While the high growth is good, but should we worry about MFI in East India getting overheated?
The poorest region of the country has 40% share and the average ticket size is about 40k. Bandhan’s geographical distribution still appears same, highly concentrated in East India, and it has also failed to diversify significantly to non-micro SME loans.
Both the concerns get addressed by upcoming merger with Gruh.
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I agree. Merger with Gruh is definitely a step in the right direction. Still the risk of possible overheating in its core geography must be kept in mind, atleast until this unsustainable MFI distribution persists.
Bandhan bank’s NIM is 10.4% how is it possible? Are they disbursing at more than 15-16%? Isn’t it an risk itself?
Yes they are doing at high rate and it is risky. So they have acquired Gruh Finance to diversify the risk. Please read whole thread to understand the business.
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First quarter 2020 exam results out for private banks
Ten papers
Toppers marked in red (attachment)
Bandhan: topper in 8 papers
HDFC Bank : topper in 1 paper
IndusInd: topper in 1 paper
Good things in life are expensive
(No recommendation)
Bank comparison Q1 2020.pdf (134.1 KB)
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Yes, they disburse loans to the weakest section of society, that is what microfinance is about. The rates are high because no one will lend to them, without any collateral, at lower rates. Bandhan has the lowest rates in this sector, this creates a positive incentive on borrower to pay back in time, so that they have access to the lowest rates in future too.
Is it more risky, riskier than giving loans to companies like DHFL or IL&FS, which were rated AAA, giving them the lowest interest rates? Those loans were considered secured with sufficiently valuable assets, but what use is such security in a system where it is easy to manipulate books without any objection from auditors.
Instead the non-collateral backed micro-financing loans are secured by creating positive incentives for the borrower to pay back. For example, they maintain strict upper limit on how much can be lent to someone with given financial background. They also give a very small amount (around 1000 rupees) loan initially, and increase the credit limit gradually, with each loan that the borrower pays back. The borrower therefore understands that his future access to finance is dependent on him/her staying honest. If they lose the access to these microfinance lenders, they will have to depend on local money lenders who charge as much as 45% or higher. The Bandhan management seems to understand this principle well and they have done good job in creating positive incentives for the borrower to pay back.
That said, there is always a possibility of MFI getting overheated, with borrowers getting spoiled by choice of MFI lenders, destroying those positive incentives to pay back and borrowing so much that dishonesty becomes tempting, as happened once in Andhra MFI crisis.
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Below are the points I gathered from different sources almost one year back. May help to understand new members about Bandhan Bank operation, so sharing.
The opportunity size in the microfinance space is large enough to absorb competition.
BBL has reduced microfinance interest rates by about 400 bps since it became a bank.(Recently it reduced another 700 bps with effect from June 18, 2019, refer my earlier post in this thread)
BBL is the lowest interest rate microfinance lender in the world. There is a ~200bps
differential with the player with the second lowest interest rate. (This is August 2018 data, need to check now)
At the margin, microfinance customers are becoming conscious of interest rates
and hence, being the lowest interest rate lender is positive for business.
There have been instances where customers have closed loans with other microfinance lenders and shifted to BBL. This, of course, does not just have to do with interest rates but, actually, has more to do with service levels offered by BBL. (This is reflecting in Senior Citizen FD now, witnessed it last saturday)
About 72%-73% of BBL’s customers are exclusive to the bank.
Margin picture
While BBL will continue to diversify away from microfinance, it would be able to maintain spreads on each asset product.
Approach to microfinance lending
BBL does not do SHG (Self Help Group) or even JLG (Joint Liability Group) lending.
BBL makes individual microfinance loans in groups of size 25-30. To obtain a loan, one
has to be part of such a group first.
The collection also happens in groups. However, this is, per se, not JLG lending since the group guarantee is absent.
BBL has observed that the existence of group guarantee does not lead to lower
probability of default.
BBL has stipulated that, in order for their customers to obtain loan renewal, they have to mandatorily attend 90% of group meetings. According to BBL, this ensures superior
repayment behaviour.
