ICRA Nepal assigns Grade 4 to the proposed 100% Rights Issue of Mirmire Microfinance Development Bank Limited

ICRA Nepal has assigned an “[ICRANP] IPO Grade 4”, indicating below-average fundamentalsto the proposed rights issue amounting to Rs 4,5 croreof Mirmire Microfinance Development Bank Limited (MMFDB). ICRA Nepal assigns IPO grading on a scale of IPO Grade 1 through IPO Grade 5, with Grade 1 indicating strong fundamentals and Grade 5 indicating poor fundamentals. For the grading categories 2, 3 and 4, the sign of + (plus) appended to the grading symbols indicate their relative position within the grading categories concerned. Thus, the grading of 2+, 3+ and 4+ are one notch higher than 2, 3, and 4, respectively. MMFDB is proposing to come out with 100% rights issue of 4.5 lakh numbers of equity  shares of face value Rs 100/- each, to be issued to its existing shareholders at par. The proposed issue is being made to augment the capital base to support the future growth plans of the management. The grading factors in MMFDB’s ability to scale up operations (credit portfolio CAGR1 103% during FY13-17, albeit over small base) partly through expansion in client base (57% CAGR) whilst maintaining moderate portfolio per member (average Rs 60,000 as of mid-Jan-182). Growth opportunities for MMFDB remain adequate given the plans for upgradation into national level MFI (Micro Finance Institution), rapid expansion targets over new geographies and large below poverty line population in Nepal that act as target group for MFIs. The growth plans are expected to be supported by incoming capital from proposed issue and internal generations as the current capitalization (9.01% as on Jan-18) remains moderate vs. regulatory minimum of 8%. Despite having witnessed high stress in initial years of operation, MMFDB’s asset quality and profitability remain comfortable as of now; NPLs declined  from 47% in Jul-12 (over small base) to 1.18% as of mid-Jan-18 with delinquencies of 6% which remains higher among peers. While MMFDB’s profitability indicators were good with RoNW and RoA3 of  36% and 2.5% respectively for FY17 (36% and 3.2% for FY16) there could be some decline in the same owing to squeezing NIMs (Net Interest Margins of 7% for H1FY18 vs. 10-12% earlier). Nonetheless, the grading is constrained by regulatory cap on lending rates for MFIs at 18% and hence the inability to pass on the increased cost of funds to borrowers resulting in pressure over NIMs. This is expected to impact profitability of the sector going forward as the borrowing cost for MFIs have increased sharply in recent periods owing to tightening liquidity across banking sector. Moreover, the recently implemented “base rate plus” lending regime would keep cost of borrowings higher compared to earlier when MFIs could borrow at subsidized rates from banks who were largely dependent upon wholesale/retail MFIs for meeting their deprived sector lending targets. Any further changes in regulations and banking sector’s preference to route deprived sector lending through MFIs could significantly impact funding support for the sector and accordingly the growth and profitability prospects of MMFDB. The grading is also constrained by MMFDB’s moderate track record (operating since October 2010), small scale of operations (asset size of Rs 1.2arbaas of Jan-18) with relatively  higher operating cost (6% of Average Total Assets - ATA). The grading also takes into account MMFDB’s promoter base being concentrated across limited promoters (26), high cost of funds (10.5% for H1FY18) and competition from larger/established peers.