Ujjivan Financial - Small Finance Bank

In theory you are right

But Banking and MFI requires two different culture and hence banks haven’t able to do what MFI has been able to do and MFI will not be able to do what banks can do .

The culture of how loans are lend and recovered in these two institutions is dramatically different

In MFI the credit analysis and recovery is on basis of social pressure , group dynamics , high level of relationship and interaction with group . This all increases cost of delivery of loans and hence higher interest rate is required -> In short . - MFI is high touch - high margin business . Field people/ resources are strength of MFI and technology is just a aid …

Pure banking is low touch - low margin business @ high scale - The products are commodity which can be easily compared and hence banks need to bring down their cost structure to compete . They continuously automate and try to reduce interaction of staff with customers so that loan process and recovery is more automatic and data driven - Technology & Data analytics are strength of banking business and people just aid the process.

Let try to put across some big challenges for MFI to being successful bank

First ability to bring down cost to income ratio and have dispassionate staff ( who will lend on basis of data and not relationships ) for individual loans which are commodity in nature

Secondly to Raise CASA balances : existing MFI customer is subprime who have more debts vis a vis saving unlike private banks like HDFC whose customer based may be balanced or may have higher saving ability -

Adverse Branch locations : MFI erstwhile branches were in deep rural areas or subprime urban areas - These are not best locations to attract high margin customers , so future customers are going to sub prime only … These sub prime customers are high cost to serve and don’t consume high margin products ( other than small ticket loans )

Cost of Funds – This will continue to be challenge as the scale goes up . Earlier these MFI used to get SIDBI / NABARD support and also grant from different international agencies . This enabled them to take reduce cost of funds and also get field cost subsidised . Now as bank they will not be able to do that .

There are more but above ones are important … Some MFI may still succeed balancing the both – but that probability may be small . I think most of these MFI may give up banking licences or sell the same to other banks in future …

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Hi Shailesh,

You have raised some good points here and I agree that existing branch network of MFIs is in areas where not much deposit mobilization can happen. One can see these SFBs are opening new branches in metro cities (there is one AU small fin Bank next to my office; our office building has ICICI and Axis). They are also trying to offer aggressive term deposit rates to bring in new deposits. So may be in time their business model will evolve to having two category of branches. Full service branches in affluent areas to get deposits and branches in the hinterland to give away credit. Now the question is whether these deposit garnering branches will be cheaper to operate vis-a-vis just taking bulk deposits from banks etc and focussing just on lending? So far the SFBs are guiding that their cost-to-income ratio will fall back in line with their historical averages soon. We need to see a few more quarters before writing them off.

Mr. Samit Ghosh covered this point of liabilities generation in one of his earlier talks. As of now, first focus is on bull deposits in the form of CDs etc. But on the end of retail deposits, bank is looking to garner FDs first, rather than offering too high rates on saving account. He says that people are not very keen to shift their accounts for 2% extra yield on savings but surely do that if we offer better rates on FDs. This is also in line of what Bandhan did.

Even NBFC’s and banks have gone through cycles, a number have gone bust. No vertical is immune from cycles. That said I agree in general this is a higher risk model than banking. I also agree that in medium term a few of the MFIs are going to be taken over by banks especially the smaller private banks who are more hungry for growth and who will find that the cream customers are already taken over by HDFC/ICICI/ Kotak. MFIs, who are well run, will offer a unique set of attributes which a normal bank will not be able to cater to in their normal processes. This is a huge under-penetrated market, which has evolved a lot from 2012-13 when the Andhra bust happened, as formalization happens it has potential for players who manage risk well.

4-5 years ago everyone thought consumer durable loans were very risky et al but Bajaj Finance showed how that market can be built and managed. I am not saying Ujjivan is necessarily that player (they did not manage DeMo well but then no one did), may be someone else will, but just saying the market is there.

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Agree … Market for MFI exists till Fintec is well adopted by Indian banks . Say for e.g Jan Dhan accounts behaviour is well mapped , credit scoring is done then MFI kind of lending @ high interest rate is not required . But that is still some time away . What may happen in mean time is margins on MFI loans may start shrinking .

On risk on consumer durable loans – Yes it very high as these are consumption loans and not productivity loans . More so if asset is taken back its value is far lower unlike housing loan .

What bajaj finance has done is good or bad will be known in couple of years … ICICI BANK was known to be guru on retail lending in 2000 - 2007 ( besides innovative products , it marketed it well & distributed it also pretty well ) , it was only after 2008 , skeleton came out …

Bajaj Finance has to go through couple of bad cycles ( like HDFC has done ) to prove its golden standard…

Couple of observations on why I’m bullish on the SFBs, particularly equitas and Ujjivan. Please note, my horizon is 3 year plus.

  1. SFBs are at the point where ICICI or kotak were in 90s… Of course, competition is significantly higher. But fundamental theme of market share moving from PSBs to private banks is intact and will continue… One just have to meet few of the GMs at public sector to know what I mean

  2. Compared to other MFIs these organizations have a killer advantage that has just started to play out viz CASA. It’s like the cement company that has own limestone quarry… Particularly when banks are less willing to lend to NBFCS

  3. Financialization of savings will continue in India.

  4. Size will hinder growth for likes of ICICI and Kotak and Yes / RBL to some extent.

  5. More importantly, the processes and tech systems will be hindrance in case of large private banks. For example, Ujjivan can directly launch a instaa loan through a digital platform and while Yes can do same, they will have to do lot of bolt ons to fit existing infra, application landscape and underwriting models

  6. It is unlikely that we will see a spate of new private banks for next few years. The industry is a bit jaded currently, in my perspective.

  7. Managerial capacity will be a constraint to begin but some of these SFBs will be able to attract talent from large private banks… And this is where we need to watch.

