash and bank balances of ~Rs. 184.64 Cr. as on June 30, 2022.
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| Outlook - Stable |
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Acuité believes that the SFPL will maintain a ‘Stable’ outlook over the medium term supported by its established presence in the microfinance segment and capital structure. The outlook may be revised to ‘Positive’ in case of significant and sustainable growth in its AUM while maintaining profitability, asset quality and capitalization indicators. Conversely, the outlook may be revised to ‘Negative’ in case of challenges in attaining optimal collection efficiency or significantly higher than expected pressur e on asset quality or profitability margins
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| Other Factors affecting Rating |
| Not applicable |
| Key Financials - Standalone / Originator | ||||||||||||||||||||||||||||||||||||||||
*Total income equals to Net Interest Income plus other income.
GNPA and NNPA as per IndAS |
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| Status of non-cooperation with previous CRA (if applicable): |
| Not Applicable |
| Any other information |
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Supplementary disclosures for Provisional Ratings:
Risks associated with the provisional nature of the credit rating In case there are material changes in the terms of the transaction after the initial assignment of the provisional rating and post the completion of the issuance (corresponding to the part that has been issued) Acuité will withdraw the existing provisional rating and concurrently assign a fresh final rating in the same press release, basis the revised terms of the transaction. Rating that would have been assigned in absence of the pending steps/documentation The structure would have become null and void for the instrument. The rating of the instrument would have been equated to the standalone rating of the issuer (ACUITE BBB+/ Stable). Timeline for conversion to Final Rating for a debt instrument proposed to be issued The provisional rating shall be converted into a final rating within 90 days from the date of issuance of the proposed debt instrument. Under no circumstance shall the provisional rating continue upon the expiry of 180 days from the date of issuance of the proposed debt instrument. |
| 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 • Default Recognition: https://www.acuite.in/view-rating-criteria-52.htm • Explicit Credit Enhancements: https://www.acuite.in/view-rating-criteria-49.htm • Non-Banking Financing Entities: https://www.acuite.in/view-rating-criteria-44.htm |
| Note on complexity levels of the rated instrument |
| https://www.acuite.in/view-rating-criteria-55.htm |
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