I have recently been hearing about the JAM Trinity (Jandhan-Adhar-Mobile). Is this a positive or a negatiive for microfinance?
Going through equitasâ quarterly presentation, I came across the following points:
While there is still large unmet demand overall, pockets of glut of MFIs and resultant over-leveraging
by clients remains a concern.
8 proposed SFBs and Bandhan account for about 70% of MFI market. These players moving away from
2 MFI / client norm could lead to further over exposure per client.
Industry efforts are on to expand voluntary code of conduct to include banksâ exposure amongst the 2
MFI norm, to mitigate this risk. However, progress is slow.
While there may not be much risk in the immediate future, probably something that needs to be tracked. The MFIs might have to look at the absolute outstanding loan with a client (across multiple MFIs/SFBs) before sanctioning further amount?
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For those betting on a blow up, hereâs more data on the sector that supports the bulls 
"Playing down such concerns, an internal note of the government on Mudra loans has said loans given under the scheme through MFIs have high rates of recovery.
âThe traditional strength of MFIs in high rates of recovery continued with Mudra as well,â it says. Their overdues were well below one per cent as on March 31, 2016."
âThe note says clear patterns have emerged in the lending behaviour of MFIs and banks. MFIs are better placed in providing smaller loans with shorter tenures. They reach most women, Scheduled Castes, Scheduled Tribes, other backward classes and minorities in terms of extending Mudra loans than banks. Banks, on the other hand, perform better in reaching bigger borrowers.â
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here are some facts regarding the established businesses in the microcredit sector.the one with the longest history is Grameen bank of bangladesh,started in 1983 as of date it has a recovery rate of 98.3%.from inception it has made losses in just 3years till date 1983(yr of commencement) 1991 1992.will need to find out why 91 and 92 were bad years.would recomend that all those who have a vested interest in this sector read BANKER TO THE POOR.BACK back home we have Bandhan bank which has been in operation for the last one yr purely as a bank with 90% of the business coming from microcredit.till may2016 (started as a bank in aug2016) it has managed to collect deposits worth 12088 crs,21% of which is CASA(2600CRS).this was done by tapping both non borrowers and borrowers,the bank offers 8.25% for a 1yr or more deposit and offers 6% on a savings account.the bank was lending at 20.5% but recently bought it down to 19.5%the average cost of deposits was 8%.in fy 17 the bank was looking at a deposit growth of 30%.the net npa was at 0.08%fro fy16.i feel those businesses in this sector who do not chase undue growth and who remain conservative could probably replicate what Grameen has done in Bangladesh.
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ey-evolving-landscape-of-microfinance-institutions-in-india.pdf (2.9 MB)
Jul 16 report from EY
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2 MFI per client is RBI norm - why do you think the MFIs would violate this?
They already do (though one cant vouch for every single MFI I guess), because total outstanding across all MFIs cant go beyond 50000 (RBI rule again). The institutional mechanism for this is enabled through organisations like MFIN and Sa-dhan which enable client data sharing among other collaborative efforts.
The following two points are straight from equitasâ presentation:
A. 8 proposed SFBs and Bandhan account for about 70% of MFI market. These players moving away from 2 MFI / client norm could lead to further over exposure per client.
B. Industry efforts are on to expand voluntary code of conduct to include banksâ exposure amongst the 2
MFI norm, to mitigate this risk. However, progress is slow.
Would like to clarify that the above are not my views.
What they seem to be trying to say is though the 2 MFI/client restriction remains, once an MFI becomes an SFB, the SFB is not restricted by the guideline and they could take an additional exposure above the 2 MFI/client limit.
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The MFI segment is in its own bull run (bubble?) I do not intend to write anything specific about any company but just a few points to ponder.
a) Differentiation: Any financial institution which lends is the worst kind of commodity play. In terms of service most of them have little that differentiates. It is extremely difficult to find where one bank/HFC/NBFC/MFI differ from the other in the sector to which it caters. Despite this you have some being success stories creating huge wealth in the long run and others not so much and still worse some continues to bleed. IMO the major differentiator is the organizationâs culture driven by a competent and prudent management.
b) Offering higher loans: Consider the scenario where you offer a borrower continuously higher loans. Does this really test a borrowerâs creditworthiness? What happens when the ticket size starts going down? I was a little unhappy when RBI increased the MFI limits. There are also doubts about the diversion of funds for consumer purposes.
c) Fast growing balance sheet: Everyone who knows the lending industry will say that this is a recipe for disaster.
d) Regulatory issues: Banks are the highest regulated bodies in a financial system despite that look at the mess they are in.
e) Black Sheep: There are umpteen numbers of MFIs in India and new ones are mushrooming everyday. Incase one of these MFIs blow up the entire sector could be at risk.
