ValuePickr Forum

Indian Microfinance Sector and the companies in the sector

Hi Ramesh,

If i am unable to repay the 15K loan and i some how arrange 15K (from others in the group/outside) for one day, repay the loan and take a fresh 20K loan from the same MFI thats evergreening which i was referring to. If the micro finance company knowingly allows this (to show growth) or it doesn’t have checks and balances to ensure customer cannot do this, that is dangerous. That was what i was referring to and it is a negative.

In the context of my question, I think we are on the same page that a high repeat customer base should be considered a positive. However the companies seem to be boasting the fact that they have a low repeat customer . See satins FY16 ppt pg 19 on client outreach. For Eg, the new customers that they acquired in FY13 (of 320k customers) declined by 30-40% every year till FY16 to become 62K etc.

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Evergreening is possible, but not a systemic problem because the contribution of individual borrower to the overall AUM of the MFI is small. “Mass” evergreening is difficult (if not impossible) to do because secrecy will not be maintained and the MFI will be quickly exposed.

That said, interpretation of repeat customer data is tricky and should be read in conjunction with other data like the company’s growth rate, average length of the loan cycle and the purpose of the loan itself. Loans in the nature of working capital will tend to repeat themselves whereas asset acquisition loans would tend to be one time.

In the table, it would be incorrect to interpret that 320K customers in FY13 have become 62K in FY16, since we don’t know the tenor of the loans. What we can infer is that as of end FY13, 320K out of 487K borrowers were first time borrowers (66%), whereas in FY16, 1335K out of 2090K (64%) were first time borrowers. The company is implying that it is enrolling new customers at a fast pace.

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Both Ujjivan and Satin report results tomorrow

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Someone help me understand why Micro finance are hardest hit today? I thought going cashless is good for them. And the section of people whom they give loans though deal in cash but not black money or real estate to have NPA issues.

I don’t think micro-finance are doing bad in isolation, it’s a result of Trump win expectation that is dragging global indices down. I agree with your analysis, due to volatility changes, micro-finance should be benefitted.

Please note cashless means the MFI outsources the cash handling to an external agency. As far as the borrowers are concerned, transactions are still mostly in cash. But now disbursements and repayments will have to happen with Rs.100 notes which will raise operational costs. There may also be a shortage of currency in the short term, which may impact the business for some time.

I see some impact of demonetization on NBFCs having exposure to LAP as it is related to real estate ,so, some cascading effect

It’s too early to say anything sir.

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I just saw a CLSA report. MFIs like Satin are also lending SMEs for working capital loans, Vehicle finance and all vehicle owners deal in cash only, I feel in the short term, MFIs will get affected

Good Comments of Udayan and this will affect NBFCs and MFIs too

'Over a longer period of time, we may look back two years down the line and feel that this was a decisive reform that took place in India. Right now, the enormous amount of disruption – I can tell you that I mean I stay in a small Himalayan Village out here people will be absolutely frozen. They just don’t know what to do. Small and medium enterprises, individuals – and I think a large part of the Indian economy is made up with such people and such enterprises – are probably running from pillar to post trying to figure out what hit them overnight. This will have tremendous consequences in the near-term for the economy, for the companies, their ability to service payments and what it needs in terms of the banking system as well "

Although there will be some short term impact on small business and MFI payments, thing to note is that it is going to be just inconvenience. Most lower and middle class people do not hoard black money at home.

All they have to do is park the money in bank account. Payment norms can change over time and looking back after 5 years not able to use white cash for payments will be the least of their worries.

On a plus side, real estate bubble and corruptions at all levels including elections will have a major setback. Which is good for the economy.

It is great to implementing the move now instead of waiting till all these things become risk to systematic failure.


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LAP is not given based on the price of the property but is given on the repayment capacity of the borrower at least thats what prudent lenders follow.Keiki Mistry.,yesterday on ET NOW

  • an unexpected default risk that no one could have anticipated. Best case scenario would be that the impact is limited to this quarter alone.

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.