RAM assigns ratings of B-/NP to Prime Grameen Micro Finance

RAM Ratings Lanka has assigned respective long- and short-term financial institution ratings of B- and NP to Prime Grameen Micro Finance Ltd (“Prime Grameen” or “the Company”); the long-term rating has a stable outlook. The Company’s ratings are pressured by its small size, weak asset quality, performance and liquidity, and short track record after the change of ownership and restructuring.

Prime Grameen was established as a micro-financing institution in 2000, under the Ceylinco Consolidated Group (“Ceylinco Group”). The Company had pioneered the Grameen micro-financing model in Sri Lanka, which involves the disbursement of small-ticket loans to self-employed individuals at the grassroots levels of the economy. However, the collapse of several unregulated financial institutions within the Ceylinco Group had trickled down to Prime Grameen, resulting in the Company facing severe financial strain and becoming insolvent.

In 2010, the Company obtained a registered finance company (“RFC”) license. Subsequently, in June 2011, it was acquired by Prime Lands (Pvt) Ltd (“Prime Lands”), a real-estate company. In accordance with the new shareholder’s requirements and the guidelines set by the Central Bank of Sri Lanka (“CBSL”), Prime Grameen’s balance sheet has been restructured. Lending operations, which had been curtailed during the crisis, have resumed. The new management intends to capitalise on the Company’s existing infrastructure and expertise to expand its micro-financing portfolio. That said, the Company remains a small RFC, accounting for just 1.01% of the industry’s asset base as at end-March 2011.

Prime Grameen’s asset quality is deemed weak, primarily due to delinquencies stemming from its legacy portfolio. This includes loans extended to related parties within the Ceylinco Group, the previous owner. However, the new management is currently pursuing a recovery drive while also taking steps to clean the Company’s books. As such, its gross non performing loans (“NPL”) ratio had eased to 42.97% by end-July 2011 (end-March 2011: 78.97%), albeit still much higher than its peers’. Looking ahead, the new management’s efforts to strengthen the Company’s collection and monitoring frameworks are expected to bear fruit over the medium to long term. That said, new loans granted will take some time to season before we can arrive at a reasonable view on its asset  quality going forward.  

Meanwhile, Prime Grameen’s performance has been weak, although it is expected to improve in the medium term as its loan portfolio expands.

Historically, its performance had been affected by hefty costs (particularly group expenses) and related-party loans on which interest had not been charged, resulting in the Company being mired in losses for the last few years. Since the change in ownership in June 2011, however, the Company has resumed lending to the high-yielding micro-financing segment. It also faces lower interest costs after the conversion of its debts and deposits into non-voting shares as part of the restructuring. The management intends to expand its portfolio by roughly 80% to around Rs. 3.0 billion by end-fiscal 2012, but we remain cautious about  this target as Prime Grameen still lacks a sufficient track record after  its restructuring and change in ownership. Nevertheless, RAM Ratings Lanka  anticipates the Company to return to the black in FYE 31 March 2013 (“FY Mar

2013).

On a separate note, Prime Grameen’s funding had been affected by declining deposits following negative publicity associated with its previous owners, as well as retained losses that had wiped out its shareholders’ funds. With the restructuring of its balance sheet and capital injection by the new owner, the Company has settled all its matured deposits while its funding position has strengthened somewhat, albeit still weaker than its peers’. As at end-July 2011, deposits accounted for 55.75% of its total funding, again at a lower level than its peers’. Prime Grameen’s liquid-asset ratio stood at 3.45% as at end-July 2011, lower than its peers’ and also the 10% regulatory requirement. Following the recent infusion in August, the ratio is estimated to have improved to around 17% but is expected to weaken in line with the Company’s anticipated loan expansion and continuing losses in the immediate term.  

The Company’s capitalisation levels are deemed moderate. Its shareholders’ funds had recovered to Rs. 242.14 million by end-July 2011 (end-FY Mar 2011: negative Rs. 2.22 billion), underpinned by the aforesaid capital injection and the restructuring of its balance sheet. As such, Prime Grameen’s tier-1 and overall risk-weighted capital-adequacy ratios (“RWCARs”) came in at 8.98% and 13.02%, respectively, as at end-July 2011. Nevertheless, we note that its capitalisation levels will be eroded until the Company returns to profitability.