Hi Yogesh, Today I read some of your post & found them really worthful. Thanks for sharing that.
Since you are from this industry, want to know your views on MFI sector. Can you please tell whether companies like Ujjivan have fully able to get recovered from the effects of Demonetisation?
Also, do you see growth rate of MFI sector more than the banks?
Dear Yogesh,
Can you please tell us how do you take care of NPA PCR in credit cost?
Thanks,
Prasad.
I know the question is addressed to Yogesh and wait for him to provide his insights. In the meanwhile waned to share my thoughts -
I would therefore be invested in SFBs from a long term perspective and keep a close watch on who can manage their credit cost and cost funds. Also, would not allocate more than 10-12% of the portfolio to SFB. I am aware I may have to take pain for next 2 quarters
Would love to hear views from other members.
Disc - invested in BFIL and Ujjivan
I think itâs loan loss provisions/total loans * 100 =Credit cost.
Credit cost is different from cost of funds.
Credit cost is the cost incurred for giving funds on credit.
@Yogesh_s please confirm is this correct?
Thanks,
Prasad.
Fantastic piece of work Mr. Yogesh. Very crisply presented comparables on all the key monitorables. I think the one thing that comes out crystal clear is that Manappuram comes out as a clear No. 1 or No. 2 in most of the parameters. Bajaj finance has been the story of the decade for me (even better than Eicher Motors) . It is the ultimate consumption story. Having bought it at 900( around 70 on an adjustable basis) in 2011 and selling out at 1300 next year will be the biggest mistake of my short investing career. Missed out on a 30x and counting story⌠Anyways, Manappuram looks very interestingly poised at current levels due to the sheer undervaluation. The difference between the quality of franchise that it is trying to build through focused product and geographic diversification and the valuation that market is willing to pay for it is something that I have not been able to make sense of for the last 2 months. Have a gut feeling that itâs just a matter of couple of quarters of strong growth that will make the big guys to sit up and take notice. Q2 numbers will be keenly tracked for the improvement in MFI book. Anyways, to my mind, technically, it is just like a spring which is getting pressed intensely since the last 2 quarters. Once it breaks 112, the upmove can be quite sharp technically. If I were to think like a bank management and think about acquiring this company outright, I would not mind paying 250/ share for this kind of a franchise. The company is doing all the right things to increase shareholder value. Asset quality is the best of the lot and in my humble opinion that is perhaps the most important parameter to track for a financial institution.
P.S. Invested in Manappuram @ WAP of around 70 and hence my views may be biased.
Thatâs not correct. Credit cost is the cost incurred to account for bad loans. It is calculated by dividing provisions and write offs by loan assets. However, I calculate it by dividing provisions and write-offs (from income statement) by total income. It is essentially the % of total income that need to be set aside to provide by loans that have gone bad or expected to go bad in future.
NPA, PCR and credit costs are all indicators of asset quality.
I am not from the industry but lenders are not that difficult to study. Personally, I am not too positive on MFI sectors for following reasons
I had a similar opinion but now I differ on the exploitation part. We need to understand why folks are ready to pay 24% interest rate. For any biz we need to have combination of inputs like land, labour, capital etc. Especially in cities all these inputs are expensive but capital is cheaper. If you go to rural areas most of these inputs are cheaper so even if you get expensive capital, often it could work for borrowers. Additionally, at many places 24% is way better than alternatives of definitely exploitative 40%-60%. This is a macro level view while individual situations could be different.
I respectfully disagree with your views. I think a lot of this has been discussed previously in this thread but worth repeating again. Just to clarify, I also earlier had the view that MFIs is not a sustainable business and was equivalent to exploitation of the poor. But after reading more about the sector on this thread and other places and also reading the book - Bandhan by Tamal Bandopadhyay, I have changed my views on this sector.
All this is not to say that there are no risks in this business. I believe this business is full of minefields like Andhra and other political risks and regulatory risks and is more risky than a typical NBFC. But having said that i do believe that if the business is run is a responsible way keeping the best interest of the customers in mind, the company can thrive. Hence it is essential to have an honest and conservative management, who focus on the risk first and returns later. The importance of management in MFI kind of business is much more than in other businesses.