The DBOs (Doorstep Banking Officers) stay close to the ground level and knows a great
deal about the customers.
Cash flow analysis is carried out for microfinance customers.
Diversification strategy
The key areas for asset diversification in the medium term are MSME, SEL (small
enterprise lending), housing loans, loans against property and gold loans.
For MSME lending, the average ticket size, as of now,is about Rs2.5mn-Rs3mn.The
broad range is about Rs1mn-Rs15mn
Share of non-microfinance book can grow to about 25% of total loan book in about two to
three years. (Again based on August 2018 data)
BBL also makes largish ticket loans to NBFC-MFIs. (But after IL&FS incident Mr. Ghosh told that they will avoid lending large ticket NBFCs, refer my earlier post in this thread)
The yield on non-microfinance businesses fall in the broad 12%-16% range.
Distribution,branding and liabilities strategy
Distribution
BBL made it a point to launch 500 branches of Day 1 of banking operations.
There were seven employees per branch to begin with.
The staff which were managing micro banking assets earlier were upgraded to
general purpose banking staff through extensive training.
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Agree with all positive points about Bandhan, but CMP has baked in 22% book value growth over a period of 10 years. Not sure if there is money to be made at this price and holding long term.
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Absolute valuation based argument don’t work in a world distorted by extreme money supply. It is difficult to guess how much the interest rates can go down, for how long, and how much devaluation of rupee they will cause to make the present stock investment more profitable than holding bonds or fixed deposit.
Rather than guessing the timing and extent of these macro distortions, I prefer to always maintain a certain amount of equity exposure. The question then is not whether the current stock appears overvalued on absolute basis, but whether I can find a better investment idea, at lower valuations, while retaining the quality of business that Bandhan offers. Again, quality is subjective, for example, I have given reasons for my preference of unsecured microfinance loans over secured wholesale loans. Many others may have opposite preference.
Nevertheless, if you do have investment ideas which you believe have lower valuation without sacrificing much on quality, do share on this forum.
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Would you mind to explain your statement with example. Hope, when you come up with your opinion it is based on some real life incident. It will be helpful for forum members to understand.
He clearly came with an example of Microfinance companies suffering during demonetization time which you can easily see from all MFC share prices during this time. It was an existential crisis for most of these companies and in the process they lost a few years of growth and still hovering around the same price then. Before this, there was AP crisis. In fact, Bharat financial, previously SKS Microfinance never got back to its listing price of 2010 besides years of good performance. May be this time it could be different for Bandhan as it is a Bank than a MFC. At the end of the day the business model is unsecured loan given to masses which comes with its own risks.
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what would be more interesting is to present with data how Bandhan performed vs rest during demonetisation. Nothing comes without risk but hard times separate men from boys. Though I have not tracked Bandhan very closely, I think there were 3 categories of companies in MFI driven business (MFI+SFB+Bank together) post demonetisation. Those who were almost unaffected, those who lost some, showed character and came back strongly n those who just kept on suffering. It’s important to compare n see where Bandhan falls. As far as I remember headlines, their GNPA n NNPA never went beyond 2 and 1 percent.
Disc: Not invested here but it was a positive surprise how Bandhan remained unaffected compared to various other players. However, Banking is too deep to derive conclusions on basis of few years and hence my interpretation is only out of few years of relatively compare numbers and many of highlighted risks still remains as is. It’s just the execution which amazes sometimes if it’s real.
Slide 18 : Though these are just isolated metric without relative comparison , gives some perspective, specially, if one is aware what were numbers for majority of other players in MFI market for few quarters post demonetisation.
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Interesting take by Bandhan on Mudra loans at the investor call …https://twitter.com/ShivamShankarS/status/1153234878990671872
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I had attended Bandhan Bank call held last Friday. Some of the points that I had noted during the concall:
• Advance growth is excellent during the quarter. Yoy good growth. QoQ – 1.43%. Q1 growth on quarterly basis is relatively lower. 86% portfolio is micro loans. Deposit growth of 42.39%. CASA a bit down during the quarter. 6% of total deposit contributed by customers who took loan.
