Northern Arc Capital - R-01072019

July 01, 2019
Northern Arc Capital Limited: [ICRA]A+(Stable) rating assigned for non-convertible

debenture programme
Summary of rated instruments

Previous Rated Current Rated
Instrument Rating Action
Amount (Rs. crore) Amount (Rs. crore)
Non-convertible Debenture - 100.00 [ICRA]A+(Stable); assigned
Cumulative non-convertible
compulsorily redeemable preference 20.00 20.00 [ICRA]A(Stable); outstanding
shares
Commercial Paper 800.00 800.00 [ICRA]A1+; outstanding
Long-term Fund Based Limits 2,000.00 2,000.00 [ICRA]A+ (Stable); outstanding
Non-convertible Debentures # 1335.00 1335.00 [ICRA]A+ (Stable); outstanding
Subordinated Debt 82.50 82.50 [ICRA]A+ (Stable); outstanding
Total 4,237.50 4,337.50
Instrument details are provided in Annexure-1
Rationale
The assigned rating considers Northern Arc Capital Limited’s (NACL) established underwriting and risk management
systems, its experience and focus on niche target segments and adequate capitalisation profile (managed gearing 1 of 2.8
times as of March 2019) aided by Rs.400 crore equity infusion during Q4FY2019. ICRA also takes note of the company’s
ongoing equity raise in the range of Rs. 200-250 crore during H1FY2020 (including Rs.44 crore raised in April 2019), which
would support its growth plans over the next 12-18 months; it envisages to grow its assets under management (AUM) at
a compounded annual growth rate (CAGR) of about 60-65% over the period FY2020-FY2021. During FY2019, NACL’s
business volumes (funding arranged for its clients through own lending and from others) grew by 23% to achieve a
quantum of Rs 14,887 crore (Rs. 14,758 crore in FY2017). ICRA takes note of the company’ moderate liquidity position as
on March 31, 2019, with mismatches2 in the less than one-year bucket. The rating continues to consider NACL’ exposure
to entities with marginal risk profiles and the moderation in the performance of some of its pass-through certificate
(PTC) investments, which led to an increase in provisions and a consequent decline in its net profitability, during FY2017-
2018. The rating also takes note of a steady reduction in its exposure to the microfinance segment over the past few
years, the relatively limited seasoning in other asset classes and the current tight market conditions, which limits access
to market debt instruments to an extent. Over the medium term, NACL’s ability to improve its liquidity profile to meet
growth plans and maintaining a comfortable capital and asset quality during the growth phase would be crucial from a
rating perspective.
Outlook: Stable
ICRA believes that NACL would benefit from its diverse product offerings and presence in niche target segments. The
outlook may be revised to Positive if there is a sustained and sizeable improvement in the company’s liquidity profile in
view of the envisaged business expansion. Improvement in the earnings profile from current levels with the asset quality
and capitalisation profile remaining comfortable, during this growth phase, would also support the positive outlook. The
1 Total debt including the guarantee exposures as a proportion of net worth

