PACRA Downgrades Entity Ratings of Thardeep Microfinance Foundation

The rating reflects the adequate profile of the Thardeep Microfinance Foundation (herein referred to as “The Foundation” or “the MFI”) as a small-tier Foundation in the MFI (Microfinance Institution) sector of Pakistan. SECP is the Regulatory body for MFIs and they are governed through NBFC Rules, 2003 and NBFC Notified Entities Regulations, 2008. The principal activity of the Foundation is to mobilize funds for the provision of microfinance services to poor persons, particularly, poor women for mitigating poverty and promoting social welfare and economic justice through community building and social mobilization with the ultimate objective of poverty alleviation. The governance structure comprises sponsoring members who are also on the board of directors. The Foundation operates as a nonprofit organization, so its funding primarily comes from three sources: a) generating profits internally, b) borrowings, and c) receiving grants. Currently, the Foundation has availed 100% domestic borrowings. The automation and integration of processes to assess the real-time status of recoveries and disbursements through technological advancement is set forth to augment the control environment. The Foundation's Gross Loan Portfolio (GLP) has shown a 9.5% YOY basis growth and stood at PKR 3.5bln. The portfolio disbursement is dominated in interior Sindh and the risk of non-performing loans may escalate mainly on the challenges specific to the geographical allocation of the portfolio. During FY23, the Foundation reported a net markup income of PKR 355mln, a decrease compared to PKR 601mln in FY22. This decline is attributed to the surge in the cost of funds and reflects the non-transferability of product pricing to the end consumer. These factors coupled with an increase in operating and administrative expenses have contributed to a loss after tax of PKR ~130mln. This started consuming the equity and has caused depleting equity levels which ultimately put pressure on the cost structure and ratings of the entity. The PAR (Portfolio at risk) stood at 5.0% which is quite high with respect to the industry average and has deteriorated the credit risk profile of the Foundation. The industry's loan portfolio requires prudent management mainly on the back of the consistent surge in the policy rate. However, going forward the impact of gross lending rate on the financial risk profile specifically on NPLs (Non-performing Loans) is being evaluated in due course of time. The restriction on the mobilization of deposits has demarcated and supplemented the risk absorption capacity while triggering the funding constraints. Despite the hyperinflationary environment and other microeconomic challenges specifically the consistent surge in KIBOR which ultimately elevated the cost of funds for MFIs, the portfolio at risk (PAR) > 30 days of MFIs has shown an improvement and reduced to 3.0% (4QCY22: 4.2%) mainly on the back of the recoveries in the flood-impacted portfolios.
The ratings are dependent on the Foundation's ability to provide comfort on asset quality through efficient management of PAR. The augmentation of the profitability matrix to strengthen the equity base remains critical.

About the Entity
Thardeep Microfinance Foundation was incorporated with the Securities and Exchange Commission of Pakistan (SECP) in 2016 as a Public Company Limited by Guarantee under Section 42 of the Companies. The overall control of the Foundation vests with a seven-member BOD. Dr. Naseer Muhammad Nizamani is the Chairman of the Board, while Mr. Sono Khangharani is the CEO.