Ujjivan Small Finance Bank Annual Report FY07 Notes

This is the first post of the series, where I will share notes taken by me while reading the annual reports of this business. I will be sharing an excel sheet at the end of the series which will capture all the relevant data throughout the years of its operation. Notes will mostly contain intangible non-financial data which will reveal subjective characteristics of the business and management. I have restrained from adding my comments and recommendations on specific subjects as I do not want to introduce my biases in this exercise. Shorthand abbreviations are used from time to time and should be logical. For any clarification, please use the comments section. This is not a buy or sell stock recommendation, just an exercise in researching and understanding the business.

The business model started with the front end of Grameen bank and back end of modern retail banking. Active in urban microfinance.

Partnered with LIC for life insurance coverage, Biocon for the out-patient care of customers, ICICI Lombard for health education, healthcare and health insurance program. Held 7 eye care camps. All this is part of our holistic approach to poverty reduction.

The birth of the firm was in the offices of Mphasis ltd., now H.O. in a converted garment factory of which visitors say is the best office in industry.

India has over 600 mn poor without access to financial services, we still have miles to go.

Our mission is to provide a full range of financial services to the economically active poor. Our venture combines a successful model of MF with technology and process of modern retail banking.

Our focus is on the urban poor, target customers are economically active women, such as maids, cooks, office workers, and self-employed women.

Currently operate 19 branches in Bangalore, Delhi and Kolkata with 285 employees.

Offer 7 products - family, business, combo, housing, top-up, emergency and festival loans. As well as life and health insurance to 28000+ customers.

Goals:
- Free customers from poverty in 5 years
- Serve 500000 customers within 6 years of operations

- Break-even in 3 years with LT ROE of 15%
- Participate in holistic poverty reduction
- Offer employee a rewarding career

1st Indian MFI to grant ESOPs.

Customer Eligibility:

- Women of 18-55 age
- Economically active
- Resident of an area for 5 years
- Household income of 2000-8000 pm
- Per capita income of > 1000 pm
- Must for a group of 5 women with an agreement of joint liability
- Complete 6-day customer group training and pass group recognition test

50% of customers are salaried. 40% self-employed and 10% in piecework jobs. Most common occupations of our customers are maids, tailors, agarbatti rollers, saree sellers and handiworkers.

Products:

Family Loans allow women to avail loans to finance a range of family needs, including school expenses, medical care, housing expenses, and the repayment of high-cost debt previously taken for family needs. Loan Sizes: Rs. 6,000-10,000 Tenor: Up to 12 months Interest Rate: 1.25% p.m. flat or 26.9% p.a. declining.

Business Loans give women access to loans to finance a range of business needs, including working capital, capital equipment, vocational training, or the repayment of high-cost debt previously taken for business needs. Loan Sizes: Rs. 6,000- 12,000 Tenor: Up to 24 months Interest Rate: 1.1% p.m. flat or 24% p.a. declining.

Combo Loans provide financing for a combination of family and business needs. Loan Sizes: Rs. 6,000-12,000 Tenor: Up to 24 months Interest Rate: 1.1% p.m. flat or 24% p.a. declining.

Housing Loans give women access to financing for rental deposits, lease amounts, or house improvements. Loan Sizes: Rs. 10,000-30,000 Tenor: Up to 36 months Interest Rate: 1-1.1% p.m. flat or 21.5-24% p.a. declining.

Emergency Loans allow customers with strong track records over 6 months to avail loans to meet unforeseen emergency requirements. The loans are disbursed within 24 hours. Loan Size: Rs. 1500 Tenor: 6 months Interest Rate: Same as existing loan.

Festival Loans give customers with strong track records over 6 months access to financing for festival expenses. Loan Size: Rs. 1500 Tenor: 6 months Interest Rate: 1.25% p.m. flat or 26.9% p.a. declining.

Top Up Loans provide additional financing of 10-20% over initial loan sizes for customers with strong track records over 6 months. Loan Sizes: 110-120% of initial loan sizes Tenor: 12 months Interest Rate: Same as existing loan.

Life insurance is a compulsory benefit for all customers. Health insurance is available at a cost of 120-360 per person per year.

Fees and Deposits

- Training Fee @ 50
- Documentation @ 60
- Annual Meeting Fee @ 50 - 70
- Replacement of Card - 25
- Security Deposit - 10% of loan, housing @ 5% with 1000 min.

Plan to reach 100000 customers by the end of this year.

Repayment rate of 96.6% with 68% loans to family, 27% for business and 5% for festival and emergencies.

What unites the Ujjivan team is the shared vision of the power of MF to transform lives of the urban poor and a strong desire to improve the communities in which we work.

Loan book was at 8.429 cr with 99% classified as standard assets. The loss during the year was due to branch CAPEX.

Gross borrowings at 6.36 cr.

MD&A

MF is seen as a viable and effective strategy for poverty reduction. We are seeing rapid expansion amongst MFIs in their customer bases.

Microfinance activity in India has geographically centered largely on the Southern states and has predominately reached out to rural rather than urban customers. Demographically, the industry almost exclusively serves self-employed women.

The keys to maintaining quality and ensuring fulfillment of the main objective of microfinance – poverty reduction - are greater cooperation amongst microfinance institutions and adherence to financial standards, fair practices, transparency and accountability in all transactions.

The MF Bill 2007, will make registration of MFIs mandatory with NABARD as the regulator. NBFCs have been kept out of the purview.

The MF sector has trusts, co-ops, NGOs, Sec. 25 cos. and NBFCs as the players.

The government’s favorable policies to strengthen microfinance are expected to boost the availability of wholesale funds to the low-income sector directly from the banking system and/or through the microfinance intermediaