PACRA Updates on the Rating of NRSP Microfinance Bank Limited | Tier II TFC | RW & Developing Outlook

NRSP Bank's asset quality witnessed significant impairment. This was due to multiple factors, chief among them was impact of Covid-19 and high inflationary environment amidst slow down in the economy and high interest rates. Only recently, the massive floods took a deep toll. This resulted in the erosion of the bank's capital adequacy ratio, which the bank is required to maintain at 15%. The bank, to supplement, its CAR, issued a Tier II TFC. Apart from this, the bank was seeking equity support from the sponsor shareholder: National Rural Support Programme. NRSP Board of Directors, as on May 12, 2022, approved an investment upto PKR 2bln into the equity of the bank. It was well noted and comfort was drawn from this. Keeping in view the process, NRSP requested to deposit the money as Share Deposit Money, which was planned to be placed in T Bills by the bank until conversion into share capital. The approval for the same was sought by NRSP from its regulator. The bank management represented that, based on this communication, they also engaged with their regulator, to allow payment, falling due, on the said TFCs, as profit. The terms of the Tier II TFC requires that, as per the Lock in Clause, neither profit nor principal, will be payable, if such payments will result in a shortfall in the bank's MCR/CAR or cause an increase in the shortfall. The bank management represented that they are seeking approval from their regulator to allow profit payment, falling due, based on the Share Deposit Money. The quantum of benefit to the CAR based on this Share Deposit Money may vary now, as against when the process was initiated. At that time, it was forecasted to help achieve a CAR of 17%. These approvals are requisite for the repayment of the profit payment, given the aforementioned circumstances.
The ratings are dependent upon the out-turn of management’s plans to complete the process of approvals to make the payments. Also on their strategy to steer the risk profile of the bank towards an improved trajectory. Any non-compliance with the regulatory or contractual obligations would be negative for the ratings.

About the Entity
NRSP Microfinance Bank Limited was incorporated as a public limited unlisted Company in October 2008 under Section 32 of the repealed Companies Ordinance, 1984 (now Companies Act2017). The Bank obtained a license from SBP on February 18, 2009 to operate, on a nationwide basis, as a microfinance bank under Microfinance Institutions Ordinance, 2001. The Bank was established to mobilize funds for providing microfinance banking and related services to low-income, underserved and marginalized segments of the society for mitigating poverty and promoting social welfare through providing access to financial markets at the micro level. National Rural Support Programme (NRSP) is a majority shareholder with a shareholding of ~57%. Other institutional shareholders include International Finance Corporation (IFC), PROPARCO and Acumen Fund USA.

About the Instrument
NRSP Bank issued a rated, unlisted, unsecured, and subordinated TFC-II in Jul-21 of PKR 770mln to contribute towards the Bank's Tier II Capital. The instrument is unsecured and subordinated as to payment of principal and profit to other indebtedness of the Bank, including deposits, but will rank pari passu with other Tier II instruments and superior to Additional Tier I instruments and common shares. The tenor of the instrument is 07 years and callable on or after five years with prior approval of SBP. The profit rate is 3MK plus 300bps and is being paid quarterly in arrears on the outstanding principal.