Indian Microfinance Sector and the companies in the sector

I think the impact of this will be felt in next couple of quarters at least as we slowly transition to new currency. Customers not able to make payments on time just because of lack of currency conversion etc is almost a non issue in big scheme of things.
More important thing is how the earning capacity of these borrowers gets affected in mid to long term. Along with inflating asset prices and corruption, black money is deeply integrated into entire chain over the years. In fact I think black money might also be subsidizing few things or creating some employment at low level. Remember getting 600 Rs for 1000 Rs (black money) is also not a bad deal for corrupt person because the black money gets converted to white money.
Having said above,borrowers repayment capacity as well as earnings capacity would be impacted only in short to mid term and hopefully in long run it would get back to new normal.

MFIs and businesses who survives or handles this short & mid term impact most efficiently will reap benefits.

Lets wait and watch.

Raghuram Rajan was a great supporter of financial inclusion and mfi. The new governor does not seem to have any view which his master’s donot propose. It is beyond me why he is not acting to agree or disagree on dispensation for mfi. Maybe his boss returning from Japan will allow him to act for a change.


I doubt if they will allow MFI customers to pay using old notes. Why would they? What is the argument in favor of making an exception? I did not understand the reasoning.

Unless the MFI is not fully dependent on actual black money then only thing that will happen is that we would see lower repayments or collections for few weeks/quarters until new currency is completely released into the system. That will lead to lower disbursements and loan growth for a quarter or two. Is that a compelling reason for government to make an exception for MFI and create one more avenue for black money holders to exploit?

Frankly, if the MFIs can not handle or survive the temporary blip in NPAs like these then we would be more worried and rethink our investments in the industry.

Disclosure : Ujjivan and Satin Creditcare are part of my core portfolio.


Its about habit. Once customers start delaying, it becomes difficult to put them back on right payment schedules esp. due to non-secured nature of loans.

MFIs have seen some of the worst days when borrowers refused to pay. In case management is good, it will tide over for sure. Please go through Samit Ghosh’s interview in Moneycontrol

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UPDATE Added Equitas, Manappuram and Muthoot based on the requests from some members. Added relevent analysis. Added Tax Costs so that all costs % + net profit margin % should add up to 100. Added value labels for 2016 series.
General notes on the charts - Charts with shades of green - higher the better. Charts with shades of red - lower the better. Blue - KPI specific for the industry. END Of UPDATE

Peer analysis of listed and unlisted MFI companies using data extracted from Capitaline. I have also included Bajaj Finance and Capital First in this list as these are close to MFI than other NBFCs. Unfortunately, I couldn’t find numbers for Bandhan.

Size - Companies and the size of their balance sheet. Bajaj Finance is the biggest, Janlakshmi is biggest MFI. Bandhan is bigger than Janalakshmi but I am still collecting it’s data.

Growth rate of loan assets - Industry is growing after AP fiasco. Growth rates are impressive even for larger players. This number is the slope of a log linear regression line on the chart of loan assets over a 5 year period. This number is somewhat backward looking but I think it captures the long term trend rather than spikes and does not get impacted by base effect as in case of CAGR. Muthoot and Manappuram are growing again over last 2 years even though the chart show they are stagnant.

Yield on Assets - I generally classify lenders based on rates they charge as that determines profile of the borrower and risks. Bhrat Financial charges highest rates while AU is the lowest among MFIs. Bajaj is actually the lowest in the list. These rates are quiet high compared to banks, other NBFCs and HFCs but much lower than indigenous money lenders. Industry should take share from indigenous money lenders.

Cost of funds - Most important metric for MFI industry. This is reflection of confidence placed by funding sources on the business model of the industry. Some of these are backed by PE/VC funds as equity. Bigger MFIs have lower costs and that help them get even bigger. Sort of self reinforcing model. Bajaj with the strong corporate backing has low cost of funds. Capital First with with it’s well connected CEO has managed to keep it’s costs at the lowest level. these costs are low although not as low as banks or HFCs.

