CreditAccess Grameen: Traditional MFI model, efficiently operating at scale

CreditAccess Grameen

The VP forum has multiple threads for MFIs and players operating in the MFI domain, however post the acquisition of the MFIs by banks or transitioning of the erstwhile MFIs into Small Finance Banks (SFBs)/Universal Banks, I wasn’t able to find a thread for the biggest NBFC-MFI operating in India i.e. CreditAccess Grameen. There are other listed NBFC-MFIs (Satin CreditCare and Spandana) however CreditAccess Grameen/Grameen Koota (referred to as GK or CAG hereon) operates a far superior business vis-à-vis the other MFIs.
In order to analyse the business, I have gone with the approach of understanding the business and its functioning and post that only arriving at the financial performance analysis, so that at least I am able to figure out what’s driving the financial performance before presenting the numbers.

Some glossary/key words used in the post:

  • CRE: Customer Relationship Executive - This is the person who performs the front-line operations of sourcing of customers, formation of group, doing the collections as part of the group meetings
  • GLP: Gross Loan Portfolio - This is the total loan outstanding that the MFI is handling. It can include loans on the MFI’s own balance sheet, loans securitised by the MFI to bankers or other NBFCs, as well as direct assingment/BC portfolio
  • DPD: Days Past Due - This means how many days is the loan EMI past its repayment date. i.e. if the loan EMI is expected to be paid of 1st of March and the customer hasn’t paid the loan till 15th March then the loan becomes DPD 15
  • PAR: Portfolio At Risk - This is the sum total of the GLP for which on-time repayments have not been received by the MFI. This is similar to DPD. So if a MFI says PAR 30+ is 50 Cr and 2% of portfolio then it means Rs. 50 Crore of loans are overdue for more than 30 days and is 2% of GLP
  • Case Load: Number of clients handled per CRE. Higher the case load, the better it is from productivity perspective
  • JLG Loans: Joint Liability Group loans are unsecured loans which are disbursed to a group of borrowers, where apart from the borrower’s ability to pay the social pressure of the group incentivizes the customer to pay back the loan. While the loans are disbursed to and used individually, the liability of repayment is on the group.
  1. Background of GK’s promoter:
  • GK, was incorporated in 1991 as Sanni Collection Private Limited and before turning into a NBFC-MFI it was already engaged in the business of providing micro-loans in Karnataka.
  • Post the AP-crisis, the company obtained the NBFC-MFI license from the RBI in Jul,2013 and was called Grameen Koota.
  • In 2014, CreditAccess Asia N.V (“CAA is primarily engaged in providing, through controlled companies, financial services to micro and small businesses and self-employed people in emerging countries. CAA also participates in, finances or conducts the management of other companies or enterprises. Presently, CAA has investments in micro-finance institutions in India, Vietnam, Indonesia and the Philippines.”) as part of the acquisition, GK was rebranded as CreditAccess Grameen (“CAG”)
  • As part of the transaction CAA acquired 99% of the stake in the company and post the IPO hold 80% in the company (therefore within the next 2 years there is a 5% dilution that CAA will have to do in GK).

Main Point: GK has international parentage of promoters who are focused on providing micro-credit internationally, hold majority of the shareholding and therefore their interest should largely be aligned with the interest of the shareholders.

  1. Industry:

As there is a parallel thread going on the MFI industry, I am not covering the details of the industry, its size and future potential (refer here: Link).
• The key latest information about the Microfinance and MFI industry are below (as of Q3 FY 20):
o Size: Rs. 2.11 Lakh Crore

  • DPD 180+: Rs. 2900 Crore

  • Active Loan Accounts: 10.11 Crore

  • Avg. Outstanding per customer (Avg. O/S): Rs. Industry: 20,870, NBFC-MFI: 18,100

  • Composition of lenders: Banks ~40%, NBFC-MFI 31.3%, SFBs: 17.6%, NBFC: 10.2%

  • Borrowers by Geography Volume | Value: East & NE: 36% | 40%, South: 27.5% | 28%, West: 15% | 14%, North: 13% | 11%, Central: 8.5% | 7.6%

  • Borrower by end-use: Agri & Allied: 57%, Trade & service: 32%, Manufacturing: 7%, Household Finance: 4%

  • Pricing for large MFI (Portfolio > 500 Cr.):

  1. Median Cost of Funds: 12.6%
  2. Median Lending Rate: 22%
  3. Spread: 9.4% against RBI’s permissible cap of 10%
  • Productivity (for large MFIs):
  1. GLP per CRE: 1 Crore
  2. CRE per branch: 5.2
  3. GLP per Branch: 5.2
  4. Customer per CRE: 448
  5. Urban Rural Mix: 46% Urban, 54% Rural

Main Point:
• Microfinance industry is a large industry, however is being competed strongly by the banking sector through organic business (majorly PSBs due to their last mile infrastructure), inorganic business (acquisition of BFIL by IndusInd, BSS by Kotak, Gramal by IDFC), MFIs turning into SFBs.
• SFBs typically operate more in urban areas than rural areas (past MFIN data showed urban portfolio having higher %, however post transition of MFIs into SFBs, the rural % increased, therefore indirectly pointing to SFB turned MFIs focusing on urban areas)
• Risks:

  1. Industry is exposed to agri & allied (usual political loan waivers don’t cover MFIs, therefore risk is not from loan waivers, but more from floods and droughts),
  • informal industry: GST & formalization may bring stress among the customer; however the target customers for MFIs are more centered on intra-village businesses, (my assumption/bias no data point for this)

  • like any MFI loans, these loans are unsecured in nature

  1. CAG’s product and modus operandi:

At a broad level, the product offered by GK to its customer is similar to what the competition offers, i.e.

