Rationale

 The revision in the rating outlook factors in the deterioration in Satin Creditcare Network Ltd.'s (SCNL) asset quality metrics, which led to pressure on its profitability in FY2021, and the expectation of further weakening in FY2022 owing to the second wave of the Covid-19 pandemic. The microfinance industry, including SCNL, has faced challenges on account of the disruptions caused by the pandemic, which impacted disbursements and the asset quality metrics. Consequently, the credit costs increased and the profitability metrics deteriorated in FY2021. Further, the second wave in Q1 FY2022 is expected to keep the asset quality metrics and hence the profitability under pressure in FY2022. SCNL's ability to navigate through the adversity and manage the impact of the pandemic on its business growth, client retention and asset quality would remain critical from a rating perspective, going forward. The ratings are further constrained by the unsecured nature of SCNL's portfolio, the marginal borrower profile and the vulnerability to income shocks, resulting in high volatility in the asset quality. In addition, the share of the portfolio in the top 3 states remained high at 51% as on March 31, 2021 despite showing some improvement. ICRA expects that the expansion of footprint while scaling up will further de-risk the book geographically. ICRA also notes that SCNL's capitalisation profile is adequate for its current level of operations with total capital to risk (weighted) assets ratio (CRAR) of 25.28% as on March 31, 2021, however, it would require regular infusion of funds to meet its envisaged growth plans. Further, the ratings factor in the company's requirement to support its growing subsidiaries. SCNL's ability to match the capital requirements of its subsidiaries by raising fresh capital and maintaining adequate capital levels for its standalone as well as consolidated operations will remain a key monitorable as the subsidiaries scale up. ICRA notes SCNL has been able to raise Rs. 90 crore during FY2021 via rights issue and is in process of raising remaining Rs. 30 crore. Nevertheless, the ratings continue to factor in SCNL's established presence in the Indian microfinance landscape as it is one of the largest players in the sector as per portfolio size. The ratings also factor in the company's diversified funding profile and strong liquidity position. Though the inflows from advances have been adversely impacted by the pandemic, the company has consistently maintained high on-balance sheet liquidity and has been able to garner funding support from lenders. Supported by a good information system, monitoring process and information technology (IT) capabilities, SCNL has been providing its customers with a wide range of online repayment options while maintaining customer connect. This supported its collection and recovery efforts during the pandemic and led to operational efficiency