Sorry, earlier link was posted by mistake, hence removed.
New relevant links
Report by M.S. Sriram is a visiting faculty at Centre for Public Policy, Indian Institute of Management, Bangalore
http://rakesh-jhunjhunwala.in/f/g.php
Most of these questions have been answered or discussed. I donât get how capped interest spread of 10% is usury vs money lenders in tehs emarkets who charge crazy rates. Either some investors dont get it or i suspect have missed the mfi bus. In any case we will see few years down the line. Bajaj finanxe was seen with similar suspicion in initial growth period - how can they lend so fast and grow so fast?
And the Prof sriram article on suicide is a bit dated now.
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I am playing devilâs advocate, investors donât take it offensively. 10-12 years back when I needed a home loan, i zeroed on the one which has lowest rate of interest( ~7.5% from HDFC). I assume there is no person who would want to pay a higher rate of interest. It cannot be that the needy poor people who take loan donât know that they are being fleeced(with rates ~20%), or may be they will come to know eventually if they donât know. Jan Dhan bank accounts and DBT will further lead to rapid increase in awareness on this aspect⌠So, I am unsure of the sustainability of these high rates and ~10% NIMs. As a side-effect, these institutions also sort of create negative loyalty(because of âBadâ ProfitsâŚ) each passing day.
If you take a loan of 20k for 2 years, an MFI will have a monthly installment of ~1000/-.
As you can see, the 1000/- is very small (comfortable for the borrower) and has very small scope of Reduction of abt 30-40 rupees even if NIMs were very low.
For an MFI, employee expense would be high. Meeting the borrowers in short period of time to collect installment. Having larger number of employees since average loan size if very small.
So NIM have to be high for MFIs for maintaining a decent RoE.
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Please understand that NIMs are 10% because Opex To GLP ratio is close to 7%. If Opex to GLP ratio falls further, it can easily be passed on to borrowers without reducing the ROA. It is the ROA (along with leverage utilized) that should typically tell us who is fleecing. But for many people a Gruh making a ROA of 2.36%( even after using huge leverage of 12x) is the most ethical and sound managements in India, while a Satin making 2.2% of ROA (with only 8x leverage) is fleecing the poor. If someone is fleecing its customers, it is Gruh and not Satin. And by that standard, a Kotak Mahindra Bank and HDFC Bank will fall into the same category of fleecers.
If you are worried about why Opex to GLP is so high for MFIs, then you need to closely look at your example of housing loan and contrast it with a 20K loan for buying a buffalo by a poor. How many times the HDFC person visited your home to disburse that home loan? And did he ever visit your home to collect the emis? To the contrary, how many times the MFI person needs to visit the house of that poor in the far flung area to disburse that tiny loan and also to collect the emis. Add the difficulties caused by not having any record of assets that the poor person owns. Unlike you, he cannot show his salary slip to ensure that he is creditworthy. So, probably a MFI person needs to visit 10 other homes in the neighborhood to understand the creditworthiness of the poor person. I am sure your HDFC loan guy would not have talked to your neighbors to find your creditworthiness. And also consider, how many such 20K loans will be needed to reach the size of your home loan. All this makes the Opex To GLP ratio closer to 7% vs. may be a less than 1% for your home loan provider. And this Opex To GLP straight away adds close to 6-7% to the interest rates and NIMs. Remove this and MFIs can also provide loans at 12 -13% and will have NIMs closer to 3-4% which is usual for other FIs.
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For a small time vendors, to generate 20%+ ROCE is peanuts. For instance, think of a typical Vegetable/Fruit Vendor and kind of ROCE he would generate on a daily basis. As far as efficiency is concerned they ofcourse beat even the most efficient companies if one thinks holistically. SMEs, which are hitherto neglected by Govts, Politicians due to vested interests, are backbone of India and enabling them will have a huge positive impact on overall economy and India things. Let the west preach and make us think otherwise but a rupee given to poor and needy will generate max. returns any day on overall scheme of things.
For more on the same, I would highly recommend, Prof. R. Vaidyanathanâs lectures, esp. this oneâŚ
Disc: Not invested in MFIs/NBFCs
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As a customer, I donât care about opex to glp ratio or such things. I am interested in getting lowest rates. If I have a bank account now via jandhan (which was not there previously) and where say ~1000-2000 Rs will come from DBT from government every month, doesnât that built credit worthiness? meaning, why jandhan bank will not start lending to such individuals who now with assured money flowing into this account every month. And it will be at a much lower rate compared to MFIs. When these things start happening, it will be natural for you to think that these MFIs had been fleecing them all the time(altouggh there might be technical factors like higher opex as you mentioned). But this may be some years away.
