Ujjivan Financial - Small Finance Bank

(ajax) #346

MFI loans have 2 distinct differentiators than say a washing machine loan - 1. MFI loan is unsecured, washing machine loan on the other hand is either secured through the asset or by blocking the credit card limit or both! and 2. Cost of operations are very different. Both these factors add 3-5% each and hence the cost of MFI loans is derived. It can come down gradually through operational efficiencies and competition, but the premium for risk will (or should) stay.

NIMs for Bandhan etc are reducing because they are now targeting larger loans, more urban loans, asset backed loans etc. As far as I understand, the price for real micro finance loan in a remote village is still same as it was few years ago.

(Naz) #347

Adding a little bit of historical perspective on this to better comprehend what lies ahead.

Pre-AP Crisis Era(Pre-2010):
Almost all MFIs used to earn a yield of ~30%+ and borrowers were happy too as the alternative was ~60%+ rate from moneylenders (sometimes 120% as well - 10% per month !! If you ask your cook/maid even today as to what rates she can get money from local people, you will be surprised). NIMs during those times were terrific (~ 12%-18%) and Opex ratio was also pretty high (Operating Expenses/Average AUM) due to higher employees cost (no POS devices) and higher back-end processing costs (no digitization of records, no MFI specific credit bureaus like equifax, highmarks etc.).
Now, some loans went bad in Andhra Pradesh which led to coercive collection practices by some Andhra based MFIs -> leading to political intervention -> leading to mass default -> leading to collapse of almost all the AP based MFIs.

Post 2011:
This resulted in government introducing NBFC-MFI regulations which capped the yield at 26%. NIMs shrank to ~ 12% for an average MFI (~14-15% cost of funds). Simultaneously many other measures like promotion of self regulating MFI authority (MFIN), promotion of MFI credit bureaus - equifax, highmarks etc. were introduced which resulted in standardization of procedures and systems. 2011-2014 witnessed huge focus on technology (POS devices by collection agents, digitization of records, auto credit verification by linkages with credit bureaus etc.). All of this eventually resulted in reduction of Opex Ratio consistently for MFIs during 2011-2014. Gold standard for a MFI during those times was (rough estimates):
Yield - 26%
cost of funds - 12-14%
spread/NIM - 14-15% (for simplicity assuming NIM and spread to be same right now)
Opex Rato - 6%
provisioning ratio - 0.5%
post tax ROA - 5%

Government felt that capping the yield at 26% doesn’t ensure MFIs will pass any benefits to end-borrower segment. So this time, it capped the spread to 10% for larger MFIs (max yield - cost of funds to be 10%). Fortunately, the whole interest rate regime started a downward shift post 2014 and average cost of funds started going down and reached at ~11-13% for good MFIs. This is the time when yields also came down to ~20-22% for larger MFIs (Ujjivan, SKS, Equitas, Janalakshmi etc) -not because of competitive pressure/free-market, not because of goodwill but simply because they had to comply with 10% spread regulation. This era also saw improvement in opex ratio mainly because of scale and previous efforts in technology investments.

Post 2016
In short, this is the small finance bank era where we are seeing crashing of cost of funds to sub 10% levels and major focus again on investments in technology and automation (Aadhar, auto credit verification/approval etc.)

Having said all this, I wanted to emphasize on two key takeaways:

  1. There has been a trend of decreasing yields being offset by decreasing opex ratio (due to scale, digitization, technological investments, standardization etc.)
  2. More importantly, MFIs never felt the competitive pressure from banks or peer MFIs to reduce interest rates in the last decade - it was always and mostly due to government regulations (and not because of any free market or competition).

Important question is why?

  1. their customer (local pan wala, garland vendor, small sellers etc.) base doesn’t care much if the monthly EMI is Rs. 250 (20% interest rate) or Rs. 270 (22% interest rate) when alternative option is 60% - so peer MFIs’ pressure is mainly with regards to size of the loan, tenure, convenience etc.
  2. their customer base (local pan wala, garland vendor, small sellers etc.) wants doorstep services because every hour spent at a branch is loss of business. And, for this, they are willing to pay a premium to MFIs. So banks were never a competitor and will not be, unless they decide to start doorstep collection services (which obviously will result in very high opex).

IMHO, Commercial Banks and MFIs are providing two different services - commercial banks are providing “credit” and MFIs are providing "convenience".
Probably a loose analogy will be FMCG Companies vs their distributors (Banks vs MFIs). Just the fact that, recent regulations have enabled these distributors (MFIs) to become FMCG companies (Banks) now !!
So the competitive pressure and laws of economics need to be looked from that perspective.

(Cshar) #348

Small finance banks are not allowed to lend to big corporates hence large NPA are impossible, recovery ratio will be stronger in small SME loans.

(Mayank Narula) #349

People often compare MFIs to sub-prime lending whereas in reality it is last mile lending.

Sub-prime borrowers have weak credit willingly, whereas MFI borrowers were never part of formal banking because of operational handicap of traditional banking with low touch points.

As a corporate banker who has worked with mid-market clients mostly (turnover between 100 to 1000 Crs), I can easily draw parallels between MFI lending and MSME lending. This is same as lending to Reliance and a 100 crs turnover foundry business. You need to make sure that business is actually running (and not just on book), cash is being routed and market feedback is good. In short, you have more touch points and monitoring for smaller clients. This is same as lending to a salary-drawing person and a pan wallah. But that doesn’t mean that you should not trust bankers for lending to small businesses.

