@Gaurav_Agarwal unless they have hope of a merger, why would they buy out holding company shares?
Yes, you are right. All I am saying is
- U-SFB board will be all powerful. At present also U-FSL board is just a show piece.
- U-SFB may decided (just to look good) to buy shares of U-FSL, how it will done - merger or something else does not matter.
- U-SFB may in-fact in future decide not to waste itâs money in buying shares of U-FSL and let the company rot just like that.
So far i always bought shares in companies where management had skin in game, at least about 50% shareholding.
What do u guys think would be incentive to the MD, CEO, management in running UFSL or USFB when they do not hold any significant shares in either of the two? Can u share your views? I want to understand about it.
They took all this effort of getting SFB license and bringing it up from scratch, opening branches, scaling up, etc. wouldnât they wish they held some stack to benefit in this growing SFB sector??? They surely have more money than i do 
The reason i ask this is, if they have some interest in UFSL, then they would take all the care in future to help it merge with USFB. 
Jatin, sure, banking sector does not see huge promoter holdings in majority of cases. But they have ESOPs schemes to align employee interests.
All the ESOPs granted by Ujjivan to its employees and even Ittira Davis, are in UFSL and not USFB. I am guessing even Nitin Chugh will get ESOPs in UFSL as well only.
@hack2abi, @Gaurav_Agarwal, @gpoliset
Guys, i believe i have got an answer to this voting right thing after a lot of confusion (on my side).
At the end of 5 years lock in period of promoter holding at 40% level, if RBI agrees to dissolve holding company, i.e. that RBI allows promoters stack to go down to zero, then it should be pretty easy for holding company shareholders to dissolve the USFL hold co. There must not be any role of new USFB shareholders in the holding company dissolution decision at that time. The reason being, it would be an internal matter of the holding company shareholders as the holding company will directly hold shares of USFB in its books and its just a matter of distributing those USFB shares to individual shareholders of holding company in proportion of their shareholding in the holding company. isnât it? What do you think?
If this is true, then i am hopeful that RBI should be okay with promoter holding going down to zero after 5 years, since there is no rule that says that promoter holding in a bank must be such and such after 5 years (current rules only decide upper limit). So there could be a considerable upside at the end of 5 years (less than 3 years from now to say). And that could also mean that holding company trading discount should not be significant in case of UFSL share.
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Jatin,
Then why dont they do the same for current listing? Give everyone a 1/10th of their holding in USFB and list. Why go to SEBI for capitalising reserves? Why canât this also be done to bring down the promoter shareholding to >=40% now or even before end of 5 years?
Also as per sebi ipo rules, promoter shares (minimum contribution 20%) are locked in for a period of 3 years. Over and above that, contribution are locked in for 1 year. So the 85-90% promoter holding in USFB cannot be fully collapsed until after Jan 2023.
I think its best to take the queries directly to the management. Too much confusion here.
This canât be done. Then there is no one holding more than 40% and no identifiable promoter remains.
This is to raise new shares of SFB, which can be distributed to holding co shareholders, without breaking hold co. This route is being looked at by equitas because they have more reseves. Ujjivan does not have significant reseves.
I agree with this that hold co breakup may take an additional year due to sebi rules. This can be taken to management for clarifocation definitely.
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@hack2abi What should a regular investor do ?
- Take a bargain by buying Holding co shares in bulk now before listing and wait for 3 yrs
or - Keep SIPing Holding co shares and SFB shares 50:50 allocation , for 3 yrs
or - Just Buy Bulk SFB shares on IPO even at 8000cr mcap or 12000 cr mcap and stay calm & peaceful for 3 yrs.
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Man, Gautham that is a tough question to answer, Ujjivan will probably list before Equitas now, and there are no comparables to cite.
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Bandhan is a Universal bank with majority MF book but has no limiting regulations of SFBs. It has traded between 7.5x to 4.5x in terms of P/B. Valuations have reduced after non-compliance with regulations.