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On of the main agenda of the Jan Dhan, Adhar combo is to provide for financial inclusion and credit worthiness of individuals in the unbanked sector. There is likelihood of a very large disruption in this space.
Sir, how do u perceive this will affect SFBs. My take is after becoming SFB interest rates will get rationalized over next 3-5 years and some real sustainable businesses will occur out of them which will gain huge scale over next decade.
@jainaj The simple answer is I donât know 
Too many variables are playing out now. Adding to that is the high valuations of most companies in the sector. But as a theme, in a credit-starved country like India, well managed and prudent financial businesses will always have a high probability of success.
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AS per satin management opp size remains huge and keeps on increasing. there is space for even 20 more MFIs/ fin instt to come and mkt will still keep growing.
FI inclusion initiatives by GOI and JAM as per them will act as tail winds.Their op costs cud come down if lady members too open teh bank ac as disbursing loans to them will become cheap.
Lot of positive changes like RBI supervision,capping of interest rates,limiting the MFIs to 2 & amount per borrower,advent of credit bureaus specializing in MFIs,lending to joint liability groups, retail focus,
These MFIs shud keep on growing as long as usurious sahukars are there in rural India .
Discl- invested in MFIs since last 1 years and in recent IPOs too
MFIs are another example of organised sector taking market share away from unorganised sector (which has been the loan sharks or usurious sahukars as @Vivek_6954 puts it). I also believe technology led disruption is very likely to play out in this space, however I see this as a positive to MFIs as most technology innovations over a period of time gets commoditised at a much faster pace than what it used to take a few years back. Anyone who is smart enough to sense this will leverage it for their business. SKS and Ujjivan have already adopted cloud based IT systems and hand held devices that their field agents carry to rural areas and which works in both online and offline modes.
Disco: Invested in Ujjivan and Satin
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For those concerned by usurious rates of 20% pls see BAjaj Finance business model. Remember they are delivering 16%+ for urban middle class consumers. Shouldnât it cost more for rural unvanked consumers?
Another point is Bajaj lends for consumption. mFI lend for cash generative busienss es mostly.
I was skeptical on Bajaj too but their performance has proven me wrong. I am sure mfi will prove sceptics wrong tooâŚ
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A different take on MFI
Disc : Not invested in any of the MFI company.
Amit
Thatâs what he has mentioned in his book too. As per him , every new sector has his bull run time, once it had that, it will never give those quick ten times return in 3-4 years. Thatâs the reason may be he keeps looking for new themes. Looks due to higher valuation , he stayed out of diagnostic tbought liked business model n picked MFIs eith small bank license
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I doubt if it matters much if some investor feels its usury. Rbi feels it is imp to give some incentive to run this challenging business profitably else no one will bother abt lending to these pepl many of whom might be genuinly credit worthy and may have good repayment ability but are starved of credit options. And GOI backs up to support mfi sector as one of priorities. May b that investors personal choice or he miss the bus. After religare gave negative view on mfi sector n took up 3% stake in satin i doubt some investors who see it as usury now may jump and take up stake if prices correct by decent amount now. Just my thoughts.
DiscâŚhold satin.
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Can I ask for some examples of success in this space from outside of India as this is a relatively new sector in India? Lending is not a simple business and could have very fat tails of negative returns in long term. Are there enough examples worldwide of successful MFIs? Thanks Butun
A wonderful talk by Prof Vaidyanathan of IIM Bangalore on the entrepreneur prevalent in unorganized sector.NPA level is v low in this sector.A v good retort and fact check on doubters of entrepreneurs class presence in Indias poor sections
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Akash,
Thanks for this wonderful video of Prof Vaidyanathan. It is by reading his book âIndian Unincâ I could understand why MFIs are here for long term (along with many other things) and hence invested big time in MFI at a significantly lower valuation that cmp.
I would strongly recommend to read his book, which will alter your entire thinking on Indian economy and their actual driver, and the issues faced by so called âUn-organized sectorâ
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Hi Vishal,
We asked exact same question to CFO of Satin post there AGM. It seems giving loans sub 50K level doesnât makes a profitable venture for Banks, given their own organizational structure. And we know the avg loan size of MFIs are 17K odd per individual. There are other issues like forming JLG, building up expertise of credit assessment amongst poor section, doing door step service, making credit available at shortest possible time where banks needs to address even with having a Jandhan account of an individual.
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