Satin Creditcare Network Ltd - Reaching out!

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Krishna, V. Vaidyanathan of Capital First was asked about the impact of demonetization. This is what he said.

Anuj: I wanted your thoughts on this demonetisation of Rs 500 and Rs 1,000 notes. I am sure you have some lakh in loan against property as well and some of the loans that you do are in the smaller cities where of course it is legal but cash does play a part. Your thoughts on how it is going to impact business?

A: This has been a concern for the people over the last 24 hours. Basically about 95 percent of our collection is in the form of either electronic instruction; electronic clearance service (ECS) or post-dated cheques (PDCs) or internet where customers come through the internet and pay and therefore there is only 5 percent that comes in the form of cash. Even in the form of cash at the heart of it what is really happening people are going to deposit their old Rs 500 notes with the banking system, they are going to take back a new Rs 500 note. So, it is just that a lot of unaccounted cash will come back to the banking system probably but that is about it. So, basically people still continue to pay and if anything we actually expect that the mode of clearance of 95 percent through electronic system might inch up in the days to come. So, there is no cause for concerned either on loan against property basis or the normal SME business.

As far as loan against property business was concerned about 42 percent is the loan-to-value (LTV). So, really we do not expect any dramatic things to happen here and I just wanted to reassure your viewers and investors.

As you rightly put it it, the impact may be felt during next 2-3 weeks when their customers will be forced to exchange the currency and it could be painful especially if a bank is far away. In the long term it should be business as usual,

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Krishna collections will be impacted and some leeway given on postponing installment payment. This will not constitute as default because 1) not 90 day past due, instalments are bi weekly 2) RBI will do whatever it takes to make sure financially weak and those helping in their inclusion are not impacted, hence likely will encourage such extensions and give whatever support required.

Net net you will see no impact in reported numbers is my view. We shall see. For ppl at the bottom of ladders such disruptions are common, like recent floods in parts of Bihar. As long as they have willingness to pay the lenders work with them and small delays are tolerated. Itā€™s a recurring long term relation. This is what creates the moat ideally in such a business.

This gives bears a good opportunity to attack though :slight_smile:

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Krishna these questions have been answered by Ujjivan CEO. Perhaps equally applies to Satin as well.

Sumaira: Before we get to your earnings we want to understand from you, since you have the pulse of the people, what is the impact of the demonetization of the high currency notes as you see it? What is the kind of impact that your company might feel?

A: Most of the repayments are in cash for the entire microfinance industry and they are done in denominations of Rs 1,000 and Rs 500 notes. So, most of us have deferred the repayment or rescheduled it or postponed it by one week. What was due this week and we have also stopped our cash disbursements. So, there will be a temporary dislocation in terms of repayments and disbursements.

We expect by next week ā€“ when the new notes are in place ā€“ that slowly will get back to normal. So, so far we have been assisting our customers, telling them how to handle this situation, where to go to get their notes replaced, etc. So, far it has been very positive from the customer and we are hoping to get back to normal next week. In the mean time, the microfinance institution, which is our association has also taken this up with the Reserve Bank of India (RBI) and with the ministry of finance to see if there could be some way where these customers could repay with old notes if this whole process is extended.

Mangalam: You spoke about your repayments being in cash. So, what proportion of this delay in repayments stands to be at risk of default?

A: Customers are very generally very cooperative. So, it is not that they are going to go into default. Given this unusual situation, we have deferred it by a week and hopefully, customers understand fully and since we are not trying to force them into doing something, they will come back and repay it after a week.

However, if this whole thing prolongs for a long time then we risk a default and that is why we have taken this up with the RBI and with the Ministry of Finance to see if we could accept the old notes because all these are documented transactions, we have repayment schedules, we have the KYC of all our customers etc. So, these are all legitimate transactions. So, if this whole process gets delayed further then we would need some kind of forbearance from the Ministry of Finance and RBI.

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I am surprised the RBI have not given them special dispensation yet. The new RBI governor appears to be unable to take calls without bosses around. Maybe after Japan trip we will see somethingā€¦

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I expect there to be disruption this quarter given UP elections + atleast 2 weeks of disbursement collection issues. I will buy more at 400/450 levels.

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With 90 days NPA period and only 50 days left in Q3, why do you think NPAs will go up? We can expect tapered growth in Q3 and possibly Q4.

Similarly, there is a very high chance of most of the pending dues will be collected in time before Q4 is done.

Lots of uncertainties but my get feeling is MFIs will be the first NBFC sector to recover from demonetization shock.