  • Joint Liability Group (JLG) loans for one year and two year (comprising min 85% of the portfolio)
  • Group meeting led repayment methodology
  • Branch/operationally heavy last mile delivery of financial services
  • Refer screenshot below for the comparison of the MFI products offered by the top 10 MFIs (ex-Samasta and Svatantra since they don’t publish their annual reports on their website)
  • Follows the same Compulsory Group Training (CRT) and Group Recognition Training (GRT) of the CRE performing the CRT for 5 days and the Branch/Area Manager doing the GRT, and visiting customer premises before approving the group formation and then loans are disbursed.
    JLG Product
    Main difference(s) in the modus-operandi:
  • Instead of doing cycle based loans, where loan is taken for a cycle and only a mid-term or emergency loan is given, GK provides a line of credit to the customers, wherein customers can avail loans against this limit any time, however as a risk management practice before any loan disbursal they perform the mandatory checks of over-exposure, multiple lenders etc.
  • Customer has the choice with respect to the amount of loan required, period for which the loan is required, repayment frequency. Therefore within a group the following differences can occur:
  • The loan amount can differ across members of the group
  • The interest rate among the members also differs based on their vintage of relationship with GK as well as other parameters, such as repayment behavior as well as the center’s vintage with GK
  • The repayment frequency is decided by the customer, however the meeting happens on a weekly basis. This allows the customers to align their repayment frequency with their cashflows. Current repayment mix: 55.5% weekly, 38.3% bi-weekly, 6.1% monthly
  • Benefit of such methodology: The loan product is customized to each customer’s behavior, vis-à-vis other lender’s approach of pushing their product prototype thus leading to customer satisfaction

Other products:

  • As an NBFC-MFI, 85% of the products have to be JLG, and therefore the MFIs have an option to expand into other products and slowly and steadily majority of the MFIs especially the larger ones are have done so.
  • GK also in the same way has also expanded its product offerings which provides GK the following benefits:
  • Customers who mature across the loan cycles and have higher loan requirements can avail these loans and not be restricted by the MFIN/RBI guidelines, thus the customer is retained within the GK ecosystem
  • GK is able to charge higher interest rates from the customer as the ticket size is higher and is not restricted by the 10% margin cap

Following is the product offerings of the top MFIs, along with the ticket sizes (as disclosed by the MFIs)


Non JLG product strategy: As mentioned earlier, GK has started offering the non-JLG products to its existing customers (internally referred by GK as “Retail Finance”). In order to provide these products to its customer while not directly cannibalising the JLG business it has defined an eligibility criteria [atleast three year customer of GK with good repayment behaviour], and GK understands that the CRE for JLG customer is different from individual loans, and therefore has created a separate sales channel. The details of the progress of the product is mentioned below:
Product & Performance
• Upto Rs. 5 Lakhs, upto 5 years with 20-22%
• Avg. O/S: 66K with Avg. Ticket Size: 90K
• 100% Monthly collection
• Retail Finance Product up from 3.3% of GLP to 5.1% YoY
• GNPA: 0.24%
Retail Financing Channel
• Branches: 70
• Employee: 1100, CRE: 695
• Portfolio per branch: 6.5 Cr
• Portfolio per CRE: 0.7 Cr
• Borrower per CRE: 96

  1. GK’s business performance vs peers:

A. Higher GLP per CRE through customer retention

The table below summarizes the different productivity metrics of the MFIs as being considered important by the MFIs. As can be seen clearly GK has been able to manage a higher GLP per CRE through a higher outstanding per client, rather than the approach followed by other MFIs of pushing a higher case load per CRE to achieve a higher GLP per CRE.

This higher outstanding is being driven by higher customer retention, as higher retention enables GK to disburse higher loans, and as per my understanding of the industry, the retention rates are the highest in the industry (BFIL retention rate ~ 80%).

B. Lower OCR through higher productivity

As MFI’s NIM on the JLG product is regulated by RBI, the critical metric that is tracked by the MFIs is the Operating Cost Ratio (Opex/Gross Loan Portfolio). With respect to OCR, GK has been able to establish industry leading standards of the lowest OCR of 5%. Refer the table below for the comparison of business performance of GK vs other MFIs along with the OCR performance.

