ICRA Nepal assigns ICRA grade 5 indicating poor fundamentals to the proposed 250% right shares of Sahara Bikas Bank

ICRA Nepal has assigned an “[ICRANP] IPO Grade 5”, indicating poor fundamentals to the proposed rights issue amounting to Rs 18.24 crore of Sahara Bikas Bank Limited (SHBL). ICRA Nepal assigns IPO/Rights issue 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. SHBL is proposing to come out with 250% rights issue of 18.24 lakh units of equity shares of face value Rs 100/- each to be issued to the existing shareholders at par. The proposed issue is being made to augment the capital base towards meeting the elevated regulatory capital requirements. The grading is mainly constrained by SHBL’s weak overall control framework and inferior borrower profile which reflects in high delinquencies 36% as of mid-Oct-171 (including Non-Performing loans-NPLs of 6%) despite 99% of borrowers having revolving loan. While assigning the grading, ICRA Nepal also takes note of the high portfolio vulnerability due to weak credit appraisal practices and very high proportion of personal loan (62% as of Oct-17) with assessed income based appraisal. Further, attaining requisite growth to serve the existing as well as large incremental capital being raised would remain a challenge given the limited geography in which SHBL is licensed to operate. Although SHBL has reported healthy profitability over the years, sustainability of same remains the concern given the fact that regulator has instructed to refund various fees and penalties with significant amount charged by bank to customers against regulations. The grading is further constrained by lack of diversity in earnings, lack of Institutional promoters, stiff competition with commercial banks and larger development banks offering products at finer lending rates and uncertain operating environment that financial institutions in Nepal are currently facing. SHBL has presence in its sole operating district (Sarlahi) through four branches and one extension counter as of mid-Oct 2017. SHBL has market share of 0.18% in terms of deposit base and 0.17% in terms of credit portfolio of development banks as on mid Oct-17. SHBL reported net profit of Rs 1.6 crore during FY2017 over an asset base of Rs 56.60 crore as of mid-Jul-17 as against net profit of Rs 70 lakh during FY2016 over an asset base of Rs 58.3 crore as of mid Jul-16. For Q1 FY2018, the bank has reported net loss of Rs 30 lakh over an asset base of Rs 58.1 crore as of mid-Oct-17. The capitalisation profile (CRAR) of SHBL was at 24.67% and gross NPLs was at 5.64% as on mid-Oct-2017.