Lanka revises the issuer rating of Sarvodaya Development Finance Limited
|Instrument||Previous Rated Amount |
|Current Rated Amount|
|Issuer rating||N/A||N/A||Revised to [SL] B (Negative) from [SL]B+ (Stable)|
ICRA Lanka Limited, subsidiary of ICRA Limited, a group Company of Moody’s Investors Service, has revised the issuer rating of Sarvodaya Development Finance Limited (SDF or the Company) to [SL]B (pronounced S L B) from [SL]B+ (pronounced S L B plus). The outlook is revised to Negative from Stable.
The rating revision factors in the continued weakness in SDF’s capital vis a vis regulatory requirement and, the subdued liquidity profile. The Company’s core capital was about LKR 1.1 Bn as of Jun-19, below the regulatory minimum capital requirement (LKR 1.5 Bn effective from Jan-19), as the Company was unable to raise equity capital as envisaged during FY2019. The failure to meet regulatory capital has led to the imposition of LKR 5.5 Bn deposit cap in January 2019 by the Central Bank of Sri Lanka (CBSL) and the same is expected to significantly constrain SDF’s financial flexibility and liquidity. As of Jun-19, SDF’s deposit base was about LKR 5.2 Bn. Further, SDF is required to increase its minimum capital to LKR 2.0 Bn by Jan-20 and LKR 2.5 Bn by Jan-21. To meet the same, ICRA Lanka notes that sizeable external capital infusion (in relation to the current net worth) would be required as internal generation is likely to remain quite moderate. Therefore, SDF’ ability to raise commensurate capital in a timely manner would be crucial from a rating perspective.
SDF’s subdued liquidity position makes it vulnerable to any large deposit outflow given the Company’s limited resource profile (about 79% public deposits as of Jun-19), the imposed restriction on deposits, and high asset liability mismatch in <1-year bucket (16.4% of total assets as of Jun-19). The rating continues to factor in SDF’s small scale (gross portfolio at LKR 6.9 Bn as of Jun-19), its weak asset quality (gross NPA ratio at 10.5% as of Jun-19) and deteriorating profitability indicators.
The rating also factors in SDF’s established franchise on the back of Lanka Jathika Sarvodaya Shramadana Sangamaya (LJSSS) and the experienced Board of Directors, with knowledge and experience in banking and retail lending.
The Negative outlook reflects SDF’s increased risk profile post the restriction on deposits, and the continued weakness in the various financial and asset quality indicators. SDF’s ability to raise capital to meet the current and upcoming regulatory requirement in a timely basis and maintaining adequate liquidity would be key rating sensitivities in the near term. The outlook may be revised to “Stable” in case of steady improvement in SDF’s capital, liquidity and asset quality profiles going forward. The rating may be downgraded in case of SDF failing to meet the regulatory capital requirement in the near to medium term and continued restriction on deposit sourcing.
Key rating drivers
Established franchise; experienced Board of Directors; SDF is a subsidiary of Sarvodaya Economic Enterprise Development Services (Guarantee) Limited (SEEDs), with the ultimate parent being Lanka Jathika Sarvodaya Shramadana Sangamaya (LJSSS), which is one of the large and established non-governmental organisations in Sri Lanka focusing on poverty alleviation in rural districts of the country. SDF has 30 branches and 21 customer service centres as of Jun-19. SDF’s Board of Directors comprised of experienced professionals with experience in the banking/financial sector.
Sizeable external capital required to meet regulatory requirement and support medium term growth; SDF has an adequate Tier I and Total capital adequacy ratios of 12.70% and 13.08% respectively as of Jun-19 vis a vis the regulatory requirement of 6.50% and 10.50%. The Company’s gearing was at 6.2 times as of Jun-19 (6.1 times as of Mar-19 and 4.4 times as of Mar-18). SDF, however, was unable to meet the regulatory minimum core capital requirement of LKR 1.5 Bn applicable for licensed finance companies (LFCs), effective since January 2019, resulting in an imposition of a deposit cap of LKR 5.5 Bn by CBSL in Jan-19. The Company’s core capital was at about LKR 1.0 Bn as of Dec-18 and LKR 1.1 Bn as of Jun-19. SDF is required to further increase its core capital to LKR 2.0 Bn and LKR 2.5 Bn by Jan-20 and Jan-21 respectively. ICRA Lanka estimates that the Company would require external capital support of about LKR 1.5-1.6 Bn over the period FY2020-FY2021 to meet the same (with adequate buffer) and support medium term growth. While some initiatives have been taken by the management to secure the required capital to meet the immediate capital requirement within Q3FY2020, SDF’s ability to raise it on a timely basis would be a key rating sensitivity going forward.
Limited resource profile; SDF’ total borrowings stood at about LKR 6.6 Bn as of Jun-19 and about 82% of it comprised of customer deposits (fixed deposits 57% and savings deposits 24%) amounting LKR 5.4 Bn. In January 2019, CBSL has imposed a deposit cap of LKR 5.5 Bn on the Company because of the non-compliance with the minimum core capital requirement. This has resulted in SDF increasing its bank borrowings to support the portfolio growth. As of Jun-19, bank borrowings accounted for 18% vis a vis 13% as of Mar-19 and 9% as of Mar-18.