The higher productivity combined with higher customer retention has enabled GK to maintain the industry leading OCR inspite of having one of the higher rural portfolio (which are characterized by longer distances, lower population density and lower customer loan ticket demands).

Given the situation in Assam, one might question if loans are being pushed by GK rather than becoming the largest lender to the customer by choice. The following metrics may be crucial to allay the concerns:
• The MFIN guidelines of not providing more than 80K of loans to a customer, not lending to a customer who has loans from two MFIs and one Bank is applicable on NBFC-MFIs and not on banks, (eg. Bandhan Bank, now IndusInd with BFIL acquisition), therefore chances of over-lending to customers by GK is lower
• GK’s ability to retain customers (through the product customisations mentioned earlier), enables it to increase the ticket size over period to customer’s who have a good repayment history (table repeated for reference)

C. On-time repayments and NPAs

NOTE: FY 17 spike is due to demonetization and FY 18 onwards spike is attributable to transition of the company to IND-AS from the earlier I-GAAP.

Even with a faster growth in the overall portfolio the PAR number has grown slowly reflecting management’s ability to grow the loan book in a quality manner while not sacrificing on the growth either.

Recent Performance:

The management has been conservative with respect to making provisions, while at the same time not sacrificing on the quality of the loan book

D. ONE AREA WHERE GK LAGS Bandhan Bank: Customer vintage with GK vis-à-vis Bandhan Bank
As per Bandhan Bank’s management commentary [Bandhan taken as reference coz it’s the listed MFI with large exposure to the troubled state of Assam]

But first three cycles we are very conservative, our retention rate, dropout rate is high in first three cycles, so we are divided in that way. So, if I come to on that point, our 55% of the customer which is more than three cycle with us, and their average alone outstanding is Rs. 49,358 rupees, so those are with us. Average if you say that, out of 18 years 3 years, you divide 15 years, seven and eight years average these people are with us. But if I go to these the other customers who are not with a very much as the latest coming on that, and they are coming on that with 45%, their average is Rs. 29,000 rupees on that.Link

Vs. GK’s vintage composition of the customers

However Bandhan’s Avg. Customer outstanding is 38,190 vs GK’s 32,000 reflecting 20% lower avg. outstanding, which may point (though a weak pointer, I admit) of GK not over-leveraging the customers.

• Also, unlike other players which incentivises the last mile CREs for the case load, GLP and adherence to the processes (weightage differs from player to player), GK has delinked the incentive completely from the business performance of GLP and collections and have linked it to number of customers serviced and quality of service, thus potentially avoiding the situation of over-leveraging.

E. Pan-India Presense:
GK has followed the philosophy of expanding its business operations through contiguous districts, while avoiding the bad districts which have bad repayment history. The strategy has enabled GK to:
• build deeper penetration in each of the respective state of operations, rather than just expanding every where,
• contiguous expansion also provides the advantage of the CREs of not facing a major cultural or language change

Through this approach, GK has been able to expand into 230 districts in India, with presense in 13 states and one UT, through a network of ~930 branches.

While GK has established presence in multiple states and districts, the business is primarily coming from the five states of Kar, Mah, Tamil Nadu, MP and Chg which is primarily driven due to vintage of operations in the states. As GK expands into multiple other states, the loan book is expected to further diversify.

F. Higher Productive Employees vs Managerial employee:
GK has been able to consistently increase its CRE headcount, which has provided it with the following advantages:

  1. CREs are lower cost employees, therefore higher the % lower is the avg. employee costs
  2. CREs are the resources which sources business for all the MFIs, and therefore higher the number reflects higher revenue possibilities
    From the table below, it can be seen that there is a very strong co-relation between the CRE headcount to the overall employee level OCR for the MFIs.

In order to realize such a larger % of CRE headcount, the operating model for a branch has been analysed to understand what provides GK the ability to support such a large employee base with limited managerial headcount (text in italics is the R&R of the people in the respective roles).

Through investments in process optimization, removal of inefficiencies, technology (has Temenos 24 as the core banking system for loan management), centralization, GK has been able to make its CREs more productive and removed the administrative activities from the managerial personnel R&R thus making them also more productive.
Extract from management commentary:

*“*Regional Processing Centers help to improve controls in the following manner:
1) Check data entry of newly enrolled customers;
2) Improve and maintain integrity in data quality;
3) Independent data entry of new customers;
4) Ensure complete and proper documentation”

“Our Regional Processing Centers have not only improved our operational efficiencies allowing our field staff to focus more on actual business workstreams but have also significantly improved the data quality of our Customers’ information.”