Net Interest Margin - Every bankers’ KPI. This industry has the highest NIM among the financial sector due to their high yield on advances. Capital First has lowest NIM despite having lowest cost of funds primarily because of it’s low yield on assets. Bharat Financial has highest NIM, legacy of the it’s predatory practices in AP. NIM appears to be inching towards average. Companies with lower NIM have seen it going up while those enjoying high NIM are seeing that advantage getting diluted. This is an indication that focus will now shift on execution rather than funding.

Return on Avg Assets - NIM tells only half the story as assets are funded by both debt and equity and NIM captures only the debt costs. ROAA is IMO the most important indicator for any lender. In cae of MFI industry, ROAA pattern is similar to NIM mainly because leverage is uniform across the industry.

Leverage - Total Assets/ Total Equity. This is the most important balance sheet number from a risk perspective. Industry has managed to keep low leverage and capital adequacy above required minimum mainly because it has been able to attract equity funds from PE/VC/IPO etc. There is some room for leverage to grow but these companies are still being conservative here.

Return on Average Equity - Most important number from an investor’s perspective. The one number that sums it all. Bharat financial has managed highest number mainly because of it’s high NIM but as NIMs are reverting to averages, I am expecting this to fall. AU Financiers has seen a big improvement. Satin has high ROE but that’s mainly because of high leverage so not really impressive. Capital First isn’t even recovering it’s cost of capital.

Next few charts compare the cost structure of the companies

Credit Costs - Provisions and write-offs as a % of total Income. Credit costs are low compared to Banks,NBFC and even some HFC which is surprising given the nature of the assets these companies have. Sometimes I think these costs are too good to be true but given the PE/VC backing of the industry, I don’t think these costs are misrepresented. Credit costs also very among companies in the industry with Capital First and Bajaj Finance having higher costs then MFIs. Apparently poor borrowers are more honest than the well-off who borrow from Bajaj to buy 70 inch TVs. Ujjivan is consistently lower than peers with AU Financiers making good improvement. No idea why capital first costs are so bad.

Operating costs - Everything except provisions, interest and taxes as a % of Total Income. Industry has high operating costs as ticket size is small. This is the cost of running the show. IMO, going forward, management of operating costs will separate wheat from chaff as SFB licence will reduce interest costs.
Bharat has made good improvement while AU’s lead is gone. Ujjivan is catching up but there is some distance to go.

Interest costs - Interest Expense as a % of Total Income. Although capital first has low cost of funds, this is not able to earn high return on assets making it’s interest costs among the highest. Satin is small to it has high costs. Rest of then are close to average with Bharat having a lead here.

Tax Costs - Adding tax costs so all costs + Net profit margin should add up to 100% for completeness purpose. Any company with unusually low or high taxes should be checked as tax costs tend to revert to mean. Bharat Financial’s taxes jumped after tax loss carry forward from earlier years expired.

Net Profit Margin - The bottom line. This is what is left after all expenses are paid and provisions are made. AU and Bharat has made good improvement here.

Overall, I think Bharat scores well in many metrics while capital first scores low. However, I think Bharat’s advantage is shrinking. AU is making good progress but we will have to see how well it can replicate it’s success in Rajasthan in other states where will have to head-on with biggies in the industry. It’s IPO is expected next year. Capital First’s bad numbers are puzzling. Bajaj is doing good but very expensive valuation, perhaps a reflection of it’s growing franchise. Manappuram and Muthoot are growing again and well adjusted in a new restrictive regulatory environment.

Disc - Invested in Bajaj Finance.


the SFB business would be a stand-alone and separate business for those MFI who have got the license. Of course, having a ready customer base is a big positive and cost of capital would come down.

Thanks Yogesh excellent post for someone who does not ve understanding of valuation of nbfc . I believe some of these kpi r strongly correlated n some not.also, I understand how much weightage to be given to each kpi must b art than science . Possible to come up with a valuation kpi attractiveness ranking of companies ? Will it even make sense or it should be left to the art side of valuation with qualititative analysis of each of these companies , what’s your view ? Disc: invested in bfsi stocks as basket approach

KPI depends on the industry and current issues facing the industry. DuPont Analysis (ROE = Leverage * Profit Margin * Asset Turnover) is a good starting point for any industry.

