Indian Microfinance Sector and the companies in the sector

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@CommonMan How do you see the approach of Satin to start “product lending” where in existing customers are chosen for solar lamp or sanitary loans with much smaller ticket size. The main point here being lending towards non-income generating needs, especially by MFI’s who do not take deposits and do not have SFB licenses.

Also I am curious why you would bet on a smaller (and perhaps more regional) player like Arman who is exposed to higher concentration risk and in a upward NPA cycle/event can put a lot of pressure on its loan books.

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Regarding product lending,ujjivan too is into it. Has a couple of resson. They give it only for customers who have a history of borrowing with them. One they know their credit worthiness, so no risk to it (like how a kotak is ready to loan more if you have a excellent credit score). Second is to develop a relationship with the customer, it may sound cliché but it plays a big part. Any way its small in the scheme of things.
Arman because I know some people there over the years and how they work. While the regional risk remains, their thoroughness is best in class and a possibility of higher growth from a lower base. Hence biased. I own ujjivan too.

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My 2 cents…

Several News article highlighting that there is 84% loan book growth against 44% Jump of Borrower base . To me this is positive more than negative.

  1. Earlier we saw there was huge increase of borrower across industry during Industry crysis (2011-13) because One customer availed loan from multiple MFIs. Basically they were circular loans i.e take loan from one and pay other continuously. But now due to stringent regulatory instruction (Thanks to RBI !) One customer can avail loan from 2 MFIs only. So MFis now had to drop out the existing customers also to comply with the regulatory requirement that not more than two MFIs can lend to a customer. You can find the same in Ujjivan , Satin 2014-2015 ARs.
  2. Now as there is regulatory limitation on increase of aggressive Borrower base , MFis can increase their loan book by increasing the ticket size. So there is a trend they are going to bank on the support of old reliable customers who already paid successfully several smaller ticket size loan earlier without any delay or miss(Same as CIBIL Score).MFI credit bureaus like Equifax was not during Industry crisis period.
    Ujjivan have 86% customer retention (As per AR 2016) .They want to grow on the support from Old Customers (Major operative states are already saturated).
    For Satin , it is different because they operate on lower penetrated level states so they have ample scope to increase the borrowers as well as ticket size(which they will concentrate post technology up gradation after Fy 2017) .
    Earlier thats why I have shared the operation performance snapshot of Ujjivan, SKS and Satin which clearly shows the trend and business approach of different MFis. IMHO , they all are good as per their different region of operation.
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Summarizing Hugh Sinclair’s case against MFI – Gave up after 11 mins of listening, way too much useless logic

  1. Some academic studied have concluded that the impact of MFI is ZERO !!
  2. MFI loans are mostly used for consumption (3/4th by his estimate), and paying other institutions
  3. Predatory lending happens
  4. Zero sum theory :: Basically if you give loan to someone to produce tomato, he just take tomato making from someone else, so no actual advantage to society
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89

Some of members here have raised question about scorching growth in MFI books. Growth in MFIs have 3 distinct components

  1. Growth in loan amount per customer (MFIs usually start lower ticket size loan, and progressively increase the amount of loan with each cycle. Eventually when the amount of loan required crosses the level suitable for JLG model, they start giving loan as Individual Loan) - Huge scope of growth here as avg loan size is 15-20K (RBI mandated limit is 1L)

  2. Growth in duration of loan - With increase in loan size, MFI increase the loan duration, so as the EMI amount wont become higher. This helps in increase in loan book

  3. Growth in number of customer. India has a huge financially unserved/underserved population, who have been depending on high interest charging money lenders (taking 40-100% interest rate) for loans. MFI at 19-24% interest rate is a boon for such population. As per reading many ARs of listed and unlisted players in MFI space, all I can conclude that the size of people who can be served via MFI are 4-5x current customer.

I feel because of superb regulatory framework by RBI, positive policy framework by NaMo govt for financial inclusion (Aadhaar, Jan Dhan, Mobile, DBT, micro-insurance etc), good GDP growth, way faster growth in middle class than GDP growth, comparative easy capital availability in the sector, MFIs should grow at good pace (40%+) for next 3-4 years.

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90

As you pointed out [quote=“subashnayak_19_, post:89, topic:3800”]
size of people who can be served via MFI are 4-5x current customer.
[/quote]

but mgt. of ujjivan said in concall that growth in future will come from individual lending and not from joint lending as it is getting saturated. please clear the air

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thanks for providing good inputs.
I want to ask your opinion on ujjivan’s medium term and long term performance after conversion to SFB. They way I see it after conversion interest rates will get rationalised over 3-5 years and that will be very good for long term sustainability.
Secondly, do you perceive among SFB’s few will rise like hdfc bank or icici over next decade?