• GNPA – 1.11% excluding IL&FS exposure.
• This quarter 7,25,000 new accounts opened for lending. We are trying to diversify the business. Geographically also trying to diversify. 37% new borrowers added – 55% of that is non east. Trying to expand in other states also. Our branch and DSCs opened for this year – 187 branches and 340 DSCs.
• Gruh Update – Kolkata NCLT – 30th July – Shareholder meeting at Bandhan. Once approval done, merger will be done. Lot of preparation has been done. Once NCLT approval comes, we will take it forward.
• Microfinance side – overleverageing in our focus markets in East – West Bengal, Bihar & Assam? We haven’t found anything exceptional. 2 weeks Mr. Ghosh visited Assam – Met customers, staff and non staff and non customers – haven’t seen any issue there. Bihar also he is planning to visit next week to Patna to monitor. Full team visits regularly this market and something is amiss we will take actions. As of now, no issue is there. In May, Odisha cyclone affected 9 DSCs in May. We have given some relief to borrowers. On time due is 99% for company while in Orissa it increased from 88% in May to 95% in June. Flood in Bihar and Assam is there – still no issue has come on disbursement point of view or collection point of view. Disbursement is slow in Q1 and picks up from Q2 onwards.
• Advances to other NBFCs/MFIs – this has doubled in last 3 quarters? We know MFI business and lend to them. Principally, these institutions borrow 86% from bank and we have a cap of 12 – 13% of their total borrowing. As of now, we are within the limit. Interest charged from MFIs is 12 – 13%.
• SME advances – different types of SME – 1 – 10 lakh, 10 lakh – 1 crore, 1 crore to 5 crore reduced? We feel that we need to have skilled staff for that. Trying to build the team. Recruited good people. Underwriting processes improved. Conscious call to learn the business and then grow.
• Average ticket size in different cycles? Cycle 1, cycle 2? Divided customers in few cycles. First 3 cycle – one type of category, after 4th cycle – things are streamlined in systematic way. Conservative in first 3 cycle – Retention rate is high. 55% of customers is more than 3 cycle. Average 7 – 8 year customers is with us where the average cycle is 49,000 per customers. 45% are within 3 cycle – average ticket size is 29,000. Asset quality between two categories? First 3 cycle – first cycle is a bit of risk. Drop out rate is high. Not continue to next cycle. Second cycle is better than first and so on.
• Deposits – micro banking – Saving account little bit decline in qoq basis. Guidance for SA? Deposit principle – deposit is from bank branches and not DSC branch. No target for DSC for deposit. Small amount kept in SA account. Liabilities will be targeted from bank branches. CASA is coming from there only. Future plan – deposit target on account of high growth.
• PAR 30 days? Microbanking – 0.90%. Collection efficiency – 99%. During the quarter gross slippages? 137 crore. Net slippages? 30 crore.
• Other interest income is on portfolio which has been written off.
• Total write offs during the quarter – 81 crore. March quarter write offs – 92 crore.
• Concerns on over leverage and flooding – Credit cost break up includes provision on standard assets. 1 – 1.5% will be the credit costs.
• 55% unique customers we have as of now.
• Incremental disbursement ticket size – 64,266 average disbursement size. Outstanding 39,298 average ticket size on entire book. Ticket size in more than 3 cycle customer for us? 49,350 per average ticket size. Below 3 cycle average size is 29,000 – 45% customer less than 3 cycle and 55% is more than 3 cycle.
• Tier I capital consumption during the quarter – Not included PAT for Q1 to calculate capital adequacy ratio. When will we start adding Net Profit? After audited accounts at Q4 end.
• DSC – no. of employees in DSC – total staff 22,228 and no. of loan officers in DSC – 16,000.