  1. Management:

a) MD & CEO: Udaya Kumar Hebbar is the MD & CEO of the Company. He is a certificated associate from the Indian Institute of Bankers and holds a diploma from Vanderbilt University. He has served as the head, commercial and banking operations at Barclays Bank PLC, Mumbai for three years. He also served at Corporation Bank for a period of over ten years. He was also associated with ICICI Bank for over eleven years. He joined GK in 2010.
b) CFO (Diwakar B.R.): He has 20 years of experience in the financial services sector. Prior to joining GK, he worked with Small Industries Development Bank of India, as Chief Manager at ICICI Bank Limited and as Commercial Supervisor at ACCION International. He was also associated with Life Insurance Corporation of India and IFMR Capital Finance Private Limited. Diwakar B.R. joined our Company on October 30, 2011.
c) Risk, Gururaj Kumar KS Rao is Senior Vice President, Risk. He holds a bachelor’s degree in commerce from Bangalore University and is a certified internal auditor from the Institute of Internal Auditors. He has 14 years of experience in the area of auditing. Prior to joining our Company, he was associated with Yusuf Bin Ahmed Kanoo W.L.L and Mallya Hospital, Bangalore. Gururaj Kumar KS Rao joined our Company on July 1, 2009. He was appointed as a Key Management Personnel on July 1, 2013.
d) VP Strategy & Planning: (Anshul Sharan) He holds a bachelor’s degree of technology in metallurgical engineering and materials science from the Indian Institute of Technology Bombay and a post graduate diploma in management from the Indian Institute of Management Indore. Prior to joining our Company, he was associated with Reliance Power Transmission Limited, Kanbay Software (India) Private Limited and INDXX Capital Management Services Private Limited. Anshul Sharan joined our Company on July 13, 2012.
e) VP Technology: (Arun Kumar B) is the Vice President He holds a bachelor’s degree of technology in textile technology from Allagappa College of Technology, Guindy, Chennai and a post graduate diploma in management from the Indian Institute of Management, Indore. Prior to joining our Company, he was associated with Infosys Technologies Limited and Barclays Bank PLC. Arun Kumar B joined our Company on November 10, 2010. He was appointed as a Key Management Personnel on April 1, 2014.
f) Operations:
a. Gopal Reddy A R is Vice President, Operations (Maharashtra, Madhya Pradesh and Chhattisgarh) of GK. He holds a bachelor’s degree in commerce from Bangalore University. He has over 15 years of experience in microfinance operations. Gopal Reddy A R joined our Company on May 30, 1999 and was employed with GK untill December 31, 2011. He later rejoined our Company on April 10, 2012.
b. Srivatsa HN is the Vice President, Operations (Karnataka and Tamil Nadu) of GK. He holds a pre-university certificate issued by the Education Department, Government of Karnataka. Srivatsa HN joined GK on December 13, 2002. He was appointed as a Key Management Personnel on April 1, 2014.

Main Point:
• The management has over 15 years experience at the minimum at the leadership level, with the CEO and CFO having over 20 years of experience, which implies that the management has seen many of the economic cycles
• They have been with GK for over 10 years, which means that they have atleast seen two tough economic downturns of 2009 recession, demonetization
• Management continuity: The management has been with the company for over 10 years which means that they know the business in & out

  1. CAG’s business performance:

Balance Sheet, P&L and Key Business Metrics

For the editable of the above excel refer Link

From the above table, observe the following key trends:

  1. Case Load has been coming down over a period and Avg. O/S standing has been consistently growing → Business transitioning from commodity MFI business to a differentiated one
  2. CRE per branch has been increasing inspite of higher branch expansion → Penetration within the geographical coverage of a branch
  3. OCR and Cost to Income has been steadily reducing, inspite of expansion → Strong control on costs, supported by higher GLP per branch
  4. NIM has been maintained over 10% inspite of the RBI cap, reflecting contribution of non-JLG products in realising higher NIM

Financial Performance vs Peers (RoA Tree comparison)

From the above table, observe the following key trends:

  1. Lowest Employee costs driven by higher CRE headcount (as discussed earlier)
  2. Industry leading RoA of 5% (Spandana has a higher RoA, but enjoys the benefits of CDR therefore ignore), Muthoot’s RoA is driven by other income rather than operations therefore ignored
  3. Cost to income also kept in check by realizing lower other opex despite CAG following a weekly meeting model vs. fortnightly and monthly model being adopted by other players

Compliance to the 10% Margin cap

  1. Acquisition of Madura Microfin:
    In Nov 2019, CAG announced the acquisition of Madura Microfinance and details of the transaction has been provided by CAG here.
    I have not analyzed the Madura business in detail, however the metrics of Madura’s business has been provided in the above analysis, peer benchmarking. My high level hypothesis with regards to the acquisition is the following:
  2. Madura has been a strong player in TN and tried expanding into the other geographies with limited success. The transaction therefore helps both GK and Madura as GK gets access to the high vintage customer of Madura, get presence into the states where GK has recently entered and the branch infra doubles up in Orissa and Bihar (which are one of the fastest growing MFI states), gets 2X additional branch infra in TN (which is considered one of the good states for MFI business)
  3. The asset is operating at similar RoA levels as GK, therefore merger is not of a distressed business (my hypothesis is that financial services business is where distress acquisition should not be done)
  4. NNPA are 0% therefore the bad loans have been provisioned for
    Similar and other benefits of the transaction has been mentioned by the management in the presentation

