The problem as I see it not repayment of existing loans,but incremental loan growth. MFIs were getting certain multiples (P/BV and P/E) because they were growing at 50-100%. If that goes away for the next year or so, will the market accord them the same multiples is the question IMHO. Further, as a lead up to UP elections there could be bad press, which again is not supportive of valuations.
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I think the value of a business is determined by the cash it generates over its lifetime. So if a business doesnât grow for 6 months or 1 year, it shouldnât have a huge impact on its value. We should rather focus on finding out the potential negative consequences of demonetisation on MFIs in the long term. For example: will small businesses get impacted due to increased digital transactions?
BTW @Akhil_7306 NBFCs dont generate cash.
I would be very interested to see your cash flows analysis to figure out the value of any NBFC or bank
They do generate cash but that cash is reinvested back in the business, so CFO seems to be negative. Itâs almost equivalent to the increase in book value.
So according to you growth in book value = free cash flow in NBFCs and banks?
According to me, a finance companyâs net profit(minus future NPAs) represents the actual cash generated by the company, so Iâd say the growth in book value from operations represents is the actual free cash flow. But then finance companies constantly raise equity at a premium to book value, which also affects future cash flows.
yes sir ,
it applies to potentially misused jandhan a/cs NOT MFI / NBFC ones
and
all serious MFIs dont move without KYC !!
Dear Hnk ,
we would be grateful if you could share updated info as most of us are aware of this news of dec 1 which is specific to an area and somewhat dated now
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PM speech at the Party Parliamentary Meet - Small business loans of 25K-50K can be disbursed under 6 minutes
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@madhug
I see positive side of this news for SME businesses and Banks but Negative for MFI and NBFC. If SME get quick and easy loan from a bank at lower rate why they go to NBFC ro MFI which normally charge at higher rate. With digitization feature, networking (last mile to customer with physical marketing) is not necessary which is presently competitive advantage of NBFC and MFI
Presently, DCB Bank is available at fair value and it is small bank having excellent digitsiation focus, i should go for it instead MFI.
Disc - Have 10% PF in DCB Bank bought at avg 75
I may sound preachy and to that point up front I apologize. My intent is not to preach anyone at all but to only speak out my mind.
In the book âThinking fast and slowâ, Mr. Daniel Kahneman have described about the two systems that each of us have within us. One that is fast and very reactive, and the other that is slow and thoughtful. This is a simple but very powerful fact. Equally important thing is that not every single time being slow to react is the right thing. May be the best thing to follow is to quickly asses the situation, and be thoughtful about whether to apply system one or system two for reaction. Well, that is like at least always keeping the system two ON.
When demonetization news came then I spent good time thinking about the net impact of it on the MFIs. It was clear that in near term there would be bad impact on the business but unclear part was the impact in the medium and long term. Frankly I am still unclear on it, but I am leaning to accept now that with some business model change things should be at least as good or bad as they were earlier. Those changes in my opinion would be move towards cashless and maybe move towards accepting the savings (SFB).
In the banking history, the problem had never been to give loans, but to get the amount & interest back on time from the borrower. If the banks were ready to deploy man power to collect the money back then of course they would have been in the business that is carried out by MFIs today. Demonetization or cashless (or less cash oriented economy) is not going to solve the problem of collection. Quick loan disbursement does not automatically mean quick collection. In fact I think if MFIs would be able to adopt the cashless quickly then maybe it would help them disburse money quickly and given that they have man power on the ground they would be able to get back the money.
I may be completely wrong in my assessment. I am invested in MFIs and my thoughts may be biased.
Regards,
Krishna
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Very well said.
Although not about microfinance, but quite relevant to this topic:
About a year back I was planning on starting up in the fintech lending space. I was specifically targetting consumer durables financing. During this time I spoke with a lot of people in the industry, especially about Bajaj Finance. BF has a lionâs share in consumer durable financing v/s other players like banks, Tata Capital, Reliance Capital etc. The feedback that I got was that the best players in any lending business are good at 2 things:
- Being in the right place at the right time i.e. being accessible to the customer when they require financing. This could be having branches, manpower etc on the field who can service the customer.
- Robust collection mechanisms so that loans donât go bad. Also once a loan goes bad, the best players have good recovery mechanisms.
Once a NBFC is good at the above things, then they automatically get funds at a lower cost. This is what differentiates Bajaj Finance from other players. It has been delivering >20% RoE consistently for a long time.
And its also about the DNA. In school or college a class topper always remains a topper (or within the top 3 in the class). Just because of temporary disruption in the environment it doesnât mean that the guy who used to be last in the class (some PSU banks and underperforming private banks/NBFCs) would suddenly become the class topper.
This is true for MFI sector as well. If people only took into account the interest rate while borrowing, then the entire NBFC industry in India would never have been there in the first place. Everyone would have simply borrowed from SBI.