Disc: Invested and views could be biased.

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Bought more around 400 levels.

Feedback from ground is that disbursement is completely dead but collections are seeing some bounce back after almost a 50% drop early last week (as people start getting cash). Still below 75%.

BC business has zero impact since BCs are allowed to collect old notes

A concern of course is given UP elections, you will see politicians getting involved in preventing collections. I expect Dec and March quarters to show a spike in NPAs.

Important to keep oneā€™s head clear and focus on a 3-4 year outcome and not let a short term disruption affect a clear multi-year growth story. Supply of credit from informal channels to MFI borrowers will get scarce. AUM growth of around 50%, therefore, is unlikely to prove a challenge once normalcy returns. The key risk to this thesis is that normalcy takes a long time to return, thereby affecting the lives of borrowers very negatively but there we hope Modi has his eyes on UP elections and isnā€™t going to allow that to play out.

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@peguyā€¦thanks for your notes.What is BC business ?

Also RBI has just relaxed the Norm for NPA recognition today

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Business correspondence - where MFIs source loans for banks on the bank balance sheets.

Itā€™s a sales agent type model, they just get a sourcing fee / share of interest income, very low liability.

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One of the reason for the sharp correction may be because agreement of Satin Creditcare and Reliance Capital for NPAs of the borrowers given by Satin Creditcare to Reliance Capital.

Satin Creditcare finds borrowers, Satin does the credit checks and also follows up for repayments. If the borrower does not pay then it becomes the liability of Satin Creditcare.

Please find the link

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pls correct me if i am wrongā€¦i think this is a very recent agreement ā€¦if so ā€¦the liability wont be much

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As per the managementā€™s presentation, it was done in Dec 2013SatinCreditcareNetworkLimited-1.pdf (1.2 MB)

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@nityanandparab
Good finding. It will correct further. Any company who connect with reliance will loose as reliance always makes agreement in fevour of reliance only!

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You are referring to the business correspondence model that satin follows under TaraShana. In this case tarashana just has a 5% first loss given default arrangement and is not due for the entire loan amount.

Of course this segment will be as impacted as any lending business but the liability is capped at 5% of loan value so wonā€™t impact Satin much.

My continued concern with satin is only the impact of UP elections in the current demonetisation scenario. All else is temporary, If UP starts misbehaving there will be a meaningful hit to FY18 financials

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Collection efficiency after November 14 at 50%: Satin Creditcare
http://www.moneycontrol.com/news/business/collection-efficiency-after-november-14-at-50-satin-creditcare_8000341.html

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Dont you find it strange that management says 40 to 50% of customers donā€™t have bank accounts given so many bank accounts have been opened under Jan Dhan

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i spoke to the company and they reassured that all is well except that initially people didnt have new notes. Now as the supply is improving people are repaying which reflects in 50% recovery HP Singh referred to. They said that we have very long term relations with our clients and as the money supply will improve the whole business will come to normal.

The industry is also trying to get approval for old notes acceptance which will be a huge boost

Thanks for clarifying Peguy !!

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In villages penetration of bank accounts is low , even those who have them under jandhan dont operate them often.
this was even mentioned by the MD that those who have them mostly are dormant

In addition the banks are far off , at present they dont even have enough cash. So long lines dont help in anyway for these daily earners.

In my opinion this business will remain in cash for some more time ā€¦though they have started encouraging bank transfers

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Yes that it very surprising. I also feel Satin should detail the benefits of having a bank account to its customers. This could help them to ask their customers, in coming years, to go for digital payments. I know I am taking it too far here, but things can change pretty fast as everyone has a mobile.

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Page 14 says " Have entered into an agreement with Reliance Capital Limited (ā€œRCLā€) in Decā€™13 to provide certain services to RCL for providing loans against property
(ā€œLAPā€) with a view to leverage on our rural reach
ļ‚§ Under the arrangement, Satin sources clients for RCL in Delhi NCR region, who need financing against residential/commercial property for productive
purposes
ļ‚§ Other services include carrying out KYC procedures, address verification, credit appraisal, assistance in security creation and follow-up for recovery.
ļ‚§ The loan is directly booked to RCL and Satin earns a fee equivalent to the interest over and above 15% per annum.
ļ‚§ The credit risk shifts from RCL to Satin in case there is a delay in loan repayment by the client and loan becomes overdue for more than 90 days"ā€¦

But, whereā€™s mention of Satinā€™s liability capped at 5%?