(LTInvestor) #350

@ajax “either secured through the asset or by blocking the credit card limit…”

Personal loans are not secured. HDFC Bank will give you loans based on your salary, which you can use it to visit Thailand. If you do not repay, they cannot take back your experience. What they can do is i.) use recovery agents, ii.) block your salary account, iii) mark you as a wilful defaulter, but not take away other assets to recover. Blocking your card limit has nothing to do with securing the loan. It still remains unsecured. So the 8-9% difference is not due to secureness of loans.
Reason also cannot be higher OPEX because theoretically you arguing that MFI are getting rewarded for been inefficient. A bank can have higher interest rates because their OPEX is high. The causality is the other way - they can afford high OPEX because they charge so high.


Thanks for putting down so concisely everything. On your two key takeaways:

“Trend of decreasing yields…due to scale, digitization, technological investments”. Is this not negative for MFI? MFI have sustained because their customers are technological impaired. By digitalization are you not educating your customers to use apps/ATM/mobile which works as a positive externality for commercial banks. So a commercial bank, thanks to the MFI educating its customers can now poach much easier.

“…was always and mostly due to government regulations…” Government regulations rarely come on their own. If any sector earns supernormal profits, other will take notice and efforts will be made to enter the market or lobby for changes and lobbying is very much part of free market.

“…their customer base (local pan wala, garland vendor, small sellers etc.)”. I think you are looking at a very small subset of MFI customer base. I do not have data, but I would have thought rural woman are large part of the customer base. Difficult to believe that a woman in rural WB or Tripura where Bandhan is big is not going to the bank because it is inconvenient . Life is tough for them and they will not be inconvenienced if they have to walk another 15kms to a bank where they will get a 15% loan. They go to MFI because they are unbanked and exploited.


“People often compare MFIs to sub-prime lending whereas in reality it is last mile lending”

Think you are emphasizing on the convenience factor for MFI for their success but reality is lack of options and exploitation.

Do not know much about MSME lending, but analogy of MSME and MFI customers looks wrong.

Anyways, those are my thoughts. I still think that MFI can charge more because of any inefficient society and structure and that margins will come down substantially bringing down valuations. The arbitrage play is on how long inefficiencies will sustain and how much can you (investors included) milk. Nothing wrong; money does not have emotion.

High margins are not because of secureness of loan or convenience of service. If those were sufficient conditions then you would have had MFIs in Scandinavia.

(lohiyaakshay08) #351

Edelweiss Research Report

ujjivan-financial-services-ltd–q4fy18-result-updat.pdf (276.1 KB)

Nirmal Bang Research Report

Ujjivan Financial Services - 4QFY18 Result Update-11 May 2018.pdf (481.4 KB)

(James Sebastian) #352

Geojit research report


Comparing with old research reports from Geojit, especially with initiating note in March 2017, I noticed that FII holding came down from 52.2 in Q1 FY 17 to 40.4 in Q3 FY18 and now reversed the trend to become 42.3. MFI/Inst holding went to down in the recent quarter to 14.2 comparing to 18.9 in Q1 FY17.

(lohiyaakshay08) #353


  1. Concall Notes - https://twitter.com/karansharma_09/status/994984703043108865

  2. https://www.moneycontrol.com/news/business/earnings/equitas-ujjivan-a-worthy-long-term-pick-2569121.html?platform=hootsuite

(lohiyaakshay08) #354

Relevant Articles:

  1. Technology & SFBs - https://www.entrepreneur.com/article/313336

  2. High Interest Rates of SFBs - https://economictimes.indiatimes.com/wealth/invest/how-safe-are-small-banks-offering-higher-interest-rates-on-deposits-to-investors/articleshow/64134138.cms

(lohiyaakshay08) #355

Relevant reads-

Source: India Debt Capital Market Summit

(lohiyaakshay08) #356
  1. Announcement

  2. Delivery Volume Today on NSE - 9,34,327. Highest in Last 3 months.

(Rohit) #357

(lohiyaakshay08) #358

Read this too:


Book will hit market soon

(lohiyaakshay08) #359

"Obviously we will not be able to enjoy the net interest margins (NIMs) we enjoyed as an NBFC. Over a period of time it will shrink. Even the RBI wants us to bring NIMs down. The benefit will come in terms of reduction in funding costs. Last year, even though we did not increase our retail book that much after demonetisation and the transition to a bank, we raised wholesale deposits and reduced our cost of funds by 150 basis points by retiring a lot of high-cost debt. This year, we expect it to reduce by another 100 basis points. Our margins will come down to around 9% from 11.6% as of March. " -Samit Ghosh

(lohiyaakshay08) #360

ConCall Transcript-
caf8c04b-310a-486d-957a-13e9fed2ecac.pdf (330.2 KB)

(lohiyaakshay08) #363

CENTRUM.pdf (254.1 KB)

(lohiyaakshay08) #366

If you see price patterns of stock and decide whether a company is doing good or not, yes you will feel that Ujjivan is weak. I would rather look at the consistent improvement the company and infact the whole sector is showing. Look at the numbers, their changing strategy and management track record, I am sure you will have a completely different perspective.

More than that, we can see following factors too that are looking positive

  • Share of DII in share capital is in increasing trend,
  • Creador, a FII had bought a large chunk of shares from open market in November
  • Interest big Sell/Buy side fund houses are showing in by attending the Analyst Meet

Finally, its related to the Financial Inclusion mission of GoI which I personally feel will be a great game changer in the Banking Industry in times to come.

Disclosure: Invested

(lohiyaakshay08) #367

AGM will be on 27th June.

Also, Early Monsoon in southern India is a good trigger for Ujjivan.

(lohiyaakshay08) #368

Annual report

(lohiyaakshay08) #369