There is no difference between universal bank and SFB regarding raising Capital. Small Finance Banks are mainly for Lending In priority Sector Areas, Small Finance Banks will have to lend 75 % of their ANBC to PSL areas , which is advantage rather than limitation because Priority sector have lesser NPA, credit cost problem .Have also reform related backing from PMJDY,MUDRA as part of Financial Inclusion Program.
In ConCall Ujjivan guided there will not have absolutely any issue to raise capital more over they guided 200 basis point reduction in cost of funds, 60% of asset (which will be increase more than 30%YOY at least) to be funded through customer deposit over a period of five years is appreciating ,IMHO.
As I mentioned earlier in thread It is inevitable fact that , ROA and ROE will be reduced during transition in SFB but it will be marginal decrease of 40-50 Basis Point as per management in the con call . The base growth rate guided by Ujjivan is 30% during transition and again the growth rate will back to 50% after transition .
You can go through the call transcript available at researchbytes.
Disc: Invested in Ujjivan part of concentrated portfolio hence views might be biased.
I think new SFBs like Ujjivan and Equitas shouldnāt be valued on their new book value because a significant portion of this book value is being invested in technology and branch infrastructure, which wouldnāt contribute to the bottom line - not in the short term at least.
We have universal banks having very low NPAs and good revenue/net profit growth that are barely making an ROE of 20%. So I donāt know how these new SFBs will make >20% ROE when the existing banks, which have the advantage of very high CASA deposits, are making <20% ROE.
We have MFIs like SKS micro and Satin that are easily making an ROE > 20%, while maintaining a healthy growth rate. SKS Micro is expected to make an ROE/ROA of 28%/4.5% this year. If this profitability continues for the next 5 years, then weāre probably looking at an āEicher Motorsā of finance.
MFI is the opposite of messing with teh public. Its helping teh public. One should question what is the option to borrowing at 22% from an MFI for a village woman to see what I mean.
Did you try studying who is financing your maid? MFI is a different model altogether and there is a restriction on the interest rates which can be charged by MFIs (lower of 10 - 12% above their average cost of borrowing or 2.75 times the average base rate of largest banks). Also, please try asking your maid that if she were to borrow the same amount from a local money lender, what would be the rate of interest being sought on that.
I feel one should also study the sector, regulations and companies in detail along with proper scuttlebutt.
on the NBFC MFI vs SFB debate, noticed interesting additional points made in todayās upgarde by MS of SKS that have not been made in the discussion above:
The funding environment for NBFC MFIs (SKS, Satin) improve further as the licence winners transition to become SFBs. As many of these MFIs become SFBs (for whom the priority sector lending target
will be 75% of credit), the void in the supply of priority sector loans will have to be filled by other MFIs. This should result in a favorable environment for NBFC MFIās. The NBFC MFIās indeed appear to be in a sweet spot next 3 yearsā¦
A key point to monitor will also be if the RBI puts in spread caps for SFBs and commercial banks similar to MFIs ā currently there exists regulatory arbitrage. If the objective in introducing the SFB is to ensure affordable borrowing by the poor, which would seem to be the case, putting spread caps for them to avoid predatory lending would make sense. In that case the lower deposit cost benefit for SFB might actually get passed on to customers and equity owners may not benefit.
Some operational performance snapshot between SKS,Ujjivan and Satin. Data are taken from investor presentation, DRHP documents and Religare report. It is often require to analyze the AUM growth for which reason? Is it due to Increase of Number of Borrower, Increase in ticket size or due to change in loan duration?
Just a thought , If Opex is reducing without much growth in ticket size is assumed as good. But If ticket size getting increased significantly with reduction of Opex that may be indicates loan outstanding is getting increased per client which is may not good as the GLP loan type is unsecured. For Ujjivan and Satin I donāt have āchange in loan durationā value which considered one of the parameter of AUM Growth. Looking for the opinion from fellow boarders.