Strength of business: Refer sections 3,4,5 for strengths in product, operations and costs efficiencies

Weakness/Challenges of business:

  1. Unsecured loan portfolio by design and regulatory requirements
  2. Bank’s trying to encroach into the traditional MFI customer segments/areas
  3. Merger of Madura Microfinance, till now GK has grown its business organically, and this is their first inorganic acquisition, ability to merge the culture, align/streamline processes will be critical
  4. COVID’s impact on the MFI business leading to disruption in collections and new customer acquisition

Stock Valuation and Performance:
Following is the stock chart of CAG, up until the market crash, CAG has been trading at a steep valuation, supported by superior business performance and lower NPAs, however post the market crash is it trading at price similar to mid 2019.
While I have been able to analyse the business performance, I am not able to comment on the price of the stock if its trading at an attractive valuation or not, since I am generally poor in valuing stocks but consider myself decent with respect to analyzing a business.

Views, Comments and Questions with regards to the analysis invited.

Sources: DRHP, Investor Presentations, MFIN, Annual Reports of the MFIs

Disclosures: Bought 250 shares @ price of 800, bought during the market crash


Thank you for sharing your detailed work on CAGL and MFI industry Divyansh, your research covers almost all aspects of the business. Could you share the few pictures again, which are too small to read and even zooming in in a new tab doesn’t help.

All the graphics are present on this link, the financials are available through the link mentioned in the post itself…

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Thanks Divyansh. Images are still too small and in other tables the image distorts after a second. Anyways great effort on the research.

Capturing points that @Hao-ming and I had over CreditAccess.

Main questions were on how GK is different from Bandhan, and doesn’t it makes sense to look at either a Bandhan or HDFC Bank vs GK. Points in italics are points/questions of @Hao-ming

Hi Hao,

While i agree in principle to the hypothesis that Bandhan being a bank has certain benefits over GK, there are few broad points that I would like to highlight before taking each of the questions.

  1. The FS space is large for multiple players to exists, and therefore you can have both a HDFC Bank as well as Bajaj who offer the same products and can have an overlap in customer base. Therefore I would not discount GK just cause Bandhan is also playing in the same field and Bandhan is a bank.
  2. Bandhan post getting the bank license, has to under-go certain changes which may or may not let it remain a hard-core MFI business (i.e. RBI’s discomfort in Bandhan having such a large MFI loan book and therefore Bandhan is trying to reduce the MFI loan book proportion; acquisition of Gruh leading to entry into the higher than the MFI customer base; need to manage the CASA side of business as well)
  3. I have received the Bandhan shares as part of the Gruh transaction, therefore hold both the companies, therefore would try to remain neutral while responding

How is it better than a bandhan bank as a business…
Even bandhan is in mfi… Bread and butter business of bandhan is still mfi…
Now being a bank bandhan will have low cost of acquisition of funds… Hence bandhan can lend at a considerably lower rate…
2) also bandhan is diversified… Has housing Finance, bank and mfi…

While evaluating Bandhan one has to look at three aspects:

  1. Microfinance business → The core of the Bandhan operations have remained within West Bengal and Asaam (62% of portfolio); Assam has had its own challenges of over-lending of customers leading to reduction in On-time repayment as well as spike in NPA. From the distribution of branch network it can be seen that the next largest network is present in Bihar. Therefore Bandhan’s MFI book is largely confined in WB, Assam, Bihar vs. GK operates more in the southern region of the country therefore limited overlap. → Thus limited competition to GK from BB
  2. GRUH business → GRUH with its erstwhile HDFC parentage, has a very good loan book, and now with Bandhan transaction there is potential for geographical expansion, however the customer base is very different (avg. loan 8.3 Lakhs in June 2019). Also with txn. happening BB’s focus will shift on growing Gruh’s book thus from management bandwidth perspective there are two businesses which are targeted to different customer segments vis-à-vis GK who has only one customer segment to target (which is usually the NBFC [single product] vs Bank [multi product] story)-> Thus management bandwidth and focus towards MFI for GK vs BB remains in favour of GK
  3. Liability business → GK doesn’t need to build this business, whereas for BB maintaining and growing becomes even a larger challenge as the MFI customers maintaining deposit with BB constitutes a very small %, therefore one more customer segment for BB to focus upon. Being a bank and having access to retail deposit provides advantage to Bandhan from steadiness of deposits as well as at a cheaper rate, which can be passed on to the customers. → Thus advantage to BB over GK wrt cost of funds, but again another customer segment to target adds one more aspect to management bandwidth of the BB management

So in summary, competencies required for growing a NBFC book focussing on a single product is far easier than building a bank business. And while it is true that BB started as MFI and is still core to BB’s business, there are many other business vying for the management attention and focus. And even though BB has lower cost of funds, there is limited overlap in the geography of operations.

3) as competition gets big because everyone wants to diversify will this company survive onslaught of say bandhan bank or other banks per say who have access to lower cost of funds.