  8. Branch network will cease to be an advantage and thus new guys will get level playing field. 811 and yono as examples…

  9. Younger workforce probably…although that may not be true in all cases

Fundamentally, the industry is being disrupted and past advantages of being incumbent may not work anymore.

Happy to get healthy critique…

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@Gary24: Though I agree with you on SFBs overall projected growth I just wanted to check my understanding on the below topics :

what is the advantage for ujjivan and Equitas when compared to other SFBs like Bandhan, AU Small Financiers ?

I understand SFBs are closer to the customer than any other financial institution , why can’t other NBFCs like M&MFS, L&TFS, satin credit care or any other MFI ?

I have my own theory for the above questions, but just wanted to know about others thinking processs visa vis mine. Thank you in advance

Hi @p2phani - I think it’s unfair to say that Ujjivan has any advantage of Bandhan or vice versa. This is where business strategy, geographic and portfolio spread and most importantly, on ground execution is critical IMO. For example, Equitas did much better than Ujjivan on CASA growth and while latter is now picking up, there is that much time lost. My point was vis-a-vis other players.

Here’s how I’m arguing this -
1 Would you work with Canara bank or PNB or Equitas / Ujjivan given other things equal?
2. Would you open an account with them?
3. A good performer but disgruntled employee of HDFC - where would she go? To Canara or Ujjivan
4. As a retail customer - do you really think too much when one (Canara) offers you 4% interest rates while another (Ujjivan) is willing to give 6 or 7?

Now couple this with the fact that Canara’s total asset are 6 lakh cr+ and Ujjivan’s are around 8k cr. Even a 10% shift from Canara to Ujjivan will drive 70% growth for latter.

PS: I work with banks as my clients and one of the thing I"m more and more convinced of is that other than SBI and may be 1 -2 others, the rest of PSBs will die.

PPS: The parallel I see is how people used to argue about MTNL and BSNL even up to 5 years ago … how their culture is changing and how aggressive their management has become and so on …

Here’s a nice article from Financial Times with some anecdotal references … of course, the picture it paints is bit too rosy. But hey !

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I find this scrip to be interesting given the honest and conservative management, spectacular performance it demonstrated prior to demo, the way they cleaned up their bad loans. It feels this SFB is in for a long haul. The recent fall in the share price, thanks to the NBFC mess, has made the stock very lucrative.

However, Ujjivan has fallen behind its arch competitor (or, at least used to be) Equitas in terms of its transformation from a NBFC into a SFB. It’s evident from the retail deposit growth rate, roll out of bank branches, etc.

Could someone who has had any experience with stakeholder personnel (employees, customers, management, etc.) throw some light on how effective their functioning is? They always boast of repeat customers in their investor reports. Would like to hear it from someone other than the management about the veracity of its functioning.

Disc: Not invested, but find it interesting

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On Succesion plan and 10x customer growth in 7yrs

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I think it is too early to judge on retail deposit growth. Equitas had a head start advantage and as Ujjivan was getting prepared, demonetization hit and they spent next 1 year getting house in order and building wholesale liability. As per AR 18, their FY 19 priority is building retail liability n CASA and would like to give them 12 months tracking every quarter

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What in think is ujjivan is in a very good spot. However major concern
-Samit Ghosh to retire and has already sold all hi shares. This leads to lack of leadership even if new person comes, the SFB is small in size and needs to be grown by founder for the best outcomes. The new leader would not have much incentive and can move to other bank’s also. Which bank in private sector doesn’t have promoter founder (with/without shares)
HDFC- Aditya Puri
Indusind -Sobti family
RBL bank- Ahuja family
Bandhan bank - Mr ghosh
Yes bank- Rana Kapoor build it up
Only ICICI is a private bank managed professionally
AU and Equitas also has promoter in execution
What’s the surety here or incentive here to the new leader sticking to business?

This is the biggest risk which I see here Ujjivan is like a baby to be grown. How well some other will take care of it? Rest all is good.

Sobti of indusind is not the promoter.Sobti came from SBI while indusind promoter is Ashok Leyland group

HDFC bank is also professionally managed. Aditya Puri is not a promoter at HDFC Bank.

Yes what I meant is the person build up Indusind is Mr sobti from 2007-08.
The name with Ujjivan was- Samit Ghosh, at this point it is a risky bet.

Well it is just like same Samit ghosh is not a promoter but still founder of Ujjivan.

What i fail to understand is the massive divergence in valuatons between Bandhan and Ujjivan. Both have similar loan book and CAR levels. Bandhan leads in CASA and C/I ratio. But rate of improvement is gonna be more in Ujjivan from now on. Ujivan trades at 1.5x while bandhan at a massive 6 times book… does a high casa/low C/I warrant such a premium?

Similarly Equitas and AU have similar business model and portfolio composition. Equitas trades at less than 2x while AU trades at 7x. Markets are sometimes irrational…!! I think Ujjivan and Equitas are more ethical and conservative while Bandhan and AU are aggressive in their business practices and recovery process. Ujjivan promoters clearly mentioned they went soft on recoveries as they wanted to empathize with borrowers during demonetization and making money is not their sole objective.

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Both Bandhan & AU has superior AQ, better return ratios(RoE & RoA) & are low cost operators compared to Ujjivan/Equitas. Also, the latter have disappointed on the above said parameters during demonetization & their transition phase, hence commanding lower multiples relative to the former is my understanding, I may be wrong.

For Equitas & Ujjivan, much depends on how they perform after they’re done with the transition/expansion, and once the operating leverage starts kicking in, which could re-rate them & multiples may expand, but for that to happen, they should focus intensely on assets quality & keep costs low

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