May 23, 2019

Fusion Microfinance (Pvt.) Ltd.: ICRA assigns provisional ratings to pass through certificates
(PTCs) issued under a micro loan receivables securitisation transaction

Summary of rating action

Rated Amount
Trust Name Instrument* Rating Action
(Rs. Crore)
PTC Series A1 49.83 Provisional [ICRA]A(SO) assigned
Northern Arc 2019 MFI Rio
PTC Series A2 2.26 Provisional [ICRA]BBB(SO) assigned
*Instrument details are provided in Annexure-1; PTCs – Pass-through certificates

Rationale
ICRA has assigned ratings of Provisional [ICRA]A(SO) to PTC Series A1 and Provisional [ICRA]BBB(SO) to PTC Series A2
under a securitisation transaction originated by Fusion Microfinance Private Limited. The PTCs are backed by a pool of
Rs. 61.37-crore micro loan receivables (underlying pool principal of Rs. 56.62 crore).

The provisional ratings are based on the strength of the cash flows from the selected pool of contracts as well as the
credit enhancement available in the form of (i) a cash collateral of 5.00% of the pool principal to be provided by the
originator, (ii) subordination of 12.00% of the pool principal for PTC Series A1 and 8.00% for PTC Series A2, and (iii) the
entire excess interest spread (EIS) in the structure. The ratings are also based on the integrity of the legal structure and
are subject to the fulfilment of all the conditions under the structure and the review of the documentation pertaining to
the transaction by ICRA.

Key rating drivers

Credit strengths
• First line of support available for the transaction through subordination of 12.00% and 8.00% of the pool principal
for PTC Series A1 and A2, respectively
• Further credit support available through subordination of EIS amounting to around 5.82% of the pool principal
amount for PTC A1 and 5.43% of the pool principal amount for PTC A2 followed by a cash collateral (CC) equivalent
to 5.00% of the initial pool principal amount
• The pool has high seasoning of 57.6 weeks and the pre-securitisation amortisation of the contracts in the pool is
around 64.6%

Credit challenges
• Moderately high geographical concentration of the contracts in the pool with the top three states and the top 10
districts accounting for around 97.7% and 40.0% of the pool principal, respectively

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Description of key rating drivers highlighted above
The first line of support for PTC Series A1 in the transaction is in the form of subordination of 12.00% of the pool
principal (includes principal payable to PTC Series A2 and over-collateralisation). After PTC Series A1 has been fully paid,
subordination of 8.00% of the pool principal will be available for PTC Series A2. The transaction is structured such that
any collection in excess of the promised interest payouts to PTC Series A1 would be first utilised for the payment of the
expected principal of PTC Series A1 and then for the expected interest payouts to PTC Series A2. After PTC Series A1 is
completely amortised, the same would be utilised for the payment of the promised interest and expected principal to
PTC Series A2. Additionally, the EIS available in the structure will provide credit enhancement support.

Further credit support is available through a CC equivalent to 5.00% of the initial pool principal amount (Rs. 2.83 crore).
The CC will be in the form of a fixed deposit from Fusion, maintained with a bank. In case of a shortfall in meeting the
promised PTC payouts during any month, the trustee will utilise the CC to meet the shortfall.

There are no overdues in the pool as on the cut-off date. The pool consists of loans that are highly seasoned with
weighted average seasoning of 57.6 weeks and pre-securitisation amortisation of around 64.6%. Consequently, the door-
to-door residual tenure of the contracts is moderate at 67 weeks. The contracts have an average ticket size of Rs. 22,010,
in line with the industry standards.

The geographical concentration of the loan contracts in the current pool is moderately high with the top three states and
the top 10 districts constituting 97.7% and 40.0% of the pool principal, respectively.

Past rated pool performance: ICRA has thus far rated nine pools backed by micro loan receivables originated by Fusion
and had ratings outstanding on five pools as on April 30, 2019. The performance of all the outstanding pools is
characterised by high cumulative collection ratios of more than 99.5% and negligible delinquency levels.

Key rating assumptions

ICRA’s cash flow modelling for rating asset-backed security (ABS) transactions involves the simulation of potential
delinquencies, losses and prepayments in the pool. The assumptions for the mean shortfall and co-efficient of variation
(CoV) are based on the values observed in the analysis of the originator’s loan portfolio. The assumptions may also be
adjusted to account for the current macroeconomic situation as well as any industry-specific factors that ICRA believes
could impact the performance of the underlying pool contracts.

After making these adjustments, the expected mean shortfall in principal collection during the tenure of the pool is
estimated to be 4.5-5.5%, with some variability. The prepayment rate for the underlying pool is estimated to be in the
range of 6.0-9.0% per annum.