• Micro loan portfolio is metro urban and rural – average ticket size? Little different in urban and rural. Different in state to state. Deviation between two is +/-10%? Cycle wise its different. Customer starting in 2003 – started with 3000. If few years back, the customer started with 20,000 – so cycle wise its different and also profession wise its different.
• Term deposit – 29,900 crore – TD retail and TD others? TD retails – 76.5% of the deposit is CASA plus retail deposits. 10,400 crore – bulk deposit (non retail).
• 9.8 million Customers are unique.
• AUM side – slightly higher in East and North – East compared to our branches in those regions.
• Mudra loans – 45% of our total customer qualify for that? We have not classified any loan as Mudra loans. Govt asking for that data which was provided by us. Customers qualifying for the Mudra scheme.
• Rough loan growth in West Bengal? Slowing down or stable? 46% is West Bengal AUM. 5 quarters same trend – 46% of AUM.
• CASA deposit – significant decline on sequential basis – reasons for it? What we have seen this quarter as interest rate bottom out, customers want to lock in higher TD rate. We ourselves want longer term deposit. Seen a shift from CASA to TD. Reduction in Government account during elections. 35 – 40% is our CASA target range.
• Incremental advances growth – non east and north eastern state? Same way growth is happening in east and north east. Not growing branches in east and north east. Not much change in no of borrowers in east and north east. As customers move up from 3 cycles, growth is coming from the additional loan disbursed to them. More branches being opened in South and North. Not a single branch to be opened in West Bengal. 80% of our customers are newly added is from non eastern market.
• Some of the peers in the industry have been concerned about eastern India. Are you concerned? Still now we haven’t faced any issue. Assam, Tripura, West Bengal, Bihar and Orissa constitute 30 crore population – borrower are just 1.6 crore which is just 5.56%. In south markets, the same proportion is 8% for micro finance. Still room for eastern regions. Eastern regions very low NPA for us – below 0.6% for all these states like Orissa, West Bengal, Bihar, Tripura and Assam. Not much issue. Closely touch with the ground.
• How big is the portfolio in Orissa and what is PAR – 30? Orissa is small presence for us. PAR 90 days is 0.44%. PAR 30 days is not with us but can share that. OTR has come down to 88% in May due to cyclone but improvement to 95% in on time repayment. Not much risky.
• Where is CA coming from? Largely secular CA – some government business where we saw outflow. Is it seasonal? Not really seasonal.
• Cost of SA deposit? 5.13% in the quarter vs 5.12% in Q4.
• Disclosure – SME portfolio – Unsecured loans with avg. ticket size of 1 – 10 lakhs rebranded as SME? Portfolio is shown as per the vertical. In terms of numbers, SEL is 1500 crore largely SME.
• Government data sources – West Bengal – Exposure is 20,700 crore. Half of MFI book. Used to be 43% earlier? Total 46% exposure to West Bengal which has been constant for past few quarters.
• RBL said eastern markets heating up while Bharat Financial also quoted the same thing? Any comments on that? We cannot comment on other companies. We see that eastern region – earlier very few companies working in the area but new people came in last few years. Key challenge while entering new areas is the employee they have. Because of our 55% of customers are unique which have more than 3 cycle. These people are not moving to other MFIs. Your customer is very different while staff is also different. We have training centers across the regions. We develop our staff to understand customers. We have already developed base in eastern regions. Also, when I enter south, I have to be very careful. It takes time to build expertise. Physical touch is very important. Talking to such people, building bond with them is very important. That’s our strength. Supervision and monitoring is very tough. Controlling it in a big way and not possible by IT. We have our own monitoring agency while others have outsourced monitoring agency. We have ground level information and connected. We have taken initiative to build the team. Even at higher temperature and rainfall, employee will go for collection. Building discipline in customers is very important.
• Gruh’s housing book – how do you plan to grow? First 2 years slow growth? We know MFI but not knowing housing. Gruh management will decide everything. They will independently decide that. We will just provide liability support to them. We have customer and infrastructure base which can help them. They will decide whom to recruit and all. What kind of incentive structure signed to retain Gruh management? Totally confidential and we cannot disclose that.