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Krishna, though I am invested in MFIs and similar thoughts going in my mind, let me disagree with my counter thoughts :
Step 1. Collection is issue for banks . Why
A. They do not know who is right guy to lend and who is wrong . Lack of data of that customer to build a strong credit default model.
Will less cash society solve this ?
Not in a day but yes over 3,4,5 years when lot of transactions of these guys and their KYC data is captured and utilized for intelligence based lending which is a data issue right now. I think it will happen, in how much time is key .This still happens at some level but I am talking about mass scale adoption from both side , application submission as well as application evaluation in a digital environment which is non supportive due to constraints and I see govt pushing from those multiple directions , cashless/fintech/integration if unique id/increasing broadband penetration
B. Once they know who is right guy to lend , they can lend through digital channel and collection can happen through digital channel from the right guy because 1. Willingness to pay is there 2. Learning curve is given by govt push 3. Technology will make it easier
The guy who is not willing to repay can be eliminated at decision making level, the false allocated could be managed by a small team.
What I see cashless and digital together solve the two problem s : 1. Whom to lend 2. How to disburse and collect
Already cities , banks are shifting to less branches n more digital .
I understand constraints are it will take good time to collect behavioral info, infra availability like broadband penetration, education, cashless push. So, it may take 3,4,5,10 years bit it should happen. Will it disrupt MFI . I donât know . What if there r MFIs who sense this and are proactive to sense the threat and adapt having backed up with prevailing relationship advantage with target customers .so, they may sail through n non adapters might perish
What are your thoughts ?
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very well articulated above âŚso let me just add a point âŚimagine an MFI whose executives bond so well with the local populace and say a bank employee âŚwhether efficient one like HDFC etc or an inefficient one say any PSB
ask yourself this Q âŚcan these bankers ever connect with the local populace like the MFIs do ?
Ans is a Big NO ⌠so cost of funds is just one aspect in the Whole gamut of doing business
Relationships are the key !
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Why microfinance is an ugly word in Indiaâs villages ?
Disc : Not invested in any MFI stocks
AmbitâŚSaurabh Mukherjea has bearish view on lending sectors.
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Everything was great before few months for MFI and now everything is going against (
Politcs, demonatisation, false interpretation of 60 days NPA windows, etcâŚ) âŚwhich also reflected in stock price almost all MFI are down more than 40-50% from its pick.
.
Disc - Not invested in MFI. As I believe that any MFI which lends to poor with high rate of interest will not give CAGR good return over long term 10-15 years investment especially in Democratic Country like India âŚwhere poor are used for political motive.
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We all write long posts about virtues of second level thinking, using Charlie Mungerâs mental models and fail to apply it in real life situation. Lets deconstruct the arguments put forwarded by many analysts.
1. MH case, state creating SIT for probing irregularities in MFI lending
MFIs are now within purview of RBI (and hence fall within perview central govt). State govt cant make any rules on regularizing MFIs as it is beyond their purview. At best what they can do is to submit the SIT findings to RBI, and hope for RBI to take action against the erring MFIs. Which is an excellent news for most of the listed big MFIs. This will weeds out the smaller ânon-rule-followingâ MFIs, and makes a better operating environment for listed MFIs
2. UP case, State election
MFIs have seen many elections in UP/North-India, and the behavior that is being seen is an well known phenomenon. Just listen to Armanâs old concall and you will know that this is a very old well-known facts. Such foolish statements are being made, rumors are being spread by petty politicians to get some brownie point, and than forget it after election fever is over. The borrower is left to its own to handle his own funding needs, and he has no better alternatives than MFIs when it come to interest rates. He has no other way but to repay his old loans and get new loans.
The basic problem lies within the minds of most of us here. We have preconceived notions within our head against evils of high-interest taking MFIs, and we tend to look the world with the tinged-glass and see things in distorted manner. The solution to it is to think it in moist rational manner, put every facts being presented to us below magnifying glasses, and try to see the correct pictures.
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A sensible article.
Will RBI /Central/ State govt allow thousands of Crore of loans from Mudra and banks turn into NPAs because of political interference & temporary shortage of new currency? Will they allow entire MFI sector to be bankrupt is the moot question. ?
Investing is all about controlling your emotions of fear and greed. MFI sector after the greed phase is now going through its fearful phase. This too shall pass IMHO. Discl- Invested in MFI & my views may be taken as biased.
Views invited
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Never Ever Trust INDIAN EXPRESS ARTICLE Always come out with big lose Article ⌠I Met MFI Person Say Collection Are Down But People Willing to Pay Once Cash Flow Increases⌠But His Concern Was MFI Working In UP & Karnataka Where Local Leader Made Announcement In Local Area That Borrower No Need To Pay Their Loan Dues It is Waived Off⌠MFI Person said they hiring Auto to make Announcement In Areas That No Such News From Either From State Govt Or Center ⌠it fake rumour ⌠He Say In Few Month Many MFI Will Give Loan Totally In Digital Format⌠Throu Ewallet âŚTough Time For 1-2 Qtrs Only But Huge Scope
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