Subdued liquidity profile; SDF’s asset liability management (ALM) profile is characterised by mismatches in the <1-year bucket (16.4% of total assets as of Jun-19) as majority of deposits (about 75%) mature in less than 12-months. This has made it vulnerable to any large deposit outflow given the limited resource profile and the imposed cap on deposits. SDF has sanctioned credit lines of about LKR 185 Mn from banks, however the ability to garner adequate fresh/renewal of deposits or funding from other alternate sources, considering its weak overall risk profile, is expected to be quite limited.
Small scale of operations and modest competitive position; SDF is a relatively small player in the NBFI industry with an asset base of about LKR 7.8 Bn as of Jun-19. The Company’s portfolio of LKR 6.9 Bn consists of loans (about 76%), leasing (about 20%), microfinance bulk lending (about 3%) and legacy microfinance loans (1%) as of Jun-19. SDF stopped microfinance loans from Dec-16 because of the high slippages witnessed and is currently maintaining the same as a collection portfolio. The loan segment largely consists of SME loans and micro-business loans (collectively 55% of the total portfolio as of Jun-19), and cash backed loans (9% of the total portfolio). The leasing portfolio mainly consists of lending for small cars, small lorries and 3-wheelers, which accounted for about 14% of the total portfolio as of Jun-19. SDF expects to achieve a total portfolio of LKR 7.5 Bn by FY2020, with an exposure of 70% to loans (major portion towards SME and small business) segment and 30% to leases. Ability to raise commensurate equity/debt would be crucial for achieving the envisaged growth.
Weak asset quality indicators; SDF’s gross NPA ratio increased to 10.5% as of Jun-19 from 6.8% as of Jun-18 (9.4% as of Mar-19). The exposure to legacy microfinance group lending and loans on personal guarantees, which largely contributed to the high NPAs before, came down to about 1% of the portfolio as of Jun-19 from 3% as of Jun-18 and are largely non performing. The GNPA% of the active portfolio (excluding legacy loans) was at 9.3% as of Jun-19. However, the same has increased from 4.7% as of Jun-18 (8.1% as of Mar-19), despite the portfolio growth of about 23% over the period. The six-month lagged GNPA% of the active portfolio was 10.6% as of Jun-19. The Company’s delinquencies in 90+ days past due (dpd) stood at about 20% as of Jun-19 (18% as of Mar-19 and 12% as of Jun-18). The slippages during the period were largely because of the subdued economic growth and other macro challenges which affected SDF’s borrower segment. SDF borrowers largely consist of lower and middle scale SMEs, who are vulnerable to adverse business cycles. The Company’s ability to control further slippages and maintain healthy asset quality indicators would be a key monitorable going forward.
Deteriorating profitability indicators; SDF’s RoA declined to 0.6% in FY2019 vis a vis 1.6% in FY2018. The same further moderated to 0.2% in Q1FY2020. The decrease in profitability was largely on account of contraction in net interest margin (NIM) which came down to 11.7% in Q1FY2020 from 13.1% in Q1FY2019 (12.3% in FY2019 and 14.1% in FY2018). The combined effect of decreasing lending yields because of the portfolio shift to asset backed lending (62% as of Jun-19 against 52% as of Mar-18) and increasing borrowing costs (gearing at 6.2 times as of Jun-19 against 4.4 times as of Mar-18) contributed to lower NIM. The operating costs (as a proportion of total assets) continued to remain high at about 10.6% in Q1FY2020. However, has improved from 11.8% in Q1FY2019 (11.7% in FY2019 and 12.5% in FY2018) because of the growth in the asset base. SDF’s provisioning cost was at about 1.4% in Q1FY2020 vis a vis 1.7% in Q1FY2019 (1.4% in FY2019 and 1.6% in FY2018). The provisioning requirement has come down despite the increase in slippages because of the shift in the portfolio to asset backed lending. Going forward, it is crucial for SDF to achieve good profitability indicators while keeping the credit and operational costs under control.
Analytical approach: For arriving at the ratings, ICRA Lanka has applied its rating methodologies as indicated below.
Links to applicable criteria: ICRA Lanka Credit Rating Methodology for Non-Banking Finance Companies
About the Company:
Sarvodya Development Finance Limited (SDF) is a licensed finance Company established in 2010. SDF is a 80% owned subsidiary of Sarvodaya Economic Enterprise Development Services (Guarantee) Limited (SEEDs) and its ultimate parent is Lanka Jathika Sarvodaya Shramadana Sangamaya (LJSSS), which is one of the large non-governmental organisations in Sri Lanka with about 1,500-member societies representing all the districts in the country. In 2014, the Japanese investor Gentosha Total Asset Consulting Inc., invested in 20% of the Company for a consideration of LKR 350 Mn. SDF is largely focusing on SME loans, leasing, micro business loans and housing loans.
During the year ended March 31, 2019, SDF reported a net profit of LKR 41 Mn on a total asset base of LKR 7.5 Bn as compared to net profit of LKR 92 Mn on a total asset base of LKR 6.4 Bn in the previous fiscal year.
For the three months ended June 30, 2019, SDF reported a net profit of LKR 4 Mn (unaudited) on a total asset base of LKR 7.8 Bn.
Key financial indicators (Audited)
Mr. Vidura Welathanthri
+94 11 4339907
Mr. Dasith Fernando
+94 11 4339907
Mr. A.M Karthik
+91 44 45964308
Mr. W. Don Barnabas
+94 11 4339907
Subsidiary of ICRA Limited
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