The key to managing the risk in the MFI business is the process. The risk management in an MFI is very different from an NBFC. Because of the kind of customers MFIs deal with, they cannot perform the due diligence like checking their creditworthiness through credit history, tax filings, salary slips etc. Instead they focus on several other things - like smaller loan sizes, hiring people from the same communities, employee engagement with the communities to develop a personal connect with the customers, operational aspects of collection etc. Hence, in my opinion the importance of a robust process for both sanctioning of the loan as well as the collections is an integral part of risk management, much more than a typical NBFC.
So far what has been missing from the picture is the liability side. Although so far they were able to lend to these customers, they were not able to offer savings products to them due to regulatory restrictions. But now with many of these MFIs getting the small bank license, that is no more the case. The missing piece of the puzzle is now in place and this should be a gamechanger for the industry in my opinion. Now the level of engagement with the customers will increase manifold.
I dont think there is any dispute that there is a very large portion of the population in India which is not served by the existing financial machinery. I believe that they can be brought under the net of financial inclusion. But the existing banks have not been able to serve them so far. Why is that? It cannot be for a lack of bank branches because PSU banks have their branches is remotest of places. I think the reason is that the existing banks have not been able to work out a profitable model to serve them. Serving these customers is operationally intensive and as a result expensive. If the MFIs are charging higher rates of interest, that is because that is the cost to serve them. The alternative will be to leave them to the mercy of the moneylenders who charge much much more.
Hence, in my opinion it is not wise to paint all the MFIs with the same brush. There is a profitable way to serve this section of the population. This has already been proved by the MFIs not only in India but in several other countries. But also keep in mind that so far the Indian MFIs have been unable to offer savings account to these customer. With that in place, it is my hope that some of todayâs MFIs will be able to transition to mass market banks of tomorrow.
PS:
To answer some specific questions:
I think I answered that above
This point has been raised above as well. I think people are confusing return on equity and cost of debt. Do you mean that a business will not grow if its cost of debt is more than its cost of equity? This statement is true only if the entire capital of the business is debt. In a business with reasonable amount of leverage, even with cost of debt more than return on equity, it can still continue to grow. I think the trick is to keep the amount of debt low.
There are different kind of products including for business and consumption just like a typical NBFC.
You may be right, I cannot comment on the valuation of the companies. But i would like to emphasize that companies like Bandhan, Ujjivan and a few others have been around for 10 years. They are still going strong despite facing all of these problems you refer to above.
Mumammad Yunus won a Nobel prize for popularizing the concept of Joint lending Group. It has been proven to work universally. You may watch Ray Dalio talk about it here (âI know of no other model which is better than this moedel, that it will fund itself and also have that kind of impact on the people who need it the mostâ) - https://www.linkedin.com/feed/update/urn:li:activity:6326056928145399808/
I thought we have left this discussion of exploitation behind. But somehow it comes back. Close to my place a vegetable vendor takes 10,000/- from a loan shark and return Rs. 120 everyday for 100 days. Rs. 100 towards principal and Rs. 20 towards interest. One can calculated what is the effective rate of interest in this case? The calculation will bring some peace to 25% is exploitation. I know most will not calculate!!
Try to ask your vegetable vendor or fruit vendor what kind of margin s/he is making?
Look at the numbers of Bandhan bank to know who made the mistake for which microfinance had to pay a hefty price!
This what Noble Committee has to say â
Yunus's long-term vision is to eliminate poverty in the world.
That vision can not be realised by means of micro-credit alone.
But Muhammad Yunus and Grameen Bank have shown that,
in the continuing efforts to achieve it, micro-credit must
play a major part.
Source - The Nobel Peace Prize for 2006
Yunus is inventor/discoverer of Joint Liability Model.
If the borrower has willingly accepted the terms, it is safe to assume that her alternatives are worse. So there is no exploitation of the poor here. The risks are also higher, which justifies high lending rates.
Besides, an often overlooked reason why lending rates appear high is the need to have repayment schedules in âround amountsâ which the borrower pays in cash. This is opposite of the traditional lending business where the rate of interest is determined first and repayment amounts are calculated later. Micro finance turns this process upside down. If these round amounts are converted into annualized IRR, the resultant rate appears high.