Disc: own sks micro from 200 levels, and ujjivan forms 15% of portfolio

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Currently , banks lend at 13-16% to the MFIs. Banks are making a disproportionate amount of profits . These rates should and will go down, sooner than we think.

Regarding long term prospects, NBFC as a whole is at a nascent stage in India with 10-15% penetration ,compared to other countries. We have a very long runway to go.
The biggest winners will be the ones with great , prudent managements…similar to what happened in HDFC,kotak, sundram. IMO ujjivan and arman satisfy the criteria.

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I am not implying that other MFI managements are in anyway inferior. .I am just more comfortable with the above two.

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GL has its limitations as it revolves largely around a single product structure. There are many customers who are not willing to form groups and offer guarantees for each other. They also have very specific needs. These customers usually want to borrow amounts higher than Rs 50,000 and request flexibility in terms of repayment tenure, mode of repayment, disbursement mode, etc.

For example in one of the branches (Ujjivan AR FY2015), MFI have successfully disbursed group loans and they may be serving 5,000 - 7,000 families. However, in the same urban work-areas, there may be up to 1,00,000 families who are financially excluded. With Group Loans, MFIs have achieved a meager 5 - 7% penetration. Ujjivan’s objective in the next five years is to increase their penetration to 50%. They can do so by widening the range of loan products to meet the specific needs of different sub-segments of the financially excluded population.

As of FY 2016, Ujjivan have 12% of Gross Loan Book towards IL Loan Book.So it will be high growth area due to lower base.
Unlike JLG , in IL there will be no guarantors hence the unsecured IL are bit risky. To mitigate the same , Ujjivan have implemented credit policy framework and risk management. Individual Loan proposals undergo field based credit underwriting and verification before being presented to the sanctioning committees. Further, as a measure of preventive vigilance, the Fraud Prevention Unit was created through the joint effort of the Credit and Vigilance Departments .As they continue to scale up Individual Lending business, Ujjivan adopted a customized Credit Application Score to further enhance our loan decisioning process. They also took another significant step towards prudent risk management by introducing a Branch Risk Scorecard. The scorecard jointly developed by Credit, Audit and Vigilance aims to monitor, manage and mitigate internal and external risks pro actively.(Input taken from Ujjivan AR FY15,FY16)

Now there are mainly 3 growth sector where individual Loan will be provided and there is ample scope of growth due to low penetration

MSE (Secured + unsecured)
The MSME sector is a major contributor to the GDP and the Government of India has launched a number of programs to accelerate the growth of the sector. Government of India has set up a dedicated refinancing agency MUDRA (Micro Units Development and Refinance Agency Limited.) to facilitate flow of funds to this segment of customers.

Housing Loan (Mostly Mortgaged)
The government’s focus on affordable housing and increased penetration by Housing Finance Companies (HFCs) in Tier II and Tier III towns are likely to fuel the next leg of growth for MFIs. Small ticket loans will be the new growth driver and HFCs with rural focus will benefit the most.Unsecured loan provided for Home improvements.

Other (Agri, Animal Husbandry , Higher Education Loans, Medical Emergency)
This include Lending to farmers is particularly most challenging /risky (disease outbreak , drought etc)and mostly they are unsecured. They are prone to reduce the quality of their loan portfolio. This area constitute lower percentage in IL portfolio of Ujjivan.

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95

Looks liek the benefit of lower deposit cost for SFB’s may be passed onto customers (see post flagging this risk Indian Microfinance Sector and the companies in the sector)

Bandhan Bank reduced lending rate for micro loans by 60 bps to 19.9% from today.

The bank said it s committed to pass on the benefit of lower cost of resources to its customers at the bottom of the pyramid.

With the latest round of lending rate reduction, Bandhan Bank has pared is micro loan rate by 250 bps percentage in three stages in less than 11 months since it started operations as a universal bank.

Read more at:
http://economictimes.indiatimes.com/articleshow/53263734.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

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Raghuram Rajan’s speech on inclusion

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http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/310B433D_1A8A_4647_AF42_A1AF503849BB_171347.pdf

blockbuster results aside, sks’s interesting ppt from mfi perspective

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Make sure that Tail Wind not become Headwind (Tornado) for your MFIS return!!
Looking at tailwind to the Micro Finance sector/companies (MFIS), most of analyst, brokerage houses, forum, bloggers are fuelling hope of non-stopping growth story. Small investors in fear of ‘LEFT OUT to RIDE the BULL’ keeping aside all their ‘value investing matrix/checklist’ and just jumping to invest in it!
However, I have contrarian view on it –
(1) You listen any Micro Finance Company’s management, everybody giving unreasonable growth guidance of 50-60 or even 70% growth story. Even less known and unlisted MFIS also hitting their drum at pick sound!
(2) Universal law of corporate governance states that when management gives unreasonable guidance on growth story in a crowded place, management has compulsion to use ‘INNOVATIVE/CREATIVE’ techniques by disregarding repayment capability, NPA, creative books, distributing loan through agents / muscle man.