At the same time the next question that I had was how do I play this bull run with limited risk since I am invested in the sector? The only way I could think of was by controlling my allocation. Every time my MFI allocation goes higher than a certain threshold I sell. The threshold can be relative to the portfolio or relative to the base price and I promise to do this without consideration of the fundamentals.
DIscl.: Holding Arman. Sold some quantity recently.
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The NBFC story: Alive and kicking
The distribution reach of NBFCs remains unmatched by banks in microfinance, used-vehicle financing, housing
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The coming revolution in Indian banking Written by Nandan Nilekani
Increasing penetration of smartphones, Aadhaar-linked bank accounts and a host of powerful open and programmable capabilities is set to create the âWhatsApp momentâ for Indian banking
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Does anyone here consider Bajaj Finance as an MFI? It does not fit the profile of typical MFI who lends to the poor but Bajaj Finance makes small ticket loans to relatively well-off to buy lifestyle products like mobile phones, TVs and even fashion now. Their growth is high and asset quality is good.
Disc - Invested since 2004 on and off.
Bajaj Finance Vs MFIâs
Lends for > Consumption - Lends for Income Generation
Demographics > Urban - Rural (although some MFIâs are not urban focused)
Demographics > Rich/Middle class - Poor
Demographics > Men - Women
Credit Bureau > CIBIL - Equifax
Size of Opportunity > Big - Bigger
Consumer behavior data quality > Decent - Doubtful
Priority Sector > No - Yes
Political Risks > No - Yes
Ticket Size > Less than 2 lakhs - Less than 1 Lakh
NPA Cycle > Consistent and Managed - Low, but can go to an extreme during a crisis
Cross Selling Opportunity > Yes - Yes
Good Customer Experience > Yes - No
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Had a chance to interact with the management of SKS Microfinance (now BFIL) . Most points were industry related so posting the highlights here:-
-
On system and checks to ensure loan for consumption
Post AP crisis company has started the policy of incentivizing LOC (Loan officer) to check whether the loan he/she approved is used for the earlier stated purpose or not. LOC reports back and files report. An external agency is also used for random checking and if their report varies significantly from LOC reports , the LOC is fired immediately. While selecting a group, they check the CIBIL score if available. For newer customers (who doesnât have taken loans before from anyone) it is considered as equivalent to good credit score. - Ratio of rejected to approved loans has gone up from 8%-9% in 2014 to 24-25% in 2016 (the Q1FY17 results ppt has the figures and reasons for the same). As per the management, major reason for his increase has been mandatory requirements of multiple KYC documents which everyone cant submit.
- External/Event risk(like cattle risk, political risk, Draught) remains one of the biggest risk to the industry. The only way to reduce this risk is diversify in different geographies. The management gave an example that out of 100 odd districts who were facing draught in last 2 years, SKS had 10% portfolio exposure only. The company believes that harnessing local people knowledge about the region risks is much better compared to statistical models.
- Apart from external risk, the increased loan ticket size remains a big risk but SKS has kept the policy of keeping loan offtake at the lowest levels among top 5 players in industry.
- On the issue of whether SFB like Ujjivan will be considered within limit of 2 , the management said that most probably (still no guideline from RBI) SFB will come under RBI purview and wonât be considered as MFI so practically it can be 2 additional mfiâs apart from likes of Ujjivan, equitas. According to the management it will be opportunity for players like SKS gave the example of Bandhan that before converting to bank they had disbursements of close to Rs 1500cr but after conversion due to stricter norms of RBI, the disbursements had reduced to 900cr leaving opportunity for other players to grab their customers.
- Strong growth to continue - 50% CAGR for next 2 years and 35% CAGR on 5 year basis is the target. This will be driven by 15-20% CAGR in Ticket size growth and 25-30% CAGR from newer customer.
- On retaining talent and attrition rate- For the company attrition rate is at 27% levels. Most attrition (50%) happens in the 1st 6 months of joining when the person realizes that this job is not for him/her. (slide 73 describes it in detail)
- Next set of growth will come from northern states like UP, Bihar and even Orissa. Southern states are mostly saturated now.
