ICRA Nepal assigns ICRANP Grade 4 to the proposed 60% rights issue of RSDC Laghubitta Bittiya Sanstha indicating below-average fundamentals
Wed, Apr 4, 2018 7:06 AM on Latest, Dividend, Bonus & Rights, Featured, Credit Rating, Stock Market,
ICRA Nepal has assigned “[ICRANP] IPO Grade 4”, indicating below-average fundamentals to the proposed rights issue of equity shares amounting Rs 21.59 crore of RSDC Laghubitta Bittiya Sanstha Limited (RSDC).
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.
RSDC has proposed 60% rights issue of 21.59 lakh number of equity shares of face value Rs 100 each to be issued to the existing shareholders at par. The issue is being made to augment capital base in order to meet the revised (higher) paid up capital requirement1 set by Nepal Rastra Bank (NRB), the banking sector regulator in Nepal.
The grading factors in the institutional promoter shareholding in RSDC (15% stake is held by RSDC-NGO and 12% is held by Bank of Kathmandu Limited2) which augurs well on the governance of RSDC. The grading also factors in RSDC’s demonstrated ability to grow (credit portfolio grew by CAGR 63% during FY14–H1FY18; albeit on a small base) driven by increase in number of partner co-operatives (from 62 in mid-Jul-14 to 169 on mid-Jan 2018).
Incremental credit growth prospect remains supported by strong capitalisation profile (CRAR 29% as on mid-Jan 2018 vs regulatory minimum 8%), fund raised through equity injections and potential for growth for MFIs in Nepal given large below poverty line population; which has been factored in while assigning the grading. The grading also takes into consideration RSDC’s good asset quality maintained over the years, with gross NPLs of 0.04% as on mid-Jan 2018.
Nonetheless, the grading is constrained by limited track record, and low seasoning of credit book of RSDC coupled with more than 85% loan to relatively weak regulated cooperatives sectors. As per current regulations, being a wholesale MFI, RSDC relies entirely on bank borrowings to fund its operations. Recent uptick in the borrowing rates (given the rising interest rates across banking industry) and limitations in passing on the increased cost to the borrowers (due to competitive pressure and upper cap 18% on MFIs retail lending) has put pressure on the interest margin of RSDC as reflected in the moderation of return indicators in past 12-18 months.
The grading is also constrained by lack of diversity in earning, increased competition from other MFIs as well as other BFIs that are aggressively expanding their reach to semi-urban/rural areas and uncertain operating environment that the financial institutions in Nepal are currently facing.
As a wholesale lender to MFIs, RSDC uses the network of existing co-operatives (separate legal entities) and NRB licensed retail MFIs3, to reach the targeted population. As on mid-Jan 2018, RSDC’s credit portfolio stood at Rs 1.26 arba, distributed among 169 partner organizations, mostly co-operatives. As on mid-Jan 2018, the borrower profile of RSDC comprises of savings and credit co-operatives (33% of credit portfolio), agriculture co-operatives (16%), Self-reliance co-operatives4 (15%) and multipurpose co-operative (11%) among others.
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