PACRA Maintains Rating of NRSP Microfinance Bank Limited | Tier II TFC

The assigned rating of NRSP Microfinance Bank Limited (the "Bank") reflects the sponsor's steadfast support during periods of financial distress, the management's strong dedication to restoring the Bank's financial stability, and an enhanced recovery strategy for managing non-performing loans. However, during CY24, the microfinance industry faced substantial headwinds driven by rising NPLs amid a strained economic landscape marked by inflation, high interest rates, and asset quality concerns. These macroeconomic headwinds led to increased credit risk, especially among vulnerable segments such as agriculture and livestock, and negatively affected borrowers’ repayment capacity. Amid these challenges, the gross loan portfolio (GLP) growth, particularly in the microfinance segment, remained modest. For NRSP Bank, the GLP reached PKR 37bln as of end-Dec'24 (De'23: PKR 35 bln), with the market share holding steady. The Bank's profit after tax rose to PKR 1.2bln during CY24, up from PKR 910mln in CY23, driven by improved management of operating expenses and enhanced recovery practices. However, on the equity side, the Bank continues to face an equity shortfall, and its CAR remains non-compliant with the minimum regulatory requirements. At end 2022, the CAR was negative with an equity shortfall of PKR 6.5bln, towards the end Dec'24 the shortfall came down to PKR 3.2bln and the CAR improved to 1%. To address the shortfall, in collaboration with the parent, the Bank has developed a business plan to secure an additional equity injection of over PKR 2bln to maintain the regulatory CAR threshold and support future growth and profitability. Shareholders have also granted in-principle approval for a right issue of PKR 3.5bln, authorizing the Board to initiate the necessary actions, which include 1)Further equity injection by NRSP foundation, 2) explore investment opportunities in the Bank, 3) Employee stock option plan and 4) internal profit generation. The parent company has reaffirmed its commitment to providing equity support and unconditional financial backing. Management believes these measures will strengthen the Bank’s financial health and enable compliance with the minimum CAR requirement.
The rating watch would remain intact to capture the non-compliance of the Bank's CAR. The ratings are dependent upon the bank’s ability to steer out of the current challenges while improving the risk profile.

About the Entity
NRSP Microfinance Bank Limited was incorporated as a public limited unlisted Company in October 2008 under Section 32 of the Companies Act 2017. NRSP is a majority shareholder with a shareholding of ~57%.

About the Instrument
In July 2021, NRSP Bank issued an unsecured, unlisted, and subordinated NRSP Microfinance Bank Limited | Tier II TFC ("TFC" or the "Instrument") of PKR 770mln to strengthen its Tier II Capital. This 7-year TFC ranks pari passu with other Tier II instruments and above Additional Tier I instruments and common shares. It is callable after five years with SBP approval and carries a profit rate of 3MK plus 300bps, paid quarterly on the outstanding principal. The terms of the Tier II TFC require 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.