I use peer analysis to decide discount rate and growth to be used in my DCF valuation.

Updates to the earlier peer analysis post -
Added Equitas, Manappuram and Muthoot based on the requests from some members. Added relevant analysis. Added Tax Costs so that all costs % + net profit margin % should add up to 100. Added value labels for 2016 series.
General notes on the charts - Charts with shades of green - higher the better. Charts with shades of red - lower the better. Blue - KPI specific for the industry.

Requesting all interested members to cross check these numbers with your own analysis and point out if these are any major deviations. Small variance is expected.


Where is the updated analysis…please share link

I have updated my earlier post so you can refer to the same post for updated charts and analysis. There is not much change in the analysis as Equitas is just about average and gold loan companies are also about the industry average.

Moreover, purpose of this post was to present the data so members here can express their own opinions for the benefit of others.

Did anyone here attend Equitas conference call yesterday evening around impact of demonetization? If yes, could you please put in a brief summary for people like me who could not attend the conference call due to timezone issues?

Before few days group was over optimistic about microfinance and any valuation was looking reasonable…now what’s fresh thought on valuation after correction?

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Overall microfinance view is short term pain, long term gain… having said that in the near term its more about:

  • how long demonetisation mess carries itself… answer to this would be well covered by newspapers
  • next quarter results… which would show pain experienced… though market may write it off as one time

Story beyond this quarter is extremely good as many moneylanders would either be wiped out or would have less new money to lend in future add to it interest rate reduction which would happen at faster pace now (but market would want to see how deep the demonetisaiton stains are first)


Anyone predicting a mass default by MFi customers citing lack of cash currency? something similar happened during the AP fiasco where borrowers were encouraged by vested interests to default en masse because MFIs were engaging in predatory practices. They did and pushed MFIs on the brink of extinction.

The reason mass default works (from a borrowers point of view) is because the loan is unsecured and cost of collection in case of a mass default is higher than the principal itself because the ticket size is small so borrower expects lender to just give up on collecting. The only way a borrower can get hit is a default will make him/her ineligible for refinance. Even here, a mass default will leave the industry with no customers (or substantially reduced customer base) so they will have no option but to ignore the default and continue to lend albeit after a cool off period.

Bajaj Finance collects post dated checks so there is less chance of a mass default and profile of customer is also better than that of MFI. Gold loan companies have a good collateral so a default is less likely here.

RBI offered an additional 60-days to certain categories of borrowers to make good on their dues.

This is essentially a debt relief (even it is for 60 days it is still a relief). Such move could trigger a mass default and is a sign of distress for the industry. Similr relief was offered by AP government that backfired for the industry. even industry is now worried about it now.


Do you think demonetization has impacted the income of MFI borrowers?

This certainly seems like a risk. But my view is, situation is different from the previous occasion this time because of two reasons
1-The RBI notification explicitly calls out that the relaxation is for all type of personal and business loans below 1 crore. MFI is a sub set on which this rule would apply. This is an important call out because unlike in the past when the relaxation was only provided to MFIs this time the relaxation covers wider spectrum of loans. My understanding is borrowers would hear from other type of loan borrowers that ultimately they have to pay back and delaying the repayment would only increase the burden on them.
2- The MFI industry and RBI have the AP fiasco behind them. They have learned few lessons from the past and I am assuming that they would be very vigilant in ensuring that money is collected at the earliest. There have been no involvement of political parties so far (does not mean that there would not be in the future) and there are not any news about distress causing impact only to the borrowers of MFI. The distress is wide spread but it has not reached to a state where it had in the case of AP fiasco. MFIs have learned to have the human element while recovering loans.

I have limited knowledge of what actually has changed from RBI perspective since AP fiasco. But the situation on the ground seems different this time. I am invested in MFIs and I may have ownership bias.


@subashnayak_19_ and @v4value
In past you did lot of positive inputs on MFI…now with change in scenario…please share your thoughts about valuation and future prospects

Please listen to Ujjivan’s Concall yesterday. Mr. Ghosh said time is tough but things are picking up. It was arranged only with focus on current issue and MFI.