The Pakistan Credit Rating Agency Limited

Rating Report
Report Contents
1. Rating Analysis
Apna Microfinance Bank Limited 2. Financial Information
3. Rating Scale
4. Regulatory and Supplementary Disclosure

Rating History
Dissemination Date Long Term Rating Short Term Rating Outlook Action Rating Watch
27-Jul-2023 BBB- A4 Negative Downgrade Yes
29-Apr-2023 BBB+ A3 Negative Maintain Yes
30-Apr-2022 BBB+ A3 Negative Maintain Yes
30-Apr-2021 BBB+ A3 Stable Maintain Yes
30-Apr-2020 BBB+ A3 Stable Maintain Yes
30-Oct-2019 BBB+ A3 Stable Maintain -
30-Apr-2019 BBB+ A3 Stable Maintain -
04-Dec-2018 BBB+ A3 Stable Maintain -
28-May-2018 BBB+ A3 Stable Upgrade -
10-Nov-2017 BBB A3 Stable Maintain -

Rating Rationale and Key Rating Drivers

Apna Bank has been facing multiple challenges emanating from muted advances in portfolio growth, low equity base, the legacy
of bad portfolio, and concentration of the deposit profile. The challenges were exacerbated by weakening in the macroeconomic
fundamentals, unprecedented inflation, and the offshoots of the COVID-19 pandemic. Varied implications of the COVID-19
pandemic and related restructuring have been witnessed in the industry players. Few players proactively managed and recovered
related affected portfolios whilst challenges extravagated for few others. The management of Apna Bank made significant
efforts to curtail and contain the negative consequences of portfolio restructuring under COVID-19; however, there was a
significant drag on the health of its portfolio and its earning ability.
In cognizance of this, the sponsoring shareholder endeavored to find a solution by way of a merger with another MFB, FINCA
Microfinance. Lately, Apna Bank notified PSX that the merger is not moving ahead. Meanwhile, the Bank’s bottom line
reported a net loss of PKR 4.4bln (CY21: PKR 1.9bln). The Bank’s accumulated loss further increased to PKR 7.3bln (CY21:
PKR 2.8bln). Equity base, in turn, risk absorption capacity reflected sizable dilution. Equity base was reported at PKR 4bln
negative at the end-Dec22. Presently, the Bank is in breach of MCR. Further, the CAR was non-compliant with the minimum
regulatory requirement as per Prudential Regulations for Microfinance Banks, 2014. The sponsoring shareholders are finding
ways to recapitalize the bank, for which a few options are being considered. Timeliness is important. The management is
striving for recoveries, where they are hopeful that a significant amount of loan can be recovered. Also, the current portfolio is
being switched towards a gold portfolio to further secure the bank, while building a revenue stream. A good size of liquidity is
parked in government securities and bank placements, which support the risk profile.
Going forward, the provisioning expense is expected to increase in upcoming quarters. Despite the buildup in NPLs, the
management should focus to enhance the recoveries. Turnaround can be achieved by equity injection and building up
performing assets to generate income for the bank in upcoming years. The management of asset quality and strengthening of
CAR remains vital.

The ratings are dependent upon the bank’s ability to aptly combat the emerging risks under the current scenario to improve its
business and financial risk profile. The ratings are also kept under “Watch” with the Negative Outlook incorporating challenges
on the profitability front and fulfilling MCR requirements. Compliance with CAR is essential, going forward. Besides, turning
loss into profitability is imperative.
Disclosure
Name of Rated Entity Apna Microfinance Bank Limited
Type of Relationship Solicited
Purpose of the Rating Entity Rating
Applicable Criteria Methodology | Microfinance Institution Rating(Jun-22),Methodology | Correlation Between Long-term & Short-term
Rating Scales(Jun-22),Methodology | Rating Modifiers(Jun-22)
Related Research Sector Study | Microfinance(Sep-22)
Rating Analysts Sehar Fatima | sehar.fatima@pacra.com | +92-42-35869504

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 Microfinance
The Pakistan Credit Rating Agency Limited
Profile

Structure Apna Microfinance Bank Limited (“the bank”) was incorporated in May 2003 as a Public Limited Company under the Companies Act, 2017 (formerly
Companies Ordinance, 1984). The bank is listed on Pakistan Stock Exchange (PSX) since the commencement of its operations in 2005 under the Microfinance Institution
Ordinance, 2001.
Background In June-15, the bank was granted a national-level license after completion of regulatory capital requirements. Presently, the bank operates with a network of
111 branches spread across Pakistan.
Operations The bank offered a wide variety of lending products customized according to the needs of various communities. These include loans for farmers, Livestock
loans, Agri-loans, House loans, Tractor Loans, Salary loans, and Business loans. However, currently, new disbursements are at a halt.
Ownership

Ownership Structure The bank is a part of the United International Group (UIG) with a pre-dominant ownership stake held by Mr. Mian Shahid through his group
companies, especially United Track and United Software.
Stability There is expected change in the shareholding of the bank in the foreseeable future as the sponsor shareholder is currently evaluating few options.
Business Acumen United International Group (UIG) has its foothold in various business ventures. The group has interests in microfinance, insurance, tracking business,
information technology, agriculture, and business consultancy. UIG is led by its Founder and Chairman – Mian Akram Shahid – the single largest shareholder.
Financial Strength United Insurance is the flagship company of the Group.
Governance

Board Structure The overall control of the bank vests with nine members. The bank has two independent directors on the Board as per the Prudential Regulations
requirement for MFBs. The board has four sub-committees; (i) Audit Committee (ii) HR and Remuneration Committee (iii) Risk and Compliance Committee, and (iv)
Monitoring Committee.
Members’ Profile Strengthening the governance framework to support healthy operations is important. Mr. Wajahat Malik is the CEO and President. All the board
members are experienced professionals carrying experience of an average of over 20 years.
Board Effectiveness During the year, six board meetings were held; the attendance of the board remained good in the meetings. The board and committee meeting
minutes are formally maintained, showing the high attendance of the members.
Transparency The audit committee of the bank comprises five members and is chaired by an independent director, Mr. Abdul Aziz Khan. A separate Internal Audit
Department is in place which reports independently to the Audit Committee. RSM Avais Hyder Liaquat Nauman & Co. Chartered Accountants are the external auditors of
the Bank. The auditors have added emphasis of matter paragraph in the audit report for 2022 and have raised material uncertainty relating to going concern.
Management

Organizational Structure A total of seven department heads report directly to the President. The SAM Department with reporting line to the COO has been established as
collateral to the disbursements to strengthen the recovery ratio.
Management Team The management positions were filled by qualified professionals to strengthen departmental results. These included the Head of SAM, the Head of
Business, and the Head of Product Development.
Effectiveness Six Management Committees are in place namely i) Asset Liability Management Committee (ALCO) ii) Credit Committee, iii) Management Committee,
iv) Compliance Committee, v) HR Committee, and vi) IT Steering Committee to ensure operational efficiency and efficient decision-making.
MIS To enhance data safety, the management improved the data collection and management centre and acquired a program for compliance handling as well.
Risk Management Framework As a consequence of the SBP inspection (as stated above), the bank envisaged betterment in risk management through improvement in the
overall control environment by revisiting and devising risk management policies and control procedures to manage its credit risk.
Technology Infrastructure Apna Bank uses Auto-banker III (ABIII) as its core-banking software. Developed by a local vendor, ABIII provides flexibility to consolidate
records based on branch, repayment behavior, classification of loan, and borrower profile.
Business Risk

Industry Dynamics Pakistan Microfinance Industry (MFI) comprises 50 microfinance providers including 30 microfinance institutions (MFIs). Varied implications of the
COVID-19 pandemic and related restructuring have been witnessed in the industry players. Few players proactively managed and recovered related affected portfolios
whilst challenges extravagated for few others.
Relative Position At end-Dec22, the bank's market share remained around 3% in terms of the Gross Loan Portfolio (CY21: 2.93%).
Revenue The markup earned witnessed an increase (CY22: PKR 2.2bln; CY21: PKR 908mln) attributable to a higher contribution from advances to stand at PKR 1.7bln
(CY21: PKR 395mln). The markup expenses also recorded an uptick (CY22: PKR 1.6bln; CY21: PKR 1.4bln). Hence, the net markup income clocked at PKR 666mln.
Net markup income to total income sizably declined to 79.6% (CY21: 141.8%). Non-mark-up income remained largely the same at PKR 171mln (CY21: PKR 162mln)
due to sustained fee and commission income.
Profitability During CY22, the bank's non-markup expenses clocked in at PKR 2.2bln (CY21: PKR 2.1bln). The bank booked a provision of PKR 3.4bln (CY21: PKR
86mln) due to the higher NPLs. The bank's profitability took a major hit and recorded losses of PKR 4.4bln (CY21: loss of PKR 1.9bln).
Sustainability The bank is only allowed to lend what it recovers. The sponsoring shareholders are finding ways to recapitalize the bank, for which a few options are being
considered. The management is striving for recoveries, where they are hopeful that a significant amount of loan can be recovered. Also, the current portfolio is being
switched towards a gold portfolio to further secure the bank, while building a revenue stream.
Financial Risk

Credit Risk During CY22, the Gross Loan Portfolio (GLP) - net declined to PKR 8.35bln (end-Dec21: PKR 11.5bln). The infection ratio further increased to 38.1% (end-
Dec21: 33.9%) attributable to a hike in the non-performing advances recorded at PKR 4.6bln (end-Dec21: PKR 4.0bln).
Market Risk At end-Dec22, the cash and bank balances with SBP and NBP are PKR 1.7bln; balances with other banks are PKR 2.2bln; whereas investment in T-Bills is
PKR 2.4bln.
Funding The bank's funding is majorly fueled through deposits (end-Dec22: PKR 22.6bln; end-Dec21: PKR 22bln). The demand deposits recorded an increase and
clocked at PKR 12bln (end-Dec21: PKR 11.3bln).
Cashflows & Coverages A good size of liquidity is parked in government securities and bank placements, which support the risk profile. The net advances to deposit ratio
also declined to stand at 37.4% (end-Dec21: 52.6%).
Capital Adequacy At end-Dec22, the bank's equity base was recorded negatively to stand at PKR 4bln (end-Dec21: PKR 442mln). The bank remained non-compliant in
meeting the minimum CAR requirement of 15%. The sponsoring shareholders are finding ways to recapitalize the bank, for which a few options are being considered.

Apna Microfinance Bank Limited Jul-23

Rating Report www.PACRA.com
Micro Finance Bank
mmary) in PKR mln 0 0 0 PKR mln
ting Agency Limited PKR mln
Apna Microfinance Bank Dec-22 Dec-21 Dec-20 Dec-19
Listed Public Limited 12M 12M 12M 12M

A BALANCE SHEET

1 Total Finances - net 7,527 7,999 10,118 8,685

2 Investments 2,366 1,160 1,604 946
3 Other Earning Assets 2,237 4,285 9,505 5,464
4 Non-Earning Assets 6,530 6,726 7,502 5,254
5 Non-Performing Finances-net 927 3,607 101 194
Total Assets 19,587 23,777 28,831 20,543
6 Deposits 22,606 22,084 26,179 18,317
7 Borrowings - 0 3 7
8 Other Liabilities (Non-Interest Bearing) 1,028 1,250 390 345
Total Liabilities 23,634 23,334 26,572 18,669
Equity (4,047) 442 2,259 1,872

B INCOME STATEMENT

1 Mark Up Earned 2,266 908 3,418 2,900

2 Mark Up Expensed (1,600) (1,459) (1,389) (1,209)
3 Non Mark Up Income 171 162 177 490
Total Income 836 (388) 2,206 2,181
4 Non-Mark Up Expenses (2,234) (2,169) (2,078) (1,798)
5 Provisions/Write offs/Reversals (3,479) (86) (70) (294)
Pre-Tax Profit (4,876) (2,643) 58 89
6 Taxes 387 712 (21) (36)
Profit After Tax (4,489) (1,931) 37 54

C RATIO ANALYSIS

1 Performance
Portfolio Yield 15.6% 4.5% 28.1% 27.5%
Minimum Lending Rate 61.2% 33.2% 36.4% 36.3%
Operational Self Sufficiency (OSS) 32.7% 27.5% 99.0% 91.5%
Return on Equity -124.5% -142.9% 1.8% 2.9%
Cost per Borrower Ratio N/A N/A N/A N/A
2 Capital Adequacy
Net NPL/Equity 22.9% 815.3% 4.5% 10.3%
Equity / Total Assets (D+E+F) -20.7% 1.9% 7.8% 9.1%
Tier I Capital / Risk Weighted Assets N/A 6.7% 10.7% 10.4%
Capital Adequacy Ratio N/A 7.9% 11.8% 11.7%
Capital Formation Rate [(Profit After Tax - Cash Dividend ) / Equity] -1014.8% -85.5% 2.0% 2.9%
3 Funding & Liquidity
Liquid Assets as a % of Deposits & Short term Borrowings 28.0% 31.8% 51.6% 42.0%
Demand Deposit Coverage Ratio 52.4% 62.0% 100.5% 74.3%
Liquid Assets/Top 20 Depositors N/A N/A 109.1% 112.9%
Funding Diversification (Deposits/(Deposits+Borrowings+Grants)) 100.0% 100.0% 100.0% 100.0%
Net Advances to Deposits Ratio 37.4% 52.6% 39.0% 48.5%
4 Credit Risk
Top 20 Advances / Advances 0.0% 0.0% 0.0% 0.0%
PAR 30 Ratio 38.5% 34.2% 4.6% 5.4%
Write Off Ratio 0.0% 0.0% 0.0% 0.0%
True Infection Ratio 38.5% 34.2% 4.6% 5.4%
Risk Coverage Ratio (PAR 30) 80.0% 12.0% 79.1% 60.1%
 Corporate Rating Criteria
Qualitative Considerations
Criteria – Cross-Sector Qualitative Rating Considerations
Methodology – Asset Manager Rating
Scale
Criteria – Cross-Sector Qualitative Rating Considerations
Methodology – Asset Manager Rating
Cross-Sector Rating
Scale – Credit Rating

Credit Rating
Credit rating reflects forward-looking opinion on credit worthiness of underlying entity or instrument; more specifically it covers relative ability to honor
financial obligations. The primary factor being captured on the rating scale is relative likelihood of default.

Long-term Rating Short-term Rating

Scale Definition Scale Definition
A1+ The highest capacity for timely repayment.
Highest credit quality. Lowest expectation of credit risk. Indicate exceptionally strong
AAA A strong capacity for timely
capacity for timely payment of financial commitments A1
repayment.
AA+ A satisfactory capacity for timely
Very high credit quality. Very low expectation of credit risk. Indicate very strong repayment. This may be susceptible to
AA A2
capacity for timely payment of financial commitments. This capacity is not significantly adverse changes in business,
vulnerable to foreseeable events. economic, or financial conditions.
AA- An adequate capacity for timely repayment.
A3 Such capacity is susceptible to adverse
A+ changes in business, economic, or financial
High credit quality. Low expectation of credit risk. The capacity for timely payment of The capacity for timely repayment is more
A financial commitments is considered strong. This capacity may, nevertheless, be susceptible to adverse changes in business,
vulnerable to changes in circumstances or in economic conditions. A4
economic, or financial conditions. Liquidity
A- may not be sufficient.
BBB+ Short-term Rating
Good credit quality. Currently a low expectation of credit risk. The capacity for timely A1+ A1 A2 A3 A4
BBB payment of financial commitments is considered adequate, but adverse changes in AAA
circumstances and in economic conditions are more likely to impair this capacity. AA+
BBB- AA
BB+ AA-
Moderate risk. Possibility of credit risk developing. There is a possibility of credit risk
A+
developing, particularly as a result of adverse economic or business changes over time;
BB A
however, business or financial alternatives may be available to allow financial

Long-term Rating
commitments to be met. A-
BB- BBB+
B+ BBB
High credit risk. A limited margin of safety remains against credit risk. Financial BBB-
B commitments are currently being met; however, capacity for continued payment is BB+
contingent upon a sustained, favorable business and economic environment. BB
B- BB-
CCC B+
Very high credit risk. Substantial credit risk “CCC” Default is a real possibility.
B
Capacity for meeting financial commitments is solely reliant upon sustained, favorable
CC B-
business or economic developments. “CC” Rating indicates that default of some kind
CCC
appears probable. “C” Ratings signal imminent default.
C CC
C
D Obligations are currently in default. *The correlation shown is indicative and, in certain
cases, may not hold.

Outlook (Stable, Positive, Rating Watch Alerts to the Suspension It is not Withdrawn A rating is Harmonization A
Negative, Developing) Indicates possibility of a rating change possible to update an withdrawn on a) change in rating due to
the potential and direction of a subsequent to, or, in opinion due to lack termination of rating revision in applicable
rating over the intermediate term in anticipation of some material of requisite mandate, b) the debt methodology or
response to trends in economic identifiable event with information. Opinion instrument is underlying scale.
and/or fundamental indeterminable rating should be resumed in redeemed, c) the rating
business/financial conditions. It is implications. But it does not foreseeable future. remains suspended for
not necessarily a precursor to a mean that a rating change is However, if this six months, d) the
rating change. ‘Stable’ outlook inevitable. A watch should be does not happen entity/issuer defaults.,
means a rating is not likely to resolved within foreseeable within six (6) or/and e) PACRA finds
change. ‘Positive’ means it may be future, but may continue if months, the rating it impractical to surveill
raised. ‘Negative’ means it may be underlying circumstances are should be considered the opinion due to lack
lowered. Where the trends have not settled. Rating watch may withdrawn. of requisite
conflicting elements, the outlook accompany rating outlook of information.
may be described as ‘Developing’. the respective opinion.

Surveillance. Surveillance on a publicly disseminated rating opinion is carried out on an ongoing basis till it is formally suspended or withdrawn. A
comprehensive surveillance of rating opinion is carried out at least once every six months. However, a rating opinion may be reviewed in the
intervening period if it is necessitated by any material happening.

Note. This scale is applicable to the following methodology(s): a) Broker Entity Rating e) Holding Company Rating
b) Corporate Rating f) Independent Power Producer Rating
c) Debt Instrument Rating g) Microfinance Institution Rating
d) Financial Institution Rating h) Non-Banking Finance Companies Rating

Disclaimer: PACRA has used due care in preparation of this document. Our information has been obtained from sources we consider to be reliable but
its accuracy or completeness is not guaranteed. PACRA shall owe no liability whatsoever to any loss or damage caused by or resulting from any error
in such information. Contents of PACRA documents may be used, with due care and in the right context, with credit to PACRA. Our reports and
ratings constitute opinions, not recommendations to buy or to sell.
 Regulatory and Supplementary Disclosure
(Credit Rating Companies Regulations,2016)

Rating Team Statements

(1) Rating is just an opinion about the creditworthiness of the entity and does not constitute recommendation to buy, hold or sell any security of the
entity rated or to buy, hold or sell the security rated, as the case may be | Chapter III; 14-3-(x)

2) Conflict of Interest
i. The Rating Team or any of their family members have no interest in this rating | Chapter III; 12-2-(j)
ii. PACRA, the analysts involved in the rating process and members of its rating committee, and their family members, do not have any conflict of
interest relating to the rating done by them | Chapter III; 12-2-(e) & (k)
iii. The analyst is not a substantial shareholder of the customer being rated by PACRA [Annexure F; d-(ii)] Explanation: for the purpose of above clause,
the term “family members” shall include only those family members who are dependent on the analyst and members of the rating committee

Restrictions
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where required under law to do so. | Chapter III; 10-(5)
(4) PACRA does not disclose or discuss with outside parties or make improper use of the non-public information which has come to its knowledge
during business relationship with the customer | Chapter III; 10-7-(d)
(5) PACRA does not make proposals or recommendations regarding the activities of rated entities that could impact a credit rating of entity subject to
rating | Chapter III; 10-7-(k)

Conduct of Business
(6) PACRA fulfills its obligations in a fair, efficient, transparent and ethical manner and renders high standards of services in performing its functions
and obligations; | Chapter III; 11-A-(a)
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accuracy or completeness is not guaranteed. PACRA does not, in every instance, independently verifies or validates information received in the rating
process or in preparing this Rating Report | Clause 11-(A)(p).
(8) PACRA prohibits its employees and analysts from soliciting money, gifts or favors from anyone with whom PACRA conducts business | Chapter III;
11-A-(q)
(9) PACRA ensures before commencement of the rating process that an analyst or employee has not had a recent employment or other significant
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(10) PACRA maintains principal of integrity in seeking rating business | Chapter III; 11-A-(u)
(11) PACRA promptly investigates, in the event of a misconduct or a breach of the policies, procedures and controls, and takes appropriate steps to
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Independence & Conflict of interest

(12) PACRA receives compensation from the entity being rated or any third party for the rating services it offers. The receipt of this compensation has
no influence on PACRA´s opinions or other analytical processes. In all instances, PACRA is committed to preserving the objectivity, integrity and
independence of its ratings. Our relationship is governed by two distinct mandates i) rating mandate - signed with the entity being rated or issuer of the
debt instrument, and fee mandate - signed with the payer, which can be different from the entity
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and associated undertakings that is being rated or has been rated by it during the preceding three years unless it has adequate mechanism in place
ensuring that provision of such services does not lead to a conflict of interest situation with its rating activities; | Chapter III; 12-2-(d)
(14) PACRA discloses that no shareholder directly or indirectly holding 10% or more of the share capital of PACRA also holds directly or indirectly
10% or more of the share capital of the entity which is subject to rating or the entity which issued the instrument subject to rating by PACRA; |
Reference Chapter III; 12-2-(f)
(15) PACRA ensures that the rating assigned to an entity or instrument is not be affected by the existence of a business relationship between PACRA and
the entity or any other party, or the non-existence of such a relationship | Chapter III; 12-2-(i)
(16) PACRA ensures that the analysts or any of their family members shall not buy or sell or engage in any transaction in any security which falls in the
analyst’s area of primary analytical responsibility. This clause shall, however, not be applicable on investment in securities through collective
investment schemes. | Chapter III; 12-2-(l)
(17) PACRA has established policies and procedure governing investments and trading in securities by its employees and for monitoring the same to
prevent insider trading, market manipulation or any other market abuse | Chapter III; 11-B-(g)

Monitoring and review

(18) PACRA monitors all the outstanding ratings continuously and any potential change therein due to any event associated with the issuer, the security
arrangement, the industry etc., is disseminated to the market, immediately and in effective manner, after appropriate consultation with the entity/issuer; |
Chapter III | 18-(a)
(19) PACRA reviews all the outstanding ratings on semi-annual basis or as and when required by any creditor or upon the occurrence of such an event
which requires to do so; | Chapter III | 18-(b)
(20) PACRA initiates immediate review of the outstanding rating upon becoming aware of any information that may reasonably be expected to result in
downgrading of the rating; | Chapter III | 18-(c)
(21) PACRA engages with the issuer and the debt securities trustee, to remain updated on all information pertaining to the rating of the entity/instrument;
| Chapter III | 18-(d)
Probability of Default
(22) PACRA´s Rating Scale reflects the expectation of credit risk. The highest rating has the lowest relative likelihood of default (i.e, probability).
PACRA´s transition studies capture the historical performance behavior of a specific rating notch. Transition behavior of the assigned rating can be
obtained from PACRA´s Transition Study available at our website. (www.pacra.com). However, actual transition of rating may not follow the pattern
observed in the past | Chapter III | 14-(f-VII)
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