The only players that I think exist as competition for MFIs are the SFBs (which had an existing field-operations required to manage MFI operations), however like Bandhan even SFBs are diversifying from the core MFI borrower customers therefore the intensity of competition may reduce. Another player who can pose a challenge is BFIL under the IndusInd, but GK has been competing with BFIL for long and there is anyways space for multiple players to exist.

In all honesty I didn’t get your question, when any FI wants to diversify and grow their business they want to target businesses which are of higher ticket size and not lower ticket size that MFI business typically operates at. Banks are more comfortable in providing loans to MFIs to get PSL benefits (on-lending link) rather than build their own network and competencies as the business operating model is very difficult to manage (digital lending doesn’t works as large base of MFI customers don’t have smartphones)

4) bandhan bank CEO has major stake in the business hence skin in the game… Whereas I see no advantage of this in CAG.

Agreed Bandhan’s CEO has major stake, but due to the dilution requirements the stake is required to be reduced to 40% and over a period of time reduce to 15% in 20 years (I think). While 20 years is a long time, but already shareholding of Mr. Ghosh has reduced to 60% vis-à-vis GK’s promoter whose holding will come to down to 75% in 2 more years.

The CAG promoter have varied and international experience in driving MFI business, so its not a case of an uninterested or unaware shareholders and additionally the BoD has three nominee directors, 5 independent directors and only one ED i.e. the CEO; therefore management should ideally operate in an responsible manner and will remain answerable to the shareholders.

Not trying to just defend the point, but the shareholding and CEO doesn’t necessarily has a direct relation case in point Yes Bank vs Kotak Mahindra Bank.

5) HOW reliable are the numbers?.. Are we sure that gnpa and nnpa is bang on nose without any divergences.

While there is no AQR for NBFCs, the sector in general has had lower NPAs compared to other financial products of banks. This is mainly driven from the following factors:

  1. Rural MFIs typically operate in geographies where banking network is very small/limited and customers are also intimidated to approach bank branches
  2. Availability of the credit bureau (and customers are also aware about it) makes the customer pay the loans on time, as they know default with one lender limits their ability to borrow from other lenders (who are already limited in a particular village)

Unlike banks which follow RBI defined Standard, Sub-standard, Doubtful and Write-offs, NBFCs are required to follow Expected Credit Loss Model where in the NBFC themselves estimates expected loss. While defining their ECL mode, GK has also taken inputs from its auditors on the approach and assumptions (refer page 93 of the FY 19 Annual Report).
GK had transitioned to ECL model which led to higher GNPAs and on-top of that GK has provided additional provisioning, therefore I would like to say that the numbers are reliable.

5) CAG looks more like a commodity business ( plain vanilla lending)…

:smiley: , isn’t every lending business a commodity business :wink: IMHO in lending the differentiator lies in the lenders ability to:

  1. Identify good customers [here GK doesn’t have much choice/ practices discretion apart from MFIN guidelines]
  2. Cross-sell / Retain customer to get more and more income post acquisition [Retention we have already covered, as part of renewal of loans rejects about 30% of the customers as well as the loan amount is dependent on attendance, on-time payment]
  3. Service them in a low cost manner [lowest cost service provide, comparable to Bandhan]
  4. Provision conservatively

6) can these survive in tougher economic conditions.
Won’t the PAR’s increase given the state of situation globally

Agree, the company and in fact all lenders are exposed to this risk. MFIs are more exposed that banks as the collection is physical rather than digital for banks.

7) what is the moat here… If we talk about customer retention rate… Even bandhan does a good job of retaining…

The moat I don’t think is customer retention, as IMHO customer retention is an outcome and not what differentiates the business. The moat that GK has compared to others are:

  1. Ability to offer customized products to customer [ticket size, repayment frequency]
  2. Service customer at low cost
  3. Investment in technology, enabling centralization through the RPCs

As per my estimate, 10% improvement in retention rate leads to 1% lower Opex; and thus retention plays a virtuous cycle role in maintaining low opex.

8) why would to want to pay 4.5 times the book for such business? Is it superior than hdfc bank… Why buy CAG When hdfc bank is cheaper…

The customer segments are very different between HDFC Bank and GK. Purely from metrics perspective, RoA for GK is 4.6% vs HDFC Bank’s 2%; post IPO GK’s leverage came down and is steadily increasing, and RoE of GK is 16.5% (with lower leverage) vs HDFC’s 17%; P/B and P/E is an easy metric to compare two businesses, however it is the RoE which matter in my opinion.

Also have u considered the sudden loan waivers govts do as soon as they come to power?..
Might be once in a time type of Black Swan events but needs to be provided…

Typically the loan waivers are given to bank loans and not for MFIs therefore the loan waiver risk doesn’t exists for MFIs; however it does impacts the credit culture which is the bigger risk.