2 Factors in the put option on Rs 250 crore NCDs with the option exercisable during Nov-Jan 2020
1
outlook may be revised to Negative in case of weakness in its liquidity, earnings or capitalisation profile or in case of
significant deterioration in the asset quality.
Key rating drivers
Credit strengths
Presence in niche segment supports business profile – NACL provides diverse financing solutions to entities providing
microfinance, affordable housing finance, commercial vehicle finance, agri finance and small business loans, and to
corporates. The company facilitates these financing solutions through loans and structured debt products including
guarantees. NACL also commenced the direct origination (DO) of small business and agri loans in FY2017 and small and
medium enterprises (SME) financing in Q1FY2019. The company also facilitates securitisation transactions for its clients
and predominantly invests in subordinated tranches. As of March 2019, the company’s assets under management 3
(AUM) stood at Rs. 4,062 crore, of which 65% was advances to non-banking finance companies (NBFCs), corporates and
SMEs, 18% was investments in debt instruments (including NBFCs and alternative investment funds),7% was deployed to
subordinated tranches of retail loan pools, 6% was guarantees and 5% was advances to the small business and agri
segment through direct origination via partners.
Reasonable track record with experienced board and senior management – NACL has a track record of 10 years in the
placement business (funding arranged for its clients via loan syndication, securitisation and assignment among others)
and has established relationships with more than 200 clients, lenders and investors. The company’s 11-member board
comprises four independent directors, six members from the private equity (PE) investors/ shareholders and Dr. Kshama
Fernandes (Managing Director & Chief Executive Officer, NACL). The company augmented its senior management team,
post the exit of some senior management personnel in Q1FY2018, by recruiting experienced personnel for key functions
including risk management, IT and business development. Going forward, NACL’s ability to retain talent would be critical
in view of its robust growth plans.
Adequate capitalisation profile, aided by sizeable equity infusion – ICRA draws comfort from NACL’s established
investor relationships and its demonstrated fund-raising ability. During FY2014-2018, the company cumulatively raised
about Rs.310 crore from several investors. Additionally, it has raised Rs.444 crore via compulsorily convertible
preference shares (CCPS) from an existing and a new investor, during March-April 2019, and is in advanced stages to
raise equity in the range of Rs. 200-250 crore in H1FY2020. Following the equity raise, NACL’s net worth and managed
gearing improved to Rs.1,130 crore and 2.8 times as of March 2019 (consolidated; IGAAP), from Rs. 640 crore and 4.8
times respectively, as of March 2018. While the capital would be sufficient to meet near-term growth plans, the
company may need further capital in case annual portfolio growth exceeds 40% over the next three-year period (FY2020-
2022), while maintaining the leverage cap at about 4x.
Credit challenges
Ability to scale up volumes to improve profitability – On a standalone basis, NACL reported net profitability of 2.2% in
FY2019 (under Ind-AS) vis a vis 2.3% in FY2018 (under IGAAP). On a consolidated basis, NACL’ net profitability stood at
2.5% each during FY2018 and 2019 (as per IGAAP), low compared to the levels witnessed during the three-year period
(average PAT/AMA of 3.5% during FY2015-2017). During FY2017, the company facilitated business of Rs. 14,759 crore
but the volumes declined in FY2018 due to muted credit demand. During FY2019, the company’s business and placement
volumes4 grew by 23% and 35% respectively, albeit on a lower base. Overall, the fee income from the placement
business and the margins in the lending business remained broadly stable while the operating expenses (Opex/AMA)
3 Includes loans, investments and guarantee extended