- Consolidation is happening in the industry (top10 players make up 90% of the market) and in a way encouraged by RBI- According to the management, the stricter norms where new entrant requires atleast 1000 cr of capital (considering 1:1 Debt to equity and 2000cr considered as book size to breakeven) now and 3 years to breakeven. Earlier companies use to breakeven much faster
- Management suggested to read reports where microfinance can be considered as reverse saving. Also suggested to read Nandan Nilekani article on formalization of the economy. To understand the opposite views (counterviews) the management suggested to go through Prof MS Sriram (IIM B) articles (See References below). Also suggested to read articles by Mint editor cum consultant to Bandhan - Tamal Bandyopadhyay
- With reduction of rates on MFI loans, MFI loans are becoming as attractive as goal loans so are goal loan customers possible target customers? Management believes that these are 2 different segments with gold loan focusing on irregular income or some emergency) while MFI is focused on people who normally donât own gold and where repayment starts within a week or initial loan.
Disclaimer - I have tried to represent the data as it is but there might be some errors on my part in terms of retention of data. Do check the investor presentation. No investments in any of the Microfinance companies.
References:-
- http://bangalore.citizenmatters.in/articles/when-micro-finance-makes-it-worse-for-poor-women-in-bengaluru
- http://www.financialexpress.com/industry/companies/tap-entrepreneurs-for-formalisation-of-economy-nandan-nilekani/271379/
- http://www.livemint.com/Search/Link/Author/Tamal%20Bandyopadhyay
- Q1FY17 Result ppt - http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/310B433D_1A8A_4647_AF42_A1AF503849BB_171347.pdf
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Government support on funding to continue. Shows govt is pro MFI.
The government target of giving loans to the tune of Rs 1.22 lakh crore through Mudra Bank has been surpassed and a new target of Rs 1.8 lakh crore has been set for the current financial year, the Rajya Sabha was informed on Tuesday.
Replying to questions, the Minister of State for Finance Santosh Gangwar said the government had set a target of Rs 1.22 lakh crore worth loans to youth but has instead provided loans worth over Rs 1.37 lakh crore during the year 2015-16. He said now a new target of Rs 1.8 lakh crore has been set for the current financial year.
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The real questions all MFI investors should be asking is if the MFI industry is actually creating any value by helping their customers improve their standard of living using the loans as a catalyst? If a borrower remains poor even after few years and several rounds of MFI funding then MFI industry is not creating any sustainable value.
Few borrowers will definitely benefit from loans and these are the ones that are highlighted in annual reports and presentations of MFI players but there should be meaningful improvement across a large number of customers.
These customers borrow at 20%+ interest rate. For the loans to be helpful, these borrowers have to generate ROCE of at least that much to break even. We all know how difficult it is to generate that kind of return. At the rate, these borrowers will beat even the most efficient companies.
small and micro businesses can often generate high returns but I am skeptical if the MFI industry is actually helping these borrowers. they are just high interest high hisk lenders hoping that the interest rates are high enough to cover the credit costs (defaults etc).
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Some Interesting papers I came across recently:
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Recent interview of Basant Maheshwari
http://m.economictimes.com/et-now/experts/Market-Makers-with-Basant-Maheshwari/videoshow/53438614.cms
Interview before few monthsâŚ
http://m.economictimes.com/markets/expert-view/housing-fin-cos-pharma-midcaps-and-hi-tech-it-are-favourites-basant-maheshwari-wealth-advisers/articleshow/51340514.cms
What I observed once he become too bullish and giving many interviews on particular sector, within few months he sell on bull and pick other Sector.
Refer past history of page, hawking, etc.
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Mr. Maheshwari is a peculiar character. About 18 months back, he said in a TV interview that HFCs that lend to salaried class, that is CanFin Homes, won`t make profits due to competition from banks. Only those HFCs that target the non-salaried class like Repco and Gruh would make profits. About one year after this interview, he gave another interview where he said that he invested in another HFC which is sponsored by a PSU bank and not itâs subsidiary, implying CanFin Homes. He also said that he invested in this company one year back and made good profits. How could he buy shares of CanFin Homes one year back when he was claiming on TV that it was a bad investment?
It is possible that he claims to have bought shares of the companies that have done well in the recent past. He was accused of falsely claiming high returns while running an investment newsletter service and had to close it.
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Equitas holdings Motilal oswal report
@hnk_so the link you shared is about is of a chit fund company. Please read the content before posting misleading headlines. That is basic courtesy if not intellectual integrety one would expect from boarders.
âThe CBI today conducted simultaneous raids on the offices of Microfinance Ltd, a chit fund company, at seven places in Odisha.â
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