Cap on the spread for SFB is theoretically and practically impossible. Because the landed cost of fund
for a bank is very distinct from a cost of fund for NBFC. In NBFC, the cost of fund and the interest cost are actually just the same. But for a bank, the landed cost is going to be the interest cost on the deposit plus the cost of mobilizing. The cost of mobilizing which is distinctively different from NBFC as it is going to be something like the cost of an IT system that SFBs are putting in place, the cost of new 400 branches that they are going to setup and the cost of the liability team which is also going to be included. So these are the things SFBs have to factor while fixing their lending rate. SFBs will start to pass on the benefit to their borrower when it is sustainable from an institutional perspective, not before.
Fallibility if sell side research. In the below report from Religare sometime in Augā15 they blasted the Indian Microfonace sector left righ tnad center. Post that they have been one of the best performers in the market. For once after reading the report I also though to sell my SKS stocks but thanks to all mighty I trusted in nwhat I see in the actual reports of the company and not some unaccountable sell side broker.
Its a truth most the the sell side prediction falls flat on the boms, another case in point was Ambit dooms day call sometime back, they had egg on their finally when they have to revise that call.
Higher loan growth as compared to customer growth was expected and is in the nature of how mirofinance works. You are likely to start with a borrower with a loan ticket size of 10K, before you give me a loan of 25K. If you take this as an example the loan book would have grown 150% while the customer base has remained the same. As long as people are not borrowing from more than 2 MFIās (as per new regulation) we can assume that there are no circular loans and loan books are not artificially inflated.
I have worked at a medium size MFI covering two western States for the last 4 years. The industry has undergone a drastic change on the back of stricter regulations and lessons from the AP crisis.
There is a misconception among us ,the city dwellers that rural/poor borrowers are not credit worthy. IMHO the truth is the absolute reverse. They do not consider MFIs as a cash cow, atleast 98% of them are prudent to the core. The deliquescent 2% are always there in any type of lending. Its on this 2% ,the group lending concept works to keep NPAs at zero.
The supply and demand outlook will ensure growth for the sector, atleast for a decade.
While the current skepticism is healthy,the industry is still a million miles away from any sort of bubble.
Disclosure : I work in the Micro finance industry.
I own Arman & Ujjivan.
The arm chair media wallas have a picture of a poor farmer who is indebted to the moneylenders. This is just first level thinking. Most of the MFIs have moved away from direct agricultural lending, there is market for life stock, flowers, last mile transport, petty shops, stockists, traders ā¦this segment is as big as the agriculture segment . This segment is completely underserved . A 100 more MFIs and small banks wonāt quench that demand.
Why do MFIs charge a very high intrest rate?
Many here in VP and elsewhere (even my family members)have put up this question time and again. I will try to explain this in a simple manner.
Smaller loans = higher interest rates.
Why?
Higher operating costs.
The operational costs on a large loan are practically identical to those on a smaller one.
These operational costs weigh heavier on the scale of a microcredit (on average 15,000 to 20,000Rs) compared to a traditional loan (in lakhs). This is simple maths. A fixed cost of Rs 10 represents 10% of a Rs 100 loan and only 1% of a Rs 1000 loan. Therefore lending smaller amounts means a higher rate of interest.
On a day to day basis, our agents are out in the field, sometimes in villages that are sparsely populated meeting groups and following up on loan repayments.This manpower, transport expense all costs money.
This is very different from a credit manager in a traditional bank who firstly remains in his branch office and secondly evaluates risk based on the income numbers in his customers books.
It is a time and cash consuming job that is at the core of the microcredit business.
This important concept must be understood, before you demonise the high interest rates.
Rates which you find very high, they are well below money-lendersā rates, which vary from 200% to 1000% per annum.
The self help groups lending was put up as concern in media reports. The RBI has already taken the necessary steps. One is a circular( 14 Jan 2016) for Self help groups to share information to the credit bureaus.