On the positives

  1. has a mnc parentage. Suppose company goofs up parent might help out… Assuming they don’t dilute equity…
  2. not incentivising CRE TO push loans…
    I am not saying your decision is bad or anything…
    I would want you to substantiate ur buy call…
    In the hindsight don’t you feel paying 4.5 times book was bad… Irrespective of the correction…
    The only reason markets was paying premium was because of growth…
    Also have u considered the sudden loan waivers govts do as soon as they come to power?..
    Might be once in a time type of Black Swan events but needs to be provided…
    My opinion is these companies are best buy at 1 or 1.5 times book… Not beyond that…
    U are free to counter this theory… Hv a good day

FY2020 Results

MMFL has been acquired & consolidated in the last few days of March, Hence one should look at its number prospectively.

One thing I found quite interesting is that if you compare the average loan outstanding per customer of both CreditAccess (CAGL) & MMFL (Madura Microfinance Ltd), the average loan outstanding of CAGL is 2x of MMFL. Therefore, there is still immense opportunity for increasing the Loan book of MMFL alone which is Rs 2100 cr. I am confident that it will cross Rs 4000 cr in 2 years. Also, there would be synergies both operational lead by efficiencies & financial ( COF would reduce for MMFL )

Pre-provision profit on a consolidated level stands at Rs 870 cr. The current Mcap of the company is around Rs 5500 cr

Strong Commentary

With over 98% of our branches being operational with over 90% staff as on date, we are looking forward to
resuming our collections & disbursements from 1st June onwards. Over 70% of our customers are positive about
> not opting for further moratorium, and about 20% of them wanted a few more weeks to start the transactions.
This leaves close to 10% of our borrowers who might opt for further moratorium. We are predominantly present
in rural markets which have always displayed strong resilience to external disturbances. Majority of our
customers are engaged in essential activities, which have been allowed to function post 20th April. Further,
various relief measures were taken by government to support people at bottom of the pyramid. Hence, we believe
our customers to display faster recovery as regards their business activities and economic transactions. Our
near-term focus will be on ensuring healthy liquidity position and timely collections from field, which will help
us provide additional financial support to our borrowers. All our lenders have been supportive, and we are
confident of raising sufficient funds from domestic and international sources in the coming months

The total provisioning done is Rs.139 cr. Covid related provisioning Rs 93 cr. The company has been conservative and had provided in excess when there were floods on Kolhapur.

I feel the company has performed well in the past. They also had to change their auditor as it had completed 10 yrs. It is always a good sign to see auditors sticking around. The new auditor is M/s. Deloitte Haskins & Sells, which is also a reputed firm. I strongly believe the company will bounce back as defaults in MFI will be lower than the entire lending industry mainly because 86% of their book is in rural areas which is hardly affected. Moreover, the JLG structure helps in lower defaults. If one looks at the history of lending in India, major defaults are by willful defaulters (read as rich guys ), Rural people do respect the credit system, especially women.

Results -

Press release -

Dic- Invested, Views maybe biased


Analyst report on CAG by KR Choksey for institutional clients

Numbers seems to be decent given the current situation.

A more detailed article on the merger transaction.

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September update- CAGL has been very transparent and timely with disclosures.


Feel valuations already reflect the collection efficiency and strong performance of CAG.

I switched to M&MFinance and Bandhan in last week’s crash - will this alpha from last week continue in other undervalued rural financing / MFI plays? Or can CAG provide further upside?

MMFL is dragging CAGL.
Cultural shift required for Operating efficiency

For the benefit of anyone tracking this stock, they’ve uploaded the earnings call transcript for Q4FY21.

My takeaways:

  • Collection efficiency has been improving, reached levels of 90-94% in March 2021, but has dropped by 6% in April due to the pandemic.

  • They’ve learned from the first wave, created an additional buffer, and are sitting on around 16% of their assets in liquidity. This may have an impact on margins in the short term.

  • Management comes across really well in making sure asset quality is maintained. They’ve stopped the group meetings due to the pandemic and have moved as much of it online as possible to ensure safety of customers and agents. Their decision making is also highlighted below, while talking about new customers:

Maharashtra particularly we did not allow the employees to add new customers
because wherever delinquency is or the collection efficiency is less than 90%, we said, no new customers to be added; to manage and enhance the sustainability there, and only when the collections are better we enable the branch to acquire more customers

  • Negotiating with regulators on policies to improve revenue and margins. They’re working on an association with the RBI. MFIs (in some states?) have been reclassified as essential services, and this is one example of regulators understanding their needs and being supportive through policy. Worth tracking how this progresses as CAGL expects tailwinds to expand NIMs.


  • The interest income of MMFL declined primarily on account of reduced lending rate, income derecognition and lower interest accrual due to increase in overdue portfolio.

  • They expect MMFL to have the same profitability as the parent company gradually over the next year. Statement below:

We are closely working with MMFL team to align the operational model with CAGL.
A detailed process integration roadmap has been devised.[…] Integration roadmap outlays the alignment of products and technology architecture, alignment of branch infrastructure, alignment of process and policies, change management, business sensitization and field force training, manpower assessment and role redeployment and phase wise conversion of branches into CAGL.

