PACRA Revises Entity Ratings of FINCA Microfinance Bank Limited

The lingering impact of Covid-19 along with the impact of the floods in Jul’22 impacted the credit quality the portfolio and the financial risk profile of the various Banks in the sector weakened. Alongside this challenge, the sector continued to grapple with an economic downturn, characterized by all-time high inflation and peaked interest rates. The reduction in disposable income, particularly of the low-income segments of society, diluted the repayment capacity of the borrowers; hence, the recovery rate from the carried forward restructured loans considerably went down. Finca is also one of those banks that got arrested in the confluence of the sector's weak business fundamentals. The weakening of the financial profile of the bank led to a negative bottom line, along with weak asset quality. Consequently, that has placed the CAR below minimum regulatory requirements. Both the management and sponsoring shareholders are fully cognizant of the current conditions. They are making earnest efforts to bridge the capital adequacy gap in a phased manner. TPL Corp along with Abhi (Pvt.) Limited is to explore the potential acquisition of the majority shareholding in Finca Microfinance Bank. In this regard, the Company has entered into a non-binding term sheet, for the due diligence. On December 18, 2023, the State Bank of Pakistan granted TPL Corp Limited its approval to commence the due diligence of Finca for the potential acquisition. The management represented that the due diligence is at an advanced stage. Given the prevailing constraints and the ongoing process of exploring the merger, the management has diverted most of the liquidity toward a secured portfolio (gold-backed). This has ensured the repeatability of the loan book and safety against delinquency. As per the management representation, there is adequate liquidity available with the bank. The latest available financial statements of the Bank are for nine months ending on Sep'2022, whereas the latest audited financial statements are for the year ending Dec'2021. The audited financial statements of Dec'2022 are pending. The association of FINCA (“the Bank”) with a global microfinance organization – FINCA International has been of significance to the assigned ratings. The projected outlook of the Bank indicates absorbing significant cash losses, hence preserving the deposit base is extremely important. The ratings are dependent upon the successful execution of the sponsor's and management’s plans to steer the risk profile of the Bank toward an improved trajectory.
Timely materialization of the merger transaction with resultant impact of equity injection is crucial. Any sudden deterioration in the risk profile and/or delay in the aforementioned plans would be considered negative.

About the Entity
Kashf Holdings (Pvt.) Ltd. established the bank in 2008. In 2013, FINCA International acquired majority ownership in the bank, through the dilution of Kashf Holdings' shareholding. FINCA International has a majority stake of 86.4%, through FINCA Microfinance Cooperatief U.A; a commercial arm registered in the Netherlands. Kashf Holdings (Pvt) Ltd. holds a 5.2% stake in the bank. The remaining stake is distributed among i) International Finance Corporation (4.9%), ii) Triodos Fair Share Fund (2.7%), and iii) Acumen Fund Pakistan (0.8%). FINCA offers a diversified range of financial products and services. The bank operates with a network of 114 branches. Mr. Jahanzeb Khan - CEO - possesses 24 years of experience with one of the largest financial services institutions. He is assisted by an experienced management team.