My notes from the Q2 FY18 concall. Please note that i have not summarized financials, which are there for everyone to see. Some excellent questions put forward by participants, which gave insights on the gold loan business model, longevity of this model, succession planning, Aadhar penetration benefits for MFI industry, risks to this business and what mgmt is doing to tackle these, and some misconceptions about gold lending business.
Q- In standalone P&L we have seen a dip in profits (gold loan business), so what exactly led to this given the flat kind of AUM but still profits going down ~10%. So is there any expenditure, which has come up which is one off?
A- There was an other income in Q1 of 19.7 Crores so that is not there in Q2. So that is the only reason.
Q- Is gold lending business undergoing a structural change? Because when we look at the growth of the gold loan business vis-à-vis other NBFC businesses after demonetization can we say that structurally competition is emerging for the gold loan business from other NBFC doing consumer durables financing or small ticket SME financing or SFBs because gold loans do tend to be expensive as compared to the sources of finance. Is this a threat to the gold loan growth business of ours?
A- No. Our customers are from the bottom of the pyramid from informal unorganized segment so these were the customers who were most affected due to demonetization, which is the reason for stagnation. So, the demand was lower the economy was not doing well. It led to a situation of higher auction. We do not see much competition compared to the previous quarters. It is more or less similar and as I said what we expect is that three years our expectation is to grow the gold loan portfolio at 15% CAGR starting Q3 onwards.
Q- Security costs ~200 cr annually. Will it come down?
A- Security was beefed up due to robberies. They are adopting new storing mechanisms to bring these costs down to 50 cr annually in next 2 qtrs. Discussed some cellular storage model from Godrej (security solution).
Q- For MFI business, what was the porftloio at risk and what are the current numbers.
A- During demonetization, 420 cr of the portfolio was at risk, which is now down to 125 cr. We have written off 109 cr till Oct 30. Balance provisioning has been 58 cr. Hopeful to recover another 100 cr of this number. So, max. risk now is ~20 cr (Further provisioning that might be required). Major write-offs are in Karnataka.
Q- Housing Finance business NPA and growth are not as expected. Reasons?
A- CEO left, and the new team is in place now. Focus on reducing NPA. Hopeful tor educe Gross NPA to 2% by end of this year. Aiming 1000 cr loan book in 3 years. Very good prospects.
Q- Auctions in this qtr?
A - 200 cr. We expect this to come down as rural economic situation improves.
Q- What is the gold lending mix between business loan and consumer loan?
A- One-third is agri sector, another one-third is working capital for this micro businesses, and further one third for consumption.
Q- With gold lending, you mentioned demonetization as the reason for AUM stagnation. On further delving, my sense is that when the rural economy weakens, they will need additional credit; so they have to come to Manappuram, pledge their gold, and then use that credit further for agri sector or for their small business or for their consumption. So, this is contrary to what has happened?
A- This the wrong impression about gold loan. The gold loan is no longer distress loan. People use it as working capital in the rural economy. The requirement of working capital comes whenever the economy is fairing okay; as the economic activities go down, the demand for borrowing naturally comes down.
Q- Is the opportunity size of the gold loan reducing since the advent of Jan Dhan Bank account. How many people would be interested in taking loan at the high rate of 23%-24%?
Q- See the Jan Dhan account and other things they did not reduce the scope for gold loan. The gold loan scope is there and you will see in the coming quarters the gold loan is back to what it had been.
Q- Succession planning?
A- The second generation is already in this business. I am assuming on bottom role as it will take sometime for them to come back to be in the leadership of businesses. Daughter is a medical professional. She is in the business now. Two sons they are business graduates. They are also in the business.
Q- With the advent of Aadhar, KYC, and the high marks credit bureau what about the defaulting persons? Were any primitive actions taken for those who have not defaulted and returning, and any measures that are left for us to be taken, and are there any credit records?
A- In MFI industry (as such, today, post demonetization) we have close to 50 lakh defaulters. As an industry as a whole, we are very clear that even if someone defaults one company, no other company is going to lend them. So, we want to bring in more discipline. Out of ~6 Cr borrowers, 50 lakh people (12%) are now in this list and I am sure that more discipline will come into the market, and we will find new borrowers. When we look at the bottom of the pyramid, we have now more than 20 cr people here and we have not even covered half the market. So I do not think demonetization has really affected the business; in a way it has brought more discipline in the market and that is the reason everybody is back to the normal collection efficiency.
Q- On Aadhar benefits?
A- Very helpful. This provides them information on how many MFIs have lended to a person. 99% of Asirvad customers have Aadhar now.
Disclaimer: Invested. Added more in last 3 months.