ICRA Nepal assigns Grade 4+ to 60% rights issue of Srijana Finance; Capital after adjustment to reach Rs 73.72 crore

ICRA Nepal has assigned [ICRANP] IPO Grade 4+, indicating below average fundamentals to the proposed rights issue of Srijana Finance Limited (SFFIL). SFFIL proposes to come up with 60% rights issue of 2,764,692 equity shares, with a face value of NPR 100 each, at par for its existing shareholders.

Strengths and opportunities

1. Adequate track record in banking operations (since 2000) with comfortable asset quality indicators, as reflected in low non-performing loans (NPLs) of 0.34% as of mid-July 2019 (0+ dpd of ~2%) against 8.80% for the industry.
2. Competitive cost of funds among peers, backed by a healthy chunk of current and savings accounts (CASA) in its deposit profile, also provides support to the grading action.
3. Low customer concentration risks with ~6% of credit and ~4% of deposits among top 20 customers as on mid-July 2019.
4. Healthy capitalisation (CRAR of 14.48% as on mid-July 2019), experienced senior management and adequate network along with its plans to expand over new geographies are expected to provide adequate growth opportunities, going forward.

Weaknesses and threats

1. High share of revolving loans in its portfolio (~68% as of mid-July 2019) where the repayment capacity of the borrower remains untested.
2. Aggressive credit growth in the last three fiscals at ~36% (over small geography) compared to ~20% growth in the banking industry. Seasoning of this incremental portfolio could have an impact over its future asset quality.
3. SFFIL has reported healthy profitability indicators so far with the return on assets (RoA) and return on net worth (RoNW) of 2.23% and ~25% respectively for FY2019, backed by healthy interest spreads of ~7.8% for FY2019. Hence, the regulation, capping the interest spreads at 5% (to be complied by mid-July 2020) along with a proposed sizeable equity injection, is likely to result in subdued return indicators.
4. Lack of diversity in earnings profile remains a further concern and has been factored into the grading action.
5. Geographically concentrated operations (three districts only) and intense competition from other classes of financial institutions with finer interest rates.
6. Lack of strong institutional promoters and its modest scalability also remain grading concerns.

Source: ICRA Nepal Rating