ICRA Nepal Gives BBB- Rating to Jeevan Bikas Laghubitta; Says This About the Microfinance Company

ICRA Nepal has assigned the issuer rating of [ICRANP-IR] BBB- to Jeevan Bikas Laghubitta Bittiya Sanstha Limited (JBLBSL), indicating a moderate degree of safety, regarding timely servicing of financial obligations with moderate credit risk.

It should, however, be noted that the rating is only an opinion on the general creditworthiness of the rated entity and not specific to any debt instrument.

Company Profile

Incorporated in August 2012 (in Office of Company Registrar), Jeevan Bikas Laghubitta Bittiya Sanstha Limited (JBLBSL), started its operation from February 2019 as a licensed national level class D microfinance institution taking over the microfinance business being conducted by Jeevan Bikas Samaj (JBS), an NGO, established in September 1997 and operating as a financial intermediary from June 2002.

The company merged with Solve Laghubitta Bittiya Sanstha Limited and Garibi Nyunikaran Laghubitta Bittiya Sanstha Limited and commenced the joint operation from September 7, 2020, under the name Jeevan Bikas Laghubitta Bittiya Sanstha Limited. As of mid-January 2021, the major shareholders of JBLBSL include JBS, NGO (~30%), Prabhu Capital Limited (~13%), SR Hydro and Investment Private Limited (~9%), Social Organization for Liberal Volunteers Engagement of Nepal (SOLVE; 7%), NIC Asia Bank (~3%), Samudayik Mahila Bikas Kendra (SWDEC; ~1%). The registered and corporate office of JBLBSL is located at Katahari-2, Morang, Nepal.

JBLBSL reported a net profit of ~NPR 354 million in FY2020, over an asset base of ~NPR 11,254 million as of mid-July 2020. Further, it reported a profit after tax of ~NPR 368 million in H1 FY2021 over an asset base of ~NPR 19,699 million as of mid-January 2021. JBLBSL’s gross NPLs stood at 0.95% and CRAR was at 8.11% as of mid-January 2021 (0.29% and 8.89%, respectively as of mid-July 2020). On the technology front, JBLBSL uses Finlite X software, which is centralized across all its
branches.

The Rating

The assigned rating factors in the long track record of JBLBSL in the microfinance sector (between 2002 and 2019 under the aegis of the promoter NGO1, Jeevan Bikas Samaj (JBS), and since 2019 as a Nepal Rastra Bank (NRB)-licensed class D microfinance institution (MFI). The rating also factors in the strong branch network of the company in the eastern region of the country (129 branches in 16 districts as of mid-January 2021).

The rating also positively factors in the company’s healthy asset quality profile (gross non-performing loans (NPLs) of 0.29% as of mid-July 2020 and 0.95% as of mid-January 2021). Furthermore, its seasoned borrower profile (approximately 86% of the loan to borrowers in the third or higher cycle), a healthy share of deposits in its funding mix (which also acts as collateral in the event of default), sound
underwriting norms and low average ticket size remain sources of comfort against asset quality shocks in the post-Covid-19 period.

The rating also factors in JBLBSL’s strong profitability aided by favorable economies of scale and lower borrowing cost on account of the mandatory deprived sector lending regulations for bank and financial institutions (BFIs) as prescribed by the Central Bank.

Image: Key Financials of the company. Its current paid-up capital is Rs 41.06 crore. The company has a huge reserve of Rs 98.74 crore and its annualized EPS is Rs 179.30 as per the 2nd quarter report.

Further, a large below-the-poverty line population in Nepal, the target group for microfinance institutions (MFIs), and experienced management team remain rating positives. Nonetheless, the rating is constrained by the company’s modest capitalization profile with a capital to risk weighted assets ratio (CRAR) of 8.11% as of mid-January 2021 against the minimum regulatory requirement of 8%.

Rating concerns also arise from its high geographical concentration (~69% of credit portfolio and ~72% of the deposit portfolio as of mid-January 2021 concentrated in three districts of eastern Nepal; a high proportion for a national level microfinance institution (MFI). ICRA Nepal also notes the regulatory changes capping the MFI’s lending rate at 15% and fees at 1.5% from FY2021 onwards.

This along with intense competition in the industry could impair the company’s profitability profile in the event of increased borrowing cost, which currently remains low because of comfortable liquidity in the banking sector. The recent regulatory restriction in collecting recurring pension deposits could limit the future deposit growth and deteriorate the deposit-to-loan ratio as well as increase the MFI’s reliance on external borrowings, which also remains a rating concern.

Moreover, rating concern arises from the marginal borrower profile and overleveraging in the MFI industry in general. The repayment capacity of the borrowers in this segment could erode in the aftermath of the Covid-19 impact and could give rise to future asset quality concerns.

Key Credit Strengths

1) Long track record of operations and experienced management team
2) Credit growth supported by branch expansion and merger; portfolio seasoning remains adequate
3) Healthy asset quality indicators
4) Strong profitability profile supported by healthy interest margins and adequate economies of scale

Credit Challenges

1) Modest capitalisation profile
2) Geographical-concentration risk
3) Low penetration of credit bureau in Nepalese MFI sector; risk of overleveraging among borrowers remains high
4) Regulatory risks

Wrapping Up

Going forward, ICRA Nepal states that Jeevan Bikas Laghubitta's ability to improve geographical diversification of its portfolio, maintain its growth and asset quality and develop a commensurate control mechanism will have a bearing on its profitability and overall financial profile. The company’s ability to build an adequate capital cushion to withstand probable credit shocks will also remain a key rating sensitivity.