Loan sharking exists in all countries including USA, UK, Australia etc. In most countries loan sharking is controlled by crime mobs like the Sicilian Mafia, Russian Mafia etc. That will always continue on the sidelines. The important thing is reducing the prevalence of predatory lending through legislation.
Next quarter may be good or bad. A bad quarter is normal in a cyclical business. Itâs the long term prospects of the bank that really matter. The way things look right now Ujjivan is expected to do well in the long term.
From 2024 - Q2 reports the NPA for Ujjivan and peers are as follows :
Equitas - GNPA 2.95%, NNPA 0.97%
AU small finance - GNPA 1.98%, NNPA 0.75%
Suryodaya - GNPA 3.03%, NNPA 0.80%
Utkarsh - GNPA 3.88%, NNPA 0.89%
Ujjivan - GNPA 2.52%, NNPA 0.56%
This is one of the reasons for Ujjivan winning the best small finance bank award.
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Ujjivan npa looks good.
AU sfb looks much better.
Do we have the numbers for credit access grameen?
AU finance will have lower gross NPA because their primary lending segment is vehicle loans. Defaulting on repayment can result in vehicle seizure. So, there will be less defaults.
Credit Access Grameen Bank has Gross NPA 2.44% and net NPA 0.76%
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AU SFB trades at a P/E of 23, Equitas at 18 and Ujjivan at a P/E of 6.
Does this point to Ujjivan being a screaming buy or are there other aspects to it?
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Have a look at their secured to unsecured loan book.
Street is giving the PE according to that.
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while analysing small finance banks or any financial institution to value the company one should use price to book instead of pe another thing microfinance companies like ujjivan are screaming buy when they are under 1 p/b
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What is the use of Book value if all Asset have turned bad.
Remember Yes Bank, DHFLâŚ
Companies which can get funds at low cost and loan out higher and recover 98-99% will continue to grow.
Even if Cost of fund is bit high but AUM are growing and performing still itâs a good bet
Then there is Role of RBI which hurts or appraises Finance sector time to time.
But Good Companies always steer through all these phases
If itâs an unsecured book, then it can be problematic. If the company is doing secured loans with due diligence, then I think itâs fine?
A lot is dependent on string underwriting, recovery rates, cost of funds, and as you mentioned RBI. Itâs better to have a strict RBI as these companies are purely money transfers in essence.
I agree with you but with yes Bank nd dhfl it was management that was fraud now whole industry is facing pain so we canât say whatâs use of asset
This micro finance cycle faces strain when government have contradictory fiscal policy and it rises or recover when goverment has expansionary fiscal policy
If you observe what goverment is doing it will help you to play this sector well
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When looking at PB, factor in 1 to 3 yr fwd BVPS in the ratio. Will help identify periods of irrationally high and low valuations.
Obviously this will have discretionary input involved which needs to be calibrated with deep industry knowledge, otherwise any valuation can be justified.
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Hello @hack2abi ,
Would love to know your perspective on Ujjivan Small Finance bank going forward. Iâd bought with a view that holding company discount would vanish and improve the valuation but things havenât quite played out as expected.
Thanks
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poor set yet again, people who have been invested, please share your updated views.
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The pain in micro finance is expected. Also as their laon book is majorly into micro finance lending. The pain is expected for some quarters to come.
But one better thing is gnpa is constant yoy and qoq. NNPA yoy it is increased but qoq it is stable.
Waiting for concall transcript for more details.
They are planning to apply for universal banking in Q425. No specific timeframe when they will getting this.
Dics. Invested
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A significant strategic move being contemplated is the application for universal banking license in Q4 2025. While this transition could offer MFIs an opportunity to diversify their product offerings and potentially stabilize income streams, it also introduces several concerns:
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Regulatory Challenges: Transitioning to a universal bank means adhering to a more stringent regulatory environment. Banking regulations for universal banks typically involve more rigorous capital requirements, risk management practices, and compliance with a broader set of financial regulations. This could lead to increased operational costs and a potential squeeze on profitability.
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Return on Equity (ROE): Achieving high ROE might become more challenging under the new banking license. Universal banks must maintain higher capital adequacy ratios, which can dilute equity returns. The current high ROE in microfinance is partly due to less regulatory overhead; this margin could be significantly impacted.
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Growth Prospects: The growth trajectory of an MFI converting to a universal bank might slow down due to the need to balance multiple product lines, each with its own risk profile and regulatory requirements. In microfinance, growth is often driven by volume and the ability to charge higher interest rates to offset the risk. As a universal bank, the focus might shift towards more diversified but possibly less lucrative lending options.
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Timing of Transition: The current economic climate, characterized by market volatility and regulatory scrutiny, might not be the most opportune time for such a transformation. Banks are facing pressures from various fronts, including increased digitalization demands, cybersecurity threats, and economic downturns affecting loan repayment capacities.
Given these points, the decision to become a universal bank at this juncture could potentially exacerbate the existing challenges rather than alleviate them. It is crucial for stakeholders to critically evaluate whether the benefits of diversification and access to larger markets outweigh the immediate and future regulatory and operational costs. This strategic move should be approached with caution, ensuring that the institution has robust systems and strategies in place to navigate the complexities of banking regulation while maintaining or improving its financial performance.
Would appreciate insights from others on how MFIs have navigated similar transitions in the past, especially in terms of maintaining growth and profitability amidst regulatory changes.
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I think a proxy for understanding this situation would be the erstwhile Capital Firstâs transition into current IDFC First bank and we have all seen how that transition hasnât been good for the share holders in the long term.
Discl:exited small position post Q2 results
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Capital First did not transition into a bank, it merged with an existing bank. IDFC Bank had been operating as a bank for three years before it merged with Capital First.
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Whatever you mentioned here applicable when a NBFC converts to a bank. Ujjivan is already a bank. When a SFB converts to Universal bank, these things do not apply. SFB is more constrained entity than a universal bank. For SFB, CRAR should be min 15%, for regular bank, this is much less. PSL requirement, rural branch requirement are also high for SFBs which is not case for regular bank. On operation level converting a NBFC to bank to tedious task, but a SFB to universal bank does not have that issue
Kotak case, IDFC case also has no relevance to Ujjivan.
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Any small finance bank that applies for a universal banking license must already conform with regulatory requirements before RBI grants them a universal banking license. Conforming to required regulatory standards is not done after giving license. They must conform before they get the license.
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Email to Management
Hello,
13.2% of our Gross Loan book is in Karnataka and Karnataka seems to be at the onset of something akin to Andhra Pradesh MFI Crisis of 2010.
See following news articles:
- Karnataka govt to take ordinance route to âprotect genuine borrowersâ
- Google News | Microfinance (Contains several other articles)
Ujjivan was, at the time, able to sidestep the entire Andhra Pradesh MFI crisis and even today we do not have any exposure to AP and only 0.2% of our loan book is in Telangana. However, in this situation, we have a large exposure - the second largest in KA.
Now given the ongoing crisis brewing up in our home state (Karnataka), once you are able to determine the extent of damage this is likely to cause, as an investor, I would appreciate if you could share thoughts, either in response to this email or as a wide public notification (via stock exchange perhaps?) on how we perceive this and since KA has a large exposure, do we foresee any large existential crisis stemming because of this?
Your sincere attention is requested.
Response from Management
Dear Sir,
Microfinance industry has matured and become resilient over the years of its operations on the back of seasoned borrowers in the industry. We are completely aware of the situation evolving in Karnataka and keeping a close watch on any developments. Collection efficiency and asset quality in the state is stable for Ujjivan SFB over the last 2 months. Our constant connect with the customers is helping us to understand this situation better. Ujjivan SFB has always been a responsible lender, and has always taken proactive measures to benefit our customers.
Basis the advisory issued by the state government to operating Microfinance entities in the state, the government is in support of Microfinance business and has a balanced approach towards the lenders as well as the borrowers. Certain ground rules have been advised in terms of collections and business operations, which Ujjivan agrees and adheres in spirit. Further, we do not expect any business stoppages or waivers being announced from any political parties. Hence, we believe situation is under control but simultaneously keeping a cautious watch.
Regards
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