• Non eastern territories are we been able to replicate employee cost of eastern side? Till now wage rate is different for each state. We are maintaining state’s wage rate and accordingly based on the states, we are providing employee cost.
• Synergies available to Bandhan business because of Gruh? Opportunities for us as well to capture their customers. Gruh customer is different from us? Gruh loan is non productive loan as they already have a loan. Opportunity for us to give MSME credit to them.
• NIMs in north eastern territory? Interest rate is same across all our customers.
• Number of liability customers? 37 lakh. Who are customers who are keeping CA with us? These are mostly small traders. How many of our MFI customers will be individual or JLG customers? More than 50,000 plus will be individual customers. All the JLG customers are assessed individually and included in the group.
• Over leveraging and over heating in NE region – Assam and Orissa? Till now not withdrawn from any location in these states. Don’t feel there is over leveraging or multiple lending happening. Less penetration in NE and East compared to South. West Bengal – per district 40 lakh population while that for TN is 20 lakh while average loan is just 50% of TN. No district has similar set of population. Relationship build up with customer is very important.
• AUM growth and deposit growth for this year? We try to grow and whole growth is dependent on our employees. Growth will not be a challenge in India.
• Seasonality associated with large disbursement in Q4 every year will not reduce with geographical diversification.
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Two contradictory opinions:
LTFHL says borrower stress in eastern market with 53% rejection rate. Will not sacrifice quality for growth
Bandhan: Denies and continue at break/neck speed…
Whether both are right? Or one them is setting up for future shock.
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Bernstein: Bandhan Bank: Imagine being punished for building a moat in world’s largest microfinance market…
Here is a short story. No bank went to West Bengal and North-East. East’s share of deposits and credit is paltry despite being home to 300m Indians. In 2001, a certain Mr. Ghosh, aged 38, fresh from his microfinance experience in Bangladesh sets up a non-profit organization focused on the toughest lending terrains of India – East & North-East. All other microfinance players started in well-banked South India. Two decades later, Mr. Ghosh runs a pre-eminent microfinance bank with ~45% market share in East. Competitors now believe forbidden eastern market is the land of opportunity. But, when they go looking, they can’t fathom Bandhan’s franchise dominance and customer ownership. What is decades of hard operating experience & franchise strength, is framed as over-leverage & high lending ticket size. And the story goes…imagine being punished for building a moat in the heart of unbanked India.
Most microfinance players started in southern markets and moved east post the 2010 A.P crisis (out of necessity). In 2012, Bandhan’s closest competitor Bhafin had 186 branches in W. Bengal vs. 753 for Bandhan. 7 years later, BhaFin has 178 vs. 938 for Bandhan. Concerns on Bandhan’s lending ticket size fail to factor Bandhan’s vintage in east. (Exhibit 4)
Bandhan operates as a de-facto bureau proxy by bottom up evaluating new to credit borrowers and thus is the primary lender in the market. In last ~2 years, 31% of Bandhan’s loan growth was driven by 18% growth in new borrowers and 11% by ticket size. (Exhibit 5) This position of being a primary lender has driven consistent credit behaviour by the customer. Imagine having a moat in the most attractive microfinance market in India - (300 M population, larger than the size of Indonesia, where BRI has built a leading $20bn micro loan book), but being framed as a concentration risk. East & north east are the most under penetrated markets even after 2 decades of Bandhan’s efforts to improve financial inclusion.
Investment Implications
We rate Bandhan a high-conviction Outperform.
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Thanks for sharing, please share the url as well if its not paid.
The outcome of NCLT convened meeting of Equity Holders
79171457-9479-4806-9716-51c2e09057b6.pdf (738.4 KB)
Concall transcript
bandhan concall.pdf (832.9 KB)
Good to note that management don’t want to poke in Gruh functions apart from providing funding support.
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