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AU SFB is similar in regulatory stead but its book is entirely different, it has traded between 4x to 9.7x and is at 6x now in terms of P/B.
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Equitas SFB is the closest comparable in term of holding structure and loan book but not in geographic spread. It has traded between 2x to 4x in terms of P/B. Their IPO came out at a P/B on 2.29x (based on 9MFY16 BV).
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Ujjivan came out with an IPO valuation of 2.2x P/B (based on 9MFY16 BV), while Bharat Finance and Satin Credit Care were both trading at 5x odd P/B at the time.
Perhaps the managements and merchant bankers of both Equitas & Ujjivan applied the holding company discount to the IPO in recognition of the holding structure.
It is difficult to imagine that all market participants did not know about the holding company structure, I have not looked into the shareholding data but it could be the case that the retail participants bid the holding company shares to 4x P/B without the knowledge of holding structure or in hope of favourable exemptions from RBI.
Assuming the above history in trading values, it may be that when the SFB IPO comes out, it will come at, at least 4x P/B and markets may bid them higher due to low float that will be available. Building a position in SFB will not be easy and cheap, given the interest that was seen in the IPO of the holding companies.
Ujjivanâs bid to show better C/I ratio and loan book growth in Q1FY20 and in the coming quarters before the IPO is also not of any help. The management had guided again and again in interviews and CCs that it will have 3 years to bring down C/I ratio to ~50%. Another factor to consider is that Ujjivan SFB will see a big leadership change from December and we need to be in a wait & watch mode to see how the leadership direction, values, culture and efficiency change.
If one truly believes in the long term story, then high valuations should not necessarily be a deterrent, we have ample examples of long term wealth being compounded at respectable rates even when purchase price were at expensive valuations. Whether Ujjivan and other SFBs are in that basket is a call the investor will have to take after their own due diligence.
I am sorry that I do not have an answer in the format of, do 1,2 or 3. You are a knowledgable investor yourself, and you know when to buy in bulk and when to SIP. The allocation decision between UFSL and USFB will need to be taken on the basis of relative valuations, and the regulatory environment of the time.
@shreyas1705 I missed your query from before. As you have seen that the conditions for Equitas have changed since the time you asked your question. Valuation comparison between Equitas and Ujjivan is a subject of long detail research. But is majorly dependent on NPA levels, loan book segmentation based on geographic and product, provision coverage, collection efficiency, management quality in assessing, mitigating risks.
Equitas did better in terms of NPA during the DEMON after-effects, but they received their SFB license before DEMON, though not all branches had been converted at the time to accept old currency notes, it is difficult to determine whether they did better due to SFB license advantage or better risk-adjusted loan book.
Currently, if my memory serves me right, Equitas has higher NPAs and lower PCR than both Bandhan and Ujjivan even though Equitas has a lower proportion of MF loans and a higher proportion in Vehicle and house finance. Equitas has moved to daily recognition of NPAs if I remember correctly, I am not sure what they mean by that, as per my understanding that is just the PAR>0 figure that everyone follows. Or maybe they are recognising NPAs on a day to day basis and providing for it daily instead of doing it at month-end or at quarter end.
On your other question, Ujjivan management has still not started work on bringing down the promoter holding to 40%, but given their preference for following regulations, they will have a plan ready and executed before the deadline, this is another area we need clarification on from the management in their next CC.
I am in a learning phase myself, and the situation in the microfinance industry, SFB industry, regulations, political interference, weather-related disruptions are so dynamic that currently, it is not possible for me to decide which business is superior between Equitas and Ujjivan and even Bandhan and AU for that matter.
It is difficult to even decide whether MFIs are worse off than SFBs currently because the good ones are showing similar Cost of Funds, NIMs and better ROAs and ROEs due to lower regulatory burden and operating costs. It doesnât help that SFBs (which were the biggest MFIs) have vacated the field for old MFIs in terms of 2 lenders and 1 lac borrowing per client policy.
There have been recommendations to incorporate client wise lending data from all sources like SHGs, SFBs, Banks and non-MFI NBFCs.
We have an excellent gauge of DEMON to check how the loan books and business of different participants performed during and after the crisis. I am working on a comparative data sheet for the same, but it is a work in progress currently.
Take the case of Janalakshmi Financial Services (now Jana SFB), if you read the industry reports before the DEMON they grew their loan book at a crazy pace, 194%, post-DEMON their NPAs reached 30+% levels. Now the management has been changed and Mr. Kanwal ex-CITI was brought in with PE investments to save the company. Does one give the business a clean chit because the top management has changed or does one penalize them for past mistakes knowing that it is difficult to change company culture? Jana still hasnât posted their FY18 AR & results on their website, while before they were, regularly.
Spandana, a recently listed MFI, went into CDR after the 2010 AP-crisis, they were one of the few who came out of CDR, others went bankrupt and BASIX pivoted to becoming an organized BC. Spandana before their IPO showed a loan book growth of 144%.
In good times, investors forget the bad past and see only the rosy future. There is no doubt that PE-backed investments want top dollar exits and managements are coerced to deliver.
I am leaving below some links to resources that one can study to understand the industry and its participantâs past if one goes through them and other company filings, you will be able to get some idea on management quality. With upcoming SFB and MFI IPOs, these are a must-read.
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MFIN - Their MicroScape, MicroMeter and Annual Reports offer good data points.(http://mfinindia.org/free-pdf-download/)
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Sa-Dhan - Their Bharat MicroFinance Reports have been sighted in a few research papers. I havenât yet got around to reading them. http://www.sa-dhan.net/publications/ & Sa-Dhan Web Map
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India Inclusive Finance - Their annual reports are a must-read to get industry insights, 2015 to current are a must-read to understand the latest developments. One can even read the ones around AP-crisis to learn more. https://inclusivefinanceindia.org/publications/inclusive-finance-india-reports.html
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Dvara Research Blog _ Microfinance through a Data Lens.pdf (953.0 KB) & Dvara Research Blog | Search Results Microfinance
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Ambit- Microfinance errclub Will the dream run continue.pdf (421.5 KB)
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The Microfinance Bill - Need for a Fresh Outlook.pdf (508.3 KB)
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http://www.ice360.in/uploads/files/PRICE_report_Indian_Citizens__Basic_Needs.pdf
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ice360survey2014-datacodebook.pdf (828.6 KB)
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Status of Micro Finance in india 2018-2019 -https://www.nabard.org/auth/writereaddata/tender/1207192354SMFI%202018-19.pdf
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Only a few MFIs & only Ujjivan as SFB has a SMART Certification -https://www.smartcampaign.org/certification/certified-organizations
https://www.smartcampaign.org/certification/certified-organizations/certified-profiles-ujjivan
(Equitas did not get re-certified after 2015 as per my knowledge.) -
MF-Rating - Provides a good global outlook - https://www.mf-rating.com/publications/
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M-CRIL - A few publications provide good resources on the history of the industry - http://www.m-cril.com & http://m-cril.com/pdf/Publications/Countrysector-studies/India/M-CRILMicrofinanceReview2014.pdf & http://www.m-cril.com/wp-content/uploads/2015/01/Much-still-to-do-Microfinance-and-the-long-journey-to-financial-inclusion-in-India.pdf
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The MIX - https://www.themix.org/mixmarket & https://www.themix.org/mixmarket/publications
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World Bank Data - The Little Data Book on Financial Inclusion 2018 | Data & Data Catalog
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CGAP - https://www.cgap.org/search?keywords=microfinance&cids[]=56
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ACCESS - http://www.accessdev.org/ & http://www.accessdev.org/wp-content/uploads/2017/07/1036-1006-FILE.pdf
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Different Rating Systems for MFIs - Microfinance Rating Systems
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MIMOSA Rating Index - https://mimosaindex.org/our-blog/
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Atlast Data - Reports - Atlas Microfinance Data & Benchmark & Documents - Atlas Microfinance Data & Benchmark
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Micro Capital - https://www.microcapital.org/
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IFAD - India
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Micro Finance Focus - Microfinance Crisis: Whose Risk is it anyway? | Microfinance Focus & https://www.microfinancefocus.com/
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Micro Save - https://www.microsave.net/
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EDA Rural Systems - Library Archive - RFILC
This is just the tip of the iceberg, I surely havenât got them all, but one can go through the research from RBI and other institutions like IIBF, PRICE, CRIF Highmark, EQUIFAX etc. to understand the macro and micro of the industry and its need. Also, as the AMBIT report reveals, we can also follow the industry developments in Brazil, Mexico, Bangladesh, and Africa to understand what happened to institutions which converted to banks from MFIs.
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Sebi refuses SoA of Equitas on some non-compliance grounds. If anyone understands this please do share. I will try to wrap my brain around this over the weekend.
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https://m.rbi.org.in/scripts/bs_viewcontent.aspx?Id=3764
New draft guidelines from rbi for on tap SFB license. Clears the route to universal bank and collapse of promoter holding but dependent on decision by rbi and sebi.
PS -
MFIN and Sa-Dhan SROs for the MFI industry adopt new Responsible Lending Code which now includes all banks, SFBs, non-MFI NBFCs. While NBFC-MFIs will still follow the 2 MFIs per borrower rule, others will follow 3 lenders per borrower but the borrowing limit of 1 lac per borrower stays the same for all.
This was adopted yesterday in the Annual national conference. This will be helpful in containing risks in the sector. As per my knowledge good SFBs and Banks were already making use of the credit bureau data while lending to the segment.
With change in designation of Bandhan and other SFBs from MFIs approximately 60% of MFI industry loan book had changed classification and left the door open for future stress in the sector. The only data missing now from credit bureauâs databases are now that of SHGs, which are a considerable amount of the industry (~87000 cr) and have higher NPAs (~5%) as on FY19 end.
These rules will not apply to individual lending products which have been left at the discretion of the lending institution.
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Good results from any angle one could dissect. Donât know if it is a pre-IPO pump or the biz momentum will be as strong going forward. Not complaining though as I remained invested after holding company setback. Now the company proposes some reservation for the existing investors as a lollipop. Letâs see mr market takes the bait.
It already is trading like a holding company with 50%+ discount. You can take AU SFB as a proxy for actual valuation of Ujjivan SFB.
These are 2.5 months old, published on Aug 14th. Not sure why it took so long for the publication to come up with the story.
Things may have changed since then. Atleast the coverage should have included the management side of the story as well.
The management needs to provide clear answers as to what they have done to rectify the issues.
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I am writing with some bias here as I am invested.
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It is good that RBI found all these operational/regulatory deficiencies at least in this case, shows that the regulator functions despite some recent lapses in a few cases. Whether they will be competent or not in the future nobody knows.
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Not sure if USFB was obligated to disclose this in the DRHP but they did. Ideally, they should have shared this in a conference call or exchange disclosure. But maybe they were just routine lapses or maybe not.
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I am not trying to dilute the seriousness of some of the offenses/violations but In a few cases it is not clear from the disclosure whether this was widespread or limited to a few loan cases/employees/branches.
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Many MFIs and SFBs have been certified by Smart for client protection since early days. This is renewed every 3 years. I am not an industry insider, so I do no know how much value to give to these certificates. Are they just a scam? Who knows?
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My thinking is that since 2 quarters have passed and we havenât heard anything from the RBI on any strict action taken against the bank, either the issues have been rectified and complied with or still under investigation.
So, we cannot be sure whether this issue is resolved completely, if the RBI is working fine then we can somewhat assume it is on top of most things. The bank must have been solved some or most of the issues to not warrant any penalties from RBI.
What is clear is, a better management would have shared this promptly in February and shared with its shareholders the progress made and answered questions. Best management would not have let this happen at all.
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Since new to the market, I have a basic questionâŚthe result announced this quarter include the performance of SFB?