4 Excluding own loan disbursements
2
increased by about 20 bps during FY2019 resulting in a drop in core operating profitability. Going forward, the company’s
ability to grow its business volumes amid industry headwinds including tight liquidity environment and increasing
competitive pressures, while containing its credit costs, would be critical for incremental profitability.
Exposure to entities with marginal risky profiles – NACL remain exposed to marginal borrower profiles given that it
predominantly lends to small and mid-sized NBFCs and NBFC-MFIs. As such, these entities face headwinds due to the
tight liquidity conditions. The performance of some of the securitised loan pools, in which the company invested in the
subordinated PTCs, weakened post demonetisation. During FY2017-2018, the company had cumulatively created
provisions of about Rs. 58 crore against its vulnerable investments, though some of the provisions were reversed in
FY2019. Investments in subordinated PTCs accounted for 6% of NACL’s AUM as of March 2019 down from 16% in March
2017. ICRA takes note of the company’s recent initiatives to further strengthen its risk management and monitoring
systems by setting up exposure limits at a counterparty, geographical and product level for tight monitoring of portfolio
risk. ICRA also takes cognisance of the stress build-up in the DO portfolio (5% of AUM as of March 2019) with 30+ dpd of
6.3% as of March 2019 and the commencement of SME lending during Q1 FY2019. Going forward, the collection
performance of these relatively new segments would be a key rating monitorable.
Considerable exposure to microfinance segment albeit steadily reducing over the past few years – The company
derives a bulk of its business from the entities in the microfinance segment, which accounted for 54% of the volumes in
FY2019 (41% in FY2018), although its share in total volumes has declined over the years from 84% in FY2014. Besides
microfinance, the company derives business mainly from the vehicle finance and small business loan segments, which
stood at about 19% and 18%, respectively, in FY2019 (29% and 28% each in FY2018). ICRA also notes that the company
has expanded its client base over the past few years with more than 200 client relationships at present. Going forward,
ICRA expects the company to expand its business by focussing on relatively new asset classes including agri loans,
corporate finance, and by undertaking the direct origination of loans through its partners.
Liquidity Position:
NACL’s asset liability maturity (ALM) profile has no significant cumulative mismatch in the less than six-month bucket as
of March 2019; however, there is a negative gap of 9% of assets in the less than one-year bucket as of March 2019, given
that the NCDs with put-options (Rs.250 crore NCDs) are considered in the six month-one year time bucket.
NACL’s cash and liquid investments was about Rs.200 crore as of May 2019. ICRA also takes note of the expected
incremental equity infusion (in the range of Rs. 150 - 200 crore) would provide comfort on the liquidity. Nevertheless, in
view of the continuing tightness in market liquidity conditions, especially for NBFCs, the company would need to
maintain adequate liquidity buffers given the sizeable repayments (average monthly repayment obligation of about Rs.
135 crore over next one year while principal collections are about Rs.130 crore per month) and secure longer-tenure
borrowings given the increasing share of non-microfinance exposures.
Analytical approach:
Analytical Approach Comments
Applicable Rating Methodologies ICRA’s Credit Rating Methodology for Non-Banking Finance Companies
Parent/Group Support Not applicable
The rating is based on consolidated financial statements of NACL and its wholly-
Consolidation / Standalone owned subsidiaries, Northern Arc Investment Managers Private Limited and
Northern Arc Investment Adviser Services Private Limited.
3
About the company
Chennai-based NACL is a systemically important non-banking finance company. The company provides diverse financing
solutions to entities providing microfinance, affordable housing finance, commercial vehicle finance, agri finance, small
business loans, and to corporates as well. NACL provides loans and other structured debt products including guarantees
to its clients. It also facilitates securitisation transactions for its clients and generally invests in subordinated tranches.
The company’s scheme of arrangement/ amalgamation was approved by National Company Law Tribunal in Feb 2019. As
per the scheme, IFMR Holdings Private Limited’s (IFHPL; erstwhile holding company of NACL) investments in NACL and
the national pension scheme (NPS) aggregation business were transferred to Dvara Investments Private Limited (DIPL),
which was later merged with NACL. As of March 2019, Leapfrog Financial Inclusion India II Limited (Leapfrog) is the
largest shareholder with about 31% stake in NACL, followed by IIFL Special Opportunities Fund (20%), Dvara Trust
(~14%), Accion (~12%), FIL Capital Investments (Mauritius) (II) Limited (~11%) and Standard Chartered Bank (Singapore
Branch) (~8%) on a fully diluted basis.
Key financial indicators (Audited)

Consolidated FY2017 FY2018 FY2019 (Provisional)
Total Income 370 476 547
Profit after Tax 64 86 101
Net Worth 503 640 1,130
Managed Portfolio 2,796 3,506 4,097
Total Managed Assets 3,038 3,845 4,313
Return on Managed Assets 2.6% 2.5% 2.5%
Return on Net Worth 16.3% 15.1% 11.4%
Managed Gearing 4.9 4.8 2.8
Gross NPA% 0.03% 0.11% 0.85%
Net NPA% 0.0% 0.08% 0.01%
CAR% 16.9% 17.1% 25.1%
Amount in Rs. Crore; as per IGAAP
Status of non-cooperation with previous CRA: Not applicable
Any other information: None
4
Rating history for last three years:
Chronology of Rating History for the past 3
Current Rating (FY2020) years
Amount Amount FY2019 FY2018 FY2017

