Proposed 150% right shares of NMB Laghubitta receive below average ratings from ICRA; 2.43 Million units to be issued

ICRA Nepal has assigned [ICRANP] IPO Grade 4, indicating below average fundamentals to the proposed rights issue of NMB Laghubitta Bittiya Sanstha Limited (NMBMF). NMBMF plans to come out with 150% rights issue of 2,430,093.75 equity shares with a face value of NPR 100 each, at par for its existing shareholders.

The assigned grading factors in the presence of a strong institutional promoter in NMBMF with 51% stake held by NMB Bank (rated at [ICRANP-IR] A-by ICRA Nepal). The bank has deputed three senior personnel to the company’s board, strengthening its board profile. This augurs well for the governance and oversight aspects, apart from supporting the funding profile of the company. The grading also factors in the lower average ticket size so far (~NPR 58,000 as of mid-Apr-2019) reflecting high portfolio granularity. Additionally, a large below-the-poverty-line population in Nepal, the target group for microfinance institutions (MFIs) along with a further branch expansion plan encompassing new geographies also spell positives from the growth perspective. The current capitalization of NMBMF (~10% as of mid-July2019) remains comfortable against the regulatory minimum of 8%. This, along with the proposed capital injection, could support the company’s growth plans. The grading additionally takes comfort from the regulatory changes, removing the 18% cap on lending rates for the MFIs, which provides them the flexibility to pass on the increased cost of funds to borrowers.

Nonetheless, the grading is constrained by the increased stress on NMBMF’s asset quality, whereby non-performing loans (NPLs) went up to 2.02% as of mid-July 2019 as against 0.98% as of mid-July 2017. The grading is also constrained by the declining profitability in the recent years (RoNW and RoA1 of ~22% and 1.98% for FY2019 against ~38% and 3.38% respectively for FY2016) on account of the relatively low interest spreads, high operating expenses and rising credit costs. It also takes note of the company’s aggressive growth plans to compensate for lower-than-industry growth in recent periods (~29% growth from mid-July 2017 to mid-April 2019 compared to industry growth of 36%). The increasing share of high-ticket collateral-based loans to marginal borrower profile (~23% as of mid-April 2019 against ~6% in mid-July 2016), along with plans for a further increment in such loans also remains a concern. Funding sources for the MFIs may also witness some constriction, going forward as the banking sector is comfortably above its deprived sector lending target (6.65% as of mid-April 2019 against 5% target). The grading also remains constrained due to the frequent regulatory changes impacting the spreads and funding sources for the MFI sector.

Moreover, the high ticket sizes permitted by regulations, the presence of a large number of players in the industry (including cooperatives), and the absence of a centralized credit information for the MFIs, raises concerns of overleveraging for the sector. Going forward, NMBMF’s ability to improve asset quality indicators, enhancing its credit appraisal capabilities and generating economies of scale will have a bearing on its overall financial profile.

Source: ICRA Ratings Nepal