There’s a lot more detail in the investor presentation and the transcript.


Thought I’d document how the liability mix, geography and product mix has changed over the years.

Liability Mix (in %)

Quarter Banks NBFCs Financial Institutions Foreign Sources PTCs Direct Assignment
Q1FY18 46.09 4.14 20.72 29.05 0 0
Q2FY18 46.22 3.1 19.91 30.78 0 0
Q3FY18 48.25 2.79 22.04 26.93 0 0
Q4FY18 61.53 1.7 14.41 22.36 0 0
Q1FY19 59.94 6.53 12.33 17.74 3.45 0
Q2FY19 53.09 7.24 9.41 18.39 10.8 1.08
Q3FY19 47.38 4.72 17.44 14.32 6.59 9.55
Q4FY19 49.94 3.44 20.37 13.13 3.73 9.39
Q1FY20 58 3 22 14 4 0
Q2FY20 61 3 23 12 2 0
Q3FY20 52 1.9 25.9 11.7 0 8.4
Q4FY20 62.4 2 20 10.6 0 5
Q1FY21 58.8 1.5 23.1 9.7 0 7
Q2FY21 61.1 1 22.6 9.6 0 5.6
Q3FY21 63.9 0.8 21.5 9.9 0 3.9
Q4FY21 60.4 1.3 17.8 9.3 0 11.2


  • While it prima facie looks like the dependence on banks has gone up, in Q4FY21 they’ve raised 8% of their liabilities through NCDs (9.4% in Q3FY21), which are classified above under banks. 52% of the liabilities are from term loans (54.2% in Q3FY21). This brings the total from NCDs to 15% this quarter.

  • Mix of 26 Commercial Banks, 3 Financial Institutions, 8 Foreign Institutional Investors, 3 NBFCs in Q1FY20 to 36 Commercial Banks, 3 Financial Institutions, 9 Foreign
    Institutional Investors, 2 NBFCs in Q4FY21.

  • The commentary in FY18/19 was a target of 50% of the liability from foreign sources. This has clearly failed, dropping from nearly 30% in FY18 to under 10% in FY21. Recent commentary has changed this target to meet funding requirement through foreign/longer term sources.

  • More information on their direct assignment strategy is on the concall linked in an earlier post.

The term breakup of the loans is given below in percentages:

Quarter < 2 Years 2 Years 2 - 3 Years 3 - 6 Years
Q3FY20 13.8 39.8 4.8 41.6
Q4FY20 13.2 39 3.4 44.4
Q1FY21 18.3 34.4 25.2 22.1

They changed the format of these disclosures slightly after Q1FY21…

Quarter < 1 Year 1 - 3 Years > 3 Years
Q2FY21 16 63 21
Q3FY21 21.9 67.4 10.7
Q4FY21 16 55.3 28.7
  • At the surface, they have 16% of their liabilities which will come due by the end of the year. They have more time for the bulk of their liabilities. Newer liabilities are for longer term durations.

Gross Loan Portfolio (in %)

Quarter Karnataka Maharashtra Tamil Nadu Others
FY15 69 28 3 0
FY16 63 30 4 3
FY17 60 28 6 6
FY18 58 27 7 8
FY19 53 26 10 11
FY20 40 24.1 19.9 15.9
FY21 38.2 23.4 18.9 19.5

They’ve become a lot less dependent on Karnataka, helped by the acquisition of MMFL in Tamil Nadu. There are a lot of states clumped in with the others. More details in the annual reports.

Loan Mix

Quarter IGL Family Welfare Home Improvement Emergency Retail Finance
Q4FY19 85 1 9 0 5
Q1FY20 85 3 7 0 5
Q2FY20 85 4 6 0 5
Q3FY20 85 3 7 0 5
Q4FY20 85 2 8 0 5
Q1FY21 86 2 8 0 5
Q2FY21 88 1 7 0 5
Q3FY21 92 0 4 0 4
Q4FY21 93 0 3 0 4
  • Home improvement loans continued despite the onset of the first covid wave (or were outstanding from the previous quarters), and now take up a negligible mix of the portfolio.

  • It’s clear that the emergency loans are indeed as they say, and it’s nice to see the management support their customers.

Disclosure: invested


Update for Aug 21

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Results and Investor Presentation.
MMFL is till a drag on Overall Performance.
Neutral Results.

Business Update.

  1. Improvement across parameters.
  2. MMFL Collection efficiency still dragging.
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Wonderful results was expecting similar data after Bandhan and MAS Finance results.

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And the journey continues

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“For the past few months, we’ve been piloting, on a very low scale, secured lending among our existing customers. We’re testing gold loans, auto loans with a focus on two-wheeler funding, home loans along with loan against property and loans to small businesses,” Creditaccess Grameen Managing Director and Chief Executive Officer Udaya Kumar told PTI.
Over the next five years, the secured book may touch 10 per cent of the AUM and will not and cannot cross 25 per cent of the book since “we want primarily to be a microlender”, Kumar said.