Rated Outstanding FY2020 December March
Instrument Type (Rs. crore) (Rs. crore) July 2019 2018 2018 January 2017
Long [ICRA]A+
1 NCD 100.00 100.00 - - -
Term (stable)
Preference Long [ICRA]A [ICRA]A
2 20.00 20.00 - -
Shares Term (stable) (stable)
Long [ICRA]A+ [ICRA]A+ [ICRA]A+ [ICRA]A+
3 Cash Credit 455.00 455.00
Term (stable) (stable) (stable) (stable)
4 Term Loans 1,545.00 1,545.00
5 NCD 1335.00 1335.00
Subordinated Long [ICRA]A+ [ICRA]A+ [ICRA]A+ [ICRA]A+
6 82.50 82.50
Debt Term (stable) (stable) (stable) (stable)
Commercial Short
7 800.00 800.00 [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+
Paper Term
Preference Long [ICRA]A(stable);
8 15.00 - - - -
Shares Term withdrawn
Complexity level of the rated instrument:

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
5
Annexure-1: Instrument Details
Date of
Issuance / Coupon Maturity Amount Rated Current Rating and
ISIN Instrument Sanction Rate Date (Rs. crore) Outlook
INE850M04027 Preference Sep-18 9.00% Sep-19 10.00 [ICRA]A (stable)
shares
INE850M04035 Preference Sep-18 9.00% Sep-19 1.60 [ICRA]A (stable)
shares
Unutilized Preference NA NA NA 8.40 [ICRA]A (stable)
shares
NA Commercial - - 7-365 days 800.00 [ICRA]A1+
Paper
NA Cash Credit NA NA NA 455.00 [ICRA]A+(stable)
NA Term Loan-1 Jun-17 NA Dec-19 15.00 [ICRA]A+(stable)
NA Term Loan-2 Mar-16 NA Mar-19 9.38 [ICRA]A+(stable)
NA Term Loan-4 Feb-16 NA Mar-19 7.50 [ICRA]A+(stable)
NA Term Loan-5 Nov-16 NA Nov-19 24.98 [ICRA]A+(stable)
NA Term Loan-6 Jun-17 NA Jun-20 40.00 [ICRA]A+(stable)
NA Term Loan-10 Apr-17 NA Apr-20 14.58 [ICRA]A+(stable)
NA Term Loan-11 Sep-15 NA Sep-18 2.50 [ICRA]A+(stable)
NA Term Loan-13 Dec-16 NA Dec-20 35.71 [ICRA]A+(stable)
NA Term Loan-15 Feb-17 NA Feb-20 111.00 [ICRA]A+(stable)
NA Term Loan-18 Dec-16 NA Jun-20 32.06 [ICRA]A+(stable)
NA Term Loan-20 Jul-17 NA Jul-20 25.00 [ICRA]A+(stable)
NA Term Loan-21 Jun-17 NA Mar-20 35.00 [ICRA]A+(stable)
NA Term Loan-24 Sep-17 NA Dec-20 22.72 [ICRA]A+(stable)
NA Term Loan-27 Nov-17 NA Sep-20 3.75 [ICRA]A+(stable)
NA Term Loan-28 Nov-17 NA May-20 64.17 [ICRA]A+(stable)
NA Term Loan-29 Dec-17 NA Jun-20 27.50 [ICRA]A+(stable)
NA Term Loan-31 Jan-18 NA Jan-22 20.00 [ICRA]A+(stable)
NA Term Loan-34 Apr-18 NA Mar-21 22.92 [ICRA]A+(stable)
NA Term Loan-35 May-18 NA May-21 20.00 [ICRA]A+(stable)
6
NA Term Loan-38 Jun-18 NA Dec-20 18.00 [ICRA]A+(stable)
NA Term Loan-41 Feb-17 NA Feb-20 21.82 [ICRA]A+(stable)
NA Term Loan-44 Apr-18 NA Apr-20 22.13 [ICRA]A+(stable)
Unutilized Term loan NA NA NA 335.03 [ICRA]A+(stable)
INE850M07095 NCD 24-Jun-16 10.90% 24-Jun-19 75.00 [ICRA]A+(stable)
INE850M08028 NCD 02-Aug-16 10.44% 02-Aug-19 80.00 [ICRA]A+(stable)
INE850M07111 NCD 29-Dec-16 9.60% 27-Dec-19 100.00 [ICRA]A+(stable)
INE850M07129 NCD 27-Mar-18 9.88% 27-Mar-20 100.00 [ICRA]A+(stable)
INE850M07137 NCD 28-Mar-18 9.69% 2-May-19 75.00 [ICRA]A+(stable)
INE850M07145 NCD 3-Apr-18 9.88% 3-Apr-20 35.00 [ICRA]A+(stable)
NCD SBI MCLR
INE850M08051 16-Jul-18 16-Jul-21 80.00 [ICRA]A+(stable)
Linked
NCD SBI MCLR
Linked
NCD SBI MCLR
Linked
INE850M07152 NCD 11-Sep-18 9.80% 27-Sep-19 50.00 [ICRA]A+(stable)
INE850M07160 NCD 11-Dec-18 9.45% 11-Jun-22 100.00 [ICRA]A+(stable)
INE850M07178 NCD 20-Dec-18 9.60% 20-Dec-23 100.00 [ICRA]A+(stable)
Unutilized NCD NA NA NA 60.00 [ICRA]A+(stable)
NA Subordinated [ICRA]A+(stable)
18-Sep-13 14.50% 18-Dec-18 7.50
Debt
Dec-17 NA Jun-23 25.00
Debt
Nov-17 NA Jun-23 15.00
Debt
Unutilized Subordinated [ICRA]A+(stable)
NA NA NA 35.00
Debt
Source: NACL
7
Annexure-2: List of entities considered for consolidated analysis
Company Name Ownership Consolidation Approach
Northern Arc Investment Managers Private Limited 100.00% Full Consolidation
Northern Arc Investment Adviser Services Private Limited 100.00% Full Consolidation
8
ANALYST CONTACTS
Karthik Srinivasan A M Karthik
+91-124-4545847 +91-44-45964308
karthiks@icraindia.com a.karthik@icraindia.com
Govindaraj Prabhu M
+91-44-45964306
govindaraj.m@icraindia.com
RELATIONSHIP CONTACT
Mr. Jayanta Chatterjee
+91 80 43326401
Jayantac@icraindia.com
MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani
Tel: +91 124 4545 860
communications@icraindia.com
Helpline for business queries:

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm)
info@icraindia.com
About ICRA Limited:

ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services
companies as an independent and professional investment Information and Credit Rating Agency.
Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited
Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit
Rating Agency Moody’s Investors Service is ICRA’s largest shareholder.
For more information, visit www.icra.in
9
ICRA Limited
Corporate Office
Building No. 8, 2nd Floor, Tower A; DLF Cyber City, Phase II; Gurgaon 122 002
Tel: +91 124 4545300
Email: info@icraindia.com
Website: www.icra.in
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1105, Kailash Building, 11th Floor; 26 Kasturba Gandhi Marg; New Delhi 110001
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© Copyright, 2019 ICRA Limited. All Rights Reserved.
Contents may be used freely with due acknowledgement to ICRA.
ICRA ratings should not be treated as recommendation to buy, sell or hold the rated debt instruments. ICRA ratings are subject to a process of
surveillance, which may lead to revision in ratings. An ICRA rating is a symbolic indicator of ICRA’s current opinion on the relative capability of the issuer
concerned to timely service debts and obligations, with reference to the instrument rated. Please visit our website www.icra.in or contact any ICRA
office for the latest information on ICRA ratings outstanding. All information contained herein has been obtained by ICRA from sources believed by it to
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While reasonable care has been taken to ensure that the information herein is true, such information is provided ‘as is’ without any warranty of any
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10

Northern Arc Capital - R-01072019

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July 01, 2019

Northern Arc Capital Limited: [ICRA]A+(Stable) rating assigned for non-convertible

Summary of rated instruments

1 Total debt including the guarantee exposures as a proportion of net worth

Key rating drivers

3 Includes loans, investments and guarantee extended

Key financial indicators (Audited)

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Amount Amount FY2019 FY2018 FY2017

Complexity level of the rated instrument:

MEDIA AND PUBLIC RELATIONS CONTACT

Helpline for business queries:

About ICRA Limited:

For more information, visit www.icra.in

Mumbai + (91 22) 24331046/53/62/74/86/87

© Copyright, 2019 ICRA Limited. All Rights Reserved.

Contents may be used freely with due acknowledgement to ICRA.

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