Hi Yogesh,
While I agree with some of the concerns youâve raised on the MFI business, I have one counter -
Joint Liability is a very well established model. Most of the MFIs that are now in reckoning due to either public listing or conversion to SFBs, have been running fairly well established models wherein JLG typically enables them to have repayment ratios of 99%+. In fact, part of my worry is the opposite. People who understand lending in MFI context, are they capable of making the requisite shifts in say housing loans or personal loans etc. And as the MFIs start to look much more like NBFCs or Banks, how does it impact their ability to grow, sustain margins etc.
Good to see alternative viewpoints. In my view, one of the important point that is overlooked is financial inclusion of these people at the bottom of the pyramid. The lethal combination of JAM (Jan Dhan, Aadhar, Mobile) and its benefits to people bringing them into mainstream financial system and reducing their dependence on loan sharks (whatever name we may call them) who have benefitted till now because of ignorance and illiteracy of these people to use financial system. The education and knowledge is vital!
@Amit009 @Yogesh_s thanks for bringing both sides of perspectives though these things have been discussed earlier too. However, I would like to add few personal experiences as I have some first hand direct experience with this target segment .
Met my old cook from Mumbai last week after 3 years . There were two points I would highlight from that discussion which is relevant here -
However, the major risk as well as opportunity I forsee in digitization of finance prior to consunerization of finance. The digitization of finance is something which will separate men from boys from evolution of newer business models where organizations who are culturally matured to manage change and grow will prosper and those who canât will perish. It is going to be very exciting time for both consumers and lenders and some times speed of change may surprise us.
I am pained to see the ignorance of stock market investors in this forum. In a free market anomalies are corrected by competition and efficiency. Not through the communist way of entitlement and force.
First, if you feel the 25% rates charged by microfinance companies is too high then the solution is more and more such companies. 5 years back these mfin companies started with 30% rates and some such as bharat financials have already cut the max rate to below 20%.
Second 25% rates is not high in this field. If you really travel around the country and inquire, you will find rates are 3 TAKA to 5 TAKA by money lenders. Which means 3% to 5% monthly translating to 36% to 60%. No money lender lends at 25%, only awareness and larger participation by micro finance companies can fix this anomaly.
Thanks to the works of Muhammad Yunus the change is coming. Otherwise the socialist would have continued blocking the microfinance industry and money lenders would have had a free run.
Good, incisive discussion going on here. There is no doubting the essential economic utility that MFIs represent in a country like ours. The value they bring in to the table is humongous and increasing substantially as we speak. If the much touted financial inclusion by the present dispensation is to be achieved, then MFIs will play a crucial role in that. At least for the next 5-7 years, I donât see a better alternative. Fintech firms, while doing great work, are primarily focused on Urban consumers and are mainly competing with Universal Banks in certain products.
The simple question to ask here is, If not MFIs, then what? Is there a better alternative? And isnât this much better than leaving this income segment to the mercy of moneylenders. PSU Banks, despite their obvious ability and ammunition to address this segment, could never tap it. Thatâs simply because the cost of serving these customers cannot be justified till you charge something in the range of 20-25% (which obviously the banks cannot charge on a large part of their book because of apparent regulatory reasons). Thatâs precisely why RBI nurtured these MFIs carefully over the past decade (along with some corrective measures along the way) and gave away bulk of the new banking licences to players in this segment. The critical economic utility of these institutions in a country like ours cannot be overstated.
However, I have been a bit worried of late with what I view as the regulators intent to include more of MFI business through the banking channel. I believe this is a structural change. The regulator is more comfortable in regulating this segment through the banking channel. After the licences being granted to 8 SFBs and the universal banking license to Bandhan(which among them contribute a large % of the outstanding MFI loan book) coupled with BFILâs acquisition of IndusInd, banks now control more than 60% (if my memory serves me right) of the market share now. So for the existing MFIs, without the patronage of any large BANK or a strong NBFI, things might get a bit difficult as capital raising as well as business growth will be
substantially more difficult.
