ICRA upgrades rating of Fusion Micro Finance; maintains 'stable' outlook

Fusion Micro Finance said that the credit rating agency ICRA has upgraded its rating on the non-convertible debentures and subordinate debt of the company to "[ICRA] A (Stable)" from "[ICRA] A- (Stable)".

ICRA said that the rating revision factors in Fusion Micro Finance's (Fusion) increased scale of operations and the improvement in its profitability indicators, driven by the increase in yields and the reduction in the credit costs in H1 FY2023. In addition, the rating action factors in the improvement in the company's capitalisation profile, given the recent capital raise via its initial public offer (IPO).

Fusion reported assets under management (AUM) of Rs. 8,047 crore as on 30 September 2022 compared to Rs 6,786 crore as on 31 March 2022. Its return on managed assets (RoMA) improved to 3.9% (annualised) in H1 FY2023 from 0.3% in FY2022. Further, Fusion raised Rs. 600 crore of equity in November 2022, which has resulted in a strong net worth base for its scale of operations and growth plans.

The rating also continues to factor in the company's healthy geographical diversification and its robust and integrated systems and processes, which aids in good credit appraisal and portfolio monitoring. ICRA notes that Fusion's profitability was impacted in FY2021 and FY2022 by higher credit costs because of the deterioration in the asset quality. However, as the incremental credit cost has declined in H1 FY2023 and net interest margins (NIMs) have increased, Fusion's profitability has improved and is expected to remain healthy.

The rating is, however, constrained by Fusion's subdued, albeit improving asset quality, as it reported gross stage 3 (GS3) of 3.8% as on 30 September 2022, after writing off Rs 156 crore of the portfolio in H1 FY2023. ICRA notes that the improvement in the GS3 from 5.7% as on 31 March 2022 was supported by write-offs and the growing loan book.

The rating also factors in the risks associated with the unsecured nature of microfinance loans, the marginal borrower profile, which is susceptible to income shocks, and the political and operational risks associated with microlending, which may lead to volatility in the asset quality indicators.

The 'stable' outlook on the [ICRA] A rating reflects ICRA's opinion that the company will be able to maintain its credit profile, while expanding its scale of operations, maintain healthy profitability and improve its asset quality.

Fusion Micro Finance started microfinance operations in 2010 and became a registered NBFC MFI in 2014. The company is engaged in microfinance lending, providing financial services (and educating borrowers on financial literacy) to poor women in India who are organised as joint liability groups (JLGs). In addition to the core business of providing microcredit, Fusion uses its distribution channels to provide other financial products and services to members, primarily the purchase of productivity enhancing products such as mobile phones, mixer grinders/ bicycles, emergency loans, etc.

As on 30 September 2022, Fusion had a presence in 390 districts across 19 states/UTs through 1,031 MFI branches. It reported a profit after tax (PAT) of Rs 170 crore in H1 FY2023 on gross AUM of Rs 8,047 crore as on 30 September 2022 as against a PAT of Rs 22 crore in FY2022 on gross AUM of Rs 6,786 crore as on 31 March 2022.

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