Janalakshmi Financial Services Ltd (JFSL), a Bengaluru-based micro-finance institution and a small finance bank (SFB) in the making, has received a rating upgrade from CRISIL for its debt instrument from A- to A on improvement in capitalisation.
An equity infusion of Rs 1,000 crore by investors in April 2016 increased its net worth to Rs 2,400 crore. It also helped JFSL to reduce gearing from 9.3 times in March 2016 to 5.3 times in June 2016.
The higher net worth could smoothen liability-side transitions as it provides headroom to avail higher inter-bank borrowing as an SFB until deposits reach a significant share of liabilities, CRISIL stated.
RBI had given the company an in-principle approval in September 2015 to float an SFB in 18 months subject to meeting regulatory norms. So, JFSL has time till the end of March 2017 to start the SFB.
CRISIL said its flexibility to raise capital would improve upon conversion to an SFB. Also, fresh equity is expected to be raised through an initial public offering (IPO) by FY19. The capitalisation is, therefore, expected to remain adequate over the medium term.
Janalakshmi with a loan portfolio of Rs 11,980 crore has diversified presence across 195 districts and 18 states as on June 30, 2016. The top five districts account for 23 per cent of the portfolio. Small group loans accounted for 92 per cent.
The rest of the portfolio comprised nano and super nano loans, loans given to emerging micro and small enterprises housing loans. However, the non-microfinance portfolio is expected to grow more rapidly as an SFB and will account for more than one-third of loan assets by 2020.
The financial services entity is expected to keep capital adequacy significantly higher than regulatory stipulation through capital infusion at regular intervals. It has demonstrated similar trend in the past.
On conversion, SFBs are expected to bear the impact of statutory liquidity ratio and cash reserve ratio requirements. SFBs will also see rise in operating expenses in the initial years.
Its higher capital position will moderate the impact on the financial risk profile of a potential decline in profitability in the initial few years of operations as an SFB. The gearing is expected to increase considering the medium-term expansion plan.
The presence of an experienced management team, established microfinance business, and diversified geographical presence in addition to adequate capitalisation will enable Janalakshmi to manage the transformation to SFB.