Liquidity position

The principal amount on the rated PTCs is promised on the scheduled maturity date. Only the interest amount is
promised on a monthly basis. This structural feature imparts significant liquidity to the transaction as even a small
amount of collections in the underlying pool contracts would be sufficient to meet the scheduled PTC payouts.

Additionally, a CC is available in the transaction, amounting to 5.00% of the pool principal amount. The CC is adequate to
meet the payment of seven months of interest payouts due to the senior PTC investors even in an unlikely scenario of no
collections in the pool.

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Analytical approach
The rating action is based on the analysis of the performance of Fusion’s portfolio till March 2019, the performance of
the previously rated ICRA pools, the key characteristics and composition of the current pool, the performance expected
over the balance tenure of the pool, and the credit enhancement cover available in the transaction.

Analytical Approach Comments

Applicable Rating Methodologies Rating Methodology for Securitisation Transactions
Parent/Group Support Not applicable
Consolidation / Standalone Not applicable

About the company

Fusion is a Delhi-based microfinance institution, which commenced operations in 2010. As on March 31, 2019, Fusion’s
operations were spread across 504 branches in 18 states/Union Territories. Fusion has a proven track record in the
microfinance segment with a managed portfolio base of Rs. 2,592 crore as on March 31, 2019. The five states of Bihar,
Uttar Pradesh, Odisha, Madhya Pradesh and Haryana accounted for 72% of the portfolio as on March 31, 2019. Warburg
Pincus acquired a significant minority stake in Fusion for Rs. 520 crore of which Rs. 300 crore was in the form of a
primary infusion in December 2018.

Fusion has a diversified funding profile with around 50 lenders in its resource profile. While the company has been able
to diversify its resource mix over time, it remains dependent on wholesale funding with NCDs accounting for 23% of its
borrowings as on December 31, 2018. The company returned to profitability in 9M FY2019 with RoE of 15.26%, after
reporting losses in FY2018, on account of a fall in credit costs to 0.69% in 9M FY2019 from 5.23% in FY2018. The diversity
in its earnings remains low with the company solely reliant on the microfinance segment.

Fusion’s regulatory capital adequacy as on December 31, 2018 stood at 29.90% and its gross and net NPA was 1.34% and
0.00%, respectively.

Key financial indicators

FY2018 9M FY2019
(audited) (provisional)
Net Interest Income 102.96 150.23
Profit before Tax (53.60) 68.21
Profit after Tax (39.41) 49.30
Gross Advances (on book) 1,322.69 2,186.19
Gross Advances (including off book) 1,492.76 2,358.74
Total Managed Assets 2,138.53 3,055.06
% Tier 1 15.14% 25.11%
% CRAR 21.87% 29.90%
Gearing 6.23 3.54
% Net Profit / Average Managed -2.33% 2.53%
Assets
% Return on Net Worth -16.62% 15.26%
% Gross NPA 3.98% 1.40%
% Net NPA 0.00% 0.00%
Net NPA / Net Worth 0.00% 0.00%
Amounts in Rs. crore
Source: ICRA research and company
* With RBI dispensation

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Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for last three years

Chronology of Rating History
Current Rating (FY2020)
for the Past 3 Years
Date &
Date & Date &
Instrument Rated Amount Rating
Date & Rating Rating in Rating in
Type Amount Outstanding in
FY2019 FY2018
(Rs. crore) (Rs. crore) FY2017
May 2019 - - -
Provisional - - -
PTC Series A1 49.83 49.83
Northern Arc [ICRA]A(SO)
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2019 MFI Rio Provisional
PTC Series A2 2.26 2.26 - - -
[ICRA]BBB(SO)

Complexity level of the rated instrument: Highly Complex

ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The
classification of instruments according to their complexity levels is available on the website www.icra.in

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Annexure-1: Instrument details
Scheduled Amount
Date of Coupon
Trust Name Instrument Name Maturity Rated Current Rating
Issuance Rate#
Date* (Rs. crore)
September Provisional
PTC Series A1 May 2019 9.75% 49.83
Northern Arc 2020 [ICRA]A(SO)
2019 MFI Rio September Provisional
PTC Series A2 May 2019 15.50% 2.26
2020 [ICRA]BBB(SO)
#
Calculated on XIRR basis
* Scheduled maturity and average life at transaction initiation; may change on account of prepayments in the underlying pool

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ANALYST CONTACTS
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vibhorm@icraindia.com abhijeet.ajinkya@icraindia.com

Rahul Panigrahi Ayush Agarwal

+91 22 6114 3436 +91 22 6114 3417
Rahul.panigrahi@icraindia.com ayush.agarwal@icraindia.com

RELATIONSHIP CONTACT
L Shivakumar
+91 22 6114 3406
shivakumar@icraindia.com

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info@icraindia.com

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Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited
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For more information, visit www.icra.in

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