My contention is that we are at the start of a cycle of inorganic growth in the sector and most of the well run large MFIs (for ex, Satin Credit Care etc.) may be potential acquisition targets. By 2020, my premise is that 90% of the Micro-finance business may be done through the banking channel. Watch out for that. That may present some wonderful investment opportunities in both public and private markets.
I have not yet seen a single case where a customer that was poor 10 years ago has progressed to a middle class (let alone rich) because of financial assistance from MFI. My observation is that majority of MFI customers remain poor and remain customer of MFI so in the long term MFIs arenât helping their customers progress on the economic ladder. If they do, they will lose them as customers. They are just taking market share from indigenous money lenders by better credit assessment using modern fintech and not actually creating any value. Regulator is happy with this as RBI has been trying to curtail activities of indigenous money lenders for decades without much success so it is enabling MFIs with banking license and other regulatory support.
IMO, for genuine business activity, these MFI customers need equity funding for their business which will provide long term capital for their business to take off. They also need some skill training, mentoring and general education. I guess no one can make a commercial business out of this. This is more like a NGO type activity. Only debt funding can be a profit making business. Very few businesses ever takes off with high interest debt funding. As investors this should be very easy for us to understand. Why do startups go for equity funding and not debt funding? Repayment obligation and interest costs will eat into their cashflow and they cannot reinvest and grow. That is one reason I believe MFI loans are just consumption loans that are given to tide over cashflow mismatches. MFI customers have volatile incomes and expenses so they get into cashflow problems and they borrow for short periods to tide over the cash crunch.
There is a reason traditional lenders charge 5% a month. Because risks are high. I do think MFIs are downplaying risk in the business and investors arenât paying attention either. There is a reason their balance sheet is leveraged only 4 times while balance sheet of banks is leveraged 8 to 10 times. Only Bharat Financial has been publicly trading for more than 7 years and during the AP fiasco its shares lost 95% of its value. That is an indication of the downside risk in this sector for investors.
MFIs are more than 10 years old now. Yet, Bharat financial (largest publicly traded MFI) is about 45th financial institution in terms of loan assets. Other financial companies (not MFIs) have grown much faster than MFI. MFI has remained a niche and I think will remain a niche.
Hi,
Just curious to know if this belief is based on some evidence or is it just an inference. My understanding is that RBI had simply created more channels to push âfin inclâ but if banks are acquiring MFIs or MFIs are becoming SFBs it is purely based of their choice (and their own vision of future) and not due to RBI or any other regulatory dictat or intent.
Thx
RR
I think loan assets is not the right way to look at MFIs. Banks lending to retail/corporate have loan tenure in years (5 years to 20 years) and hence runoff rate is low and asset size tends to grow. In MFI, average loan duration is in months (12 tp 24 months, average 14 months) and hence large runoff rate. e.g. Arman will have loan disbursements of 400Cr this year but AUM might be at 300Cr. I think RoA is probably right metric to look at MFI with higher tolerance for PAR (Portfolio at risk). NPA concept of 90 days of non-repayment is also not fully applicable as payment collection frequency in MFI is daily/weekly. Also MFI tend to come out of stress in AUM much faster compared to Banks simply because of smaller loan duration. e.g. Arman reported losses in Namra for 2 quarters post DeMo and they were in the positive in Q1 FY18 and ready to grow again.
Also there is a limit of 12% interest spread as per RBI regulation once AUM crosses 100Cr mark. The operational costs (branches, field workforce, daily collection) of MFI tend to be very high at 8-10% and hence funding cost + 12% is best MFI customers can hope to get.
Best Regards,
Rupesh
There were around 35 applicants for the banking licenseâŚWhy do you think erstwhile MFIâs got 80 % of the licenses on offer? When you change the liability side of the balance sheet (i.e. funds and cost of funds) for some of the largest MFIs by one stroke of signature, you have also changed the equations for those MFIâs who could not bag the license. Look at the capital raising spree that Satin Creditcare has been undergoing taking the capital adequacy to 26 percent. I would say thatâs a very smart management.If and when the bidder comes, and they will surely come, they want to be in a very strong position to negotiate.
Bada game Hai boss, you have to read the tea leaves through 2nd level thinkingâŚ