(3) Let’s look at repayment capacity of borrowers:
(a) Borrowers are using loan for spending/consumption or lavish life on the borrowed money instead of generating source of income!
(b) Why people go to MFIS and pay high interest rate instead of going PSU bank/Private bank which land at lower rate?...because (in most of case!) they don’t have valid proof of income, robust source of income, their source of income is not stable, etc……that means MFIS dealing with people whose source of income is not guaranteed!
© In most of rural area (which is focus of MFIS) are relying on agriculture income / business depends, mostly, on agriculture income. As I am from rural area, I understand better than the stock analyst sitting in AC office in Mumbai, how these people are struggling to feed their family due to poor rain, lower price of their products, higher price of pesticides & fertilisers, etc. Please be careful, good rain does not guarantee that they will earn more but it depends many uncontrollable variables like – crop failure due to insects, crop failure due to non-seasonal rain (rain when crop is near to harvest – what happen recently in Punjab!)
(d) MFIS loan growth in rural area is higher is one of the indication that these people are not able to manage their life with the income what they are getting from their farm/business and forced to take loan to feed their family. Otherwise, rural people discourage to take loan (old ethic rule – karj lena pap hay!)
(e) Due to stress in earning and rising of inflation and day to day living cost, people forced to take drug/liquor (udta Panjab, Bihar, UP, etc). Sometime their such spending is higher than their income!
(4) What is expected future:
(a) As borrowers are taking loan for consumption instead of income generation there will be rise in repayment problem.
(b) MFIS company will use all means to minimise NPA on their books by re-financing it, deploying muscle man as collection agent, etc.
© Borrower is in trap – not having sufficient income to repay it and not having money to feed their family, which force him/her to do unethical practices or finally at the end suicide
(d) India is a democratic country and all Politian are hungry of the drama, which directly linked to poor people (refer recent case happen in Dalit in Gujarat, Before election in Bihar, past case study of AP). If there is even one case of suicide due to unethical practice of any MFIS (listed or not listed), there will be big drama….all politians from Delhi – Sonia, Kerjarival, BJP, etc and media will make sure that poor are protected and will blame high interest rate charged by MFIS and forced them to write-off.
(e) Such situation will be headwind (tornado!) for MFIS

(5) Conclusion: Investor who invested before one or two year when PE was very reasonable, they can enjoy ride of multibaggar! However, people who are in fear of ‘Left Out of the bull’ should think twice and evaluate their Risk – Reward capability.
Instead of investing MFIS, I wold like to invest in other companies (FMCG, Auto, etc), which will get benefitted by consumption of rural people (which is fed by loan of MFIS!)

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In addition to what Subhash said, one can look at the RoEs for comfort. They are in the range 10-25% for most MFIs. Which is decent/good.

If the RoE were 40-50%+ , one could have said that probably these are kind-of obscene and unsustainable.

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Guys, any idea how to calculate the fair values of MFIs - SKS, Satin and Arman?

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You are correct. You show not only sarcasm but also extreme rudeness. Time will tell who is right and who is wrong. RBI has been regulating NBFCs for ever, and yet every other NBFC ran away with the money of depositors who could not access banks.
It is very difficult to isolate the effect of luck in investing. Even if one makes money investing in a company, it does not prove that the company was not taking undue risk. So, let’s maintain basic courtesy even if we think that we are knowledgeable and the other person is wrong.

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@subashnayak_19…I don’t have in-depth knowledge like you, hence, please excuse me.
My assessment is based reality assessment. Though I did not read many AR, but i check picture on ground. I put up this note after doing small sample survey : around 20 borrowers and around 4 landers. Considering small sample size, my analysis might be wrong!

But always worry, if something growing very fast in spite of its base of growth is poor and rural people though there is no much income growth of these people !!

Good article - http://capitalmind.in/2016/07/credit-and-deposit-growth-at-multi-decade-lows-in-india-the-economy-in-charts/

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Can we do a simple thing to make this thread more informative and constructive for the future readers ?

Instead of raising new queries/opinions , We can read this thread entirely from the beginning and find out whether our queries are already answered by somebody or there is counter opinion /logic provided by someone against our opinion .
I believe if you go through this richly informative thread , the questions you raised in earlier post , somebody surely have clarified and expressed their counter logic why they are not thinking so. If you have different opinion on those counter logic you can also put your logic against those . In this way we can learn mutually from each other and refrain ourselves from posting duplicate queries/opinions.

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simple take on this is not all mfi will be good for a long period but surely buisness has potemtial and one wo or more will do exceedingly well now which one ,one has to find out and believe in that …