Indian Microfinance Sector and the companies in the sector

Regarding the interest charged by microfinance vs. non-MFI alternatives, there are a couple of interesting slides in the Fy18 Q2 investor presentation on Bharat Financial web site. Alternatives are indeed very poor from a borrower’s point of view.

There is another interesting analysis on reasons for default in the presentation. 60% of the defaults are due to the borrower not needing another loan, rather than political influence.

I believe micro finance has a long runway (through SFB or merger with banks, not stand alone), with hiccups every few years.

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For Bharat Financial Inclusion looks like most of NPAs have been provided for and new NPA creation are almost nil.



Industry is back on track from Q3 FY18.

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Anyone here who is still tracking this sector?

I have invested in Ujjivan and Arman. I think this sector has great potential and some of the stocks have already written off their bad debts due to Demonetisation. So these stocks can finally look forward to growth in profit from next quarter onwards.

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So, how are you finding Ujjivan based on product diversification. I find equitas better in terms of product diversification but ujjivan better in geographical diversification.

Also, do you have any idea like how is the ujjivan placed in terms of adding savings accounts compared to other SFBs?

This promotional by ESAF small finance bank on their 1st anniversary is good for an overview on their growth how they do. They were also one of the microfinance institution which got SFB license along with Equitas, Ujjivan etc . (Not listed in exchanges). https://www.youtube.com/watch?v=iBaiPIK5t3M

Yes, I think that too. You forgot to add Arman which has moved up ~70% since start of the year. I think next one is Satin.

Disclosure- 60% of portfolio invested in MFIs at bottom prices of last year.

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Mayank, have to give it to you - 60% of p/f in MFIs during a time of great uncertainty and crisis is a type of life-changing risk few people can take. Glad that it worked out for you. Are you invested in any SFBs or NBFCs as well?

Hi,
I am invested in satin, unjjivan and Arman and haven’t sold a single share. For me, this a combined growth and value bet.

I made my positions during aug-dec last year at the time when bull run was in full swing. Idea was to invest in the growth stocks going through hiccups. At that time, most of the market was over valued. Microfinance was one of the sector with good return-risk profile as sector was going through post demonization turmoil.

My assessment was that:

  1. it is a growth segment and given the size of opportunity, they will keep on growing with 30%+ growth for forseeable future.

  2. Sector was attractively valued with 1-2x of book value, mainly due to a Black swan event. So whole assessment as an equity investor came down to assessing their survival. I wont have taken this bet if valuations were in excess of 3-4x of BV. (Barring Arman, which is the best bet in the sector IMO).

  3. With so many foreign and Marquee investors with board memberships, they were forced to do upfront provisioning, so that reduces the risk of skeletons tumbling out of closets.

  4. All of their loans have average maturity of 6-9 months. As a banker, I know that it is not possible to keep shorter duration bad loans on books for a long time. Sooner or later, you have to do provisioning and get on with life. This is not the case for long project finance loans of 10+ years maturity.
    And this has been the case in reality as well, as now more than 90% of their books have been originated after Jan 2017 and even later.

  5. Last and most importantly, one should always look to use a good crisis in a positive way, equally applicable for both investors and organisations. Quite apparently, MFIs are using these opportunity to make their credit system more robust, diversification of portfolio through products and geographical spread. So, things are looking good.

Also, even during peak of the crisis, they we’re never short of liquidity and funds both in form of debt and equity. Can we say this for PSUs banks?

All in all, this looks like a risky bet but I am sitting on some gain as my buying price was good. (10-15% at portfolio level in less than 1 year, which is not bad given market situation). I am ready to play out the bet as long as things keep on improving. But as we go forward, I will reduce the sector allocation, may be after 2-3 years.

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Cross referencing this very useful presentation in VP meet. Thank you @hitesh2710 @manish962 @vivek_mashrani!

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How badly is the below news set to impact credit growth of MFIs? Assuming MFI ticket sizes are around 18-30k, will ODs upto 10k increase appetite for MFI loans, or are they expected to shrink the pool of MFI borrowers due to high interest cost involved? The data the government will gather will not be “seasoned”, so I guess qualitative risk experience of MFIs may still come on top.

This seems like an election gimmick. Just as SoniaG used MNREGA to distribute money and win 2009 elections, Modi is probably betting on this to sail through.

Have you looked at Capital Trust

Shady Promoters. Was invested back in 2015-2017. Looked quite promising back then, has floundered since then.

Any research report on the sector??

Guys have a look at Credit Access Gramin one of the rare MNC owned cos in booming MFI sector. Creditaccess has a good reputation n trackrecord of excecution all over the world before coming to India and taking over a small but reputed MFI Gramin Koota which was formed under guidance of legendary Mohd Yunus.

This MNC ownership gives an added advantage of liabilities sourcing big sums as required at an atrractive rate where rates are very low besides well defined processes.

Creditaccess deliberately refused to apply for SFB license to RBi and instead chose to opt for pure play MFI where opp size is huge due to less penetration of credit in rural sector. No wonder co is growing at 50% CAGR with very conservative accounting and provisioning policy.

Creditaccess opens its branch offices steadily in geographically contiguous districts starting from Ktk N then moving to Maha MP CG TN. MD Mr Hebbar is doer with good reputation n experience

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It is indeed a good mfi … I did go through its annual reports and investor presentation… it’s impressive as their is this mnc backing it up which also ups it’s corporate governance…their are no npas as of now … I was little worried with the valuations of the market as such and hence booked out of it at little loss… Waiting for it correct and then nibble.
Regards
Divyansh

Sir please have a look at their 2018 AR. NPAs came to zero after write offs. You can go through a couple of credit rating reports from last year. During demonetization NPAs jumped big time and they couldn’t collect back most of it? Not even delayed collection surprised me

DM was a black swan event for whole of India and MFI sector in particular.Good to see MFI sector has recovered well from this big unexpected shock.

https://www.moneycontrol.com/news/business/moneycontrol-research/ideas-for-profit-high-earnings-growth-reasonable-valuation-makes-creditaccess-grameen-a-worthy-buy-3671391.html

Enclosed write up gives a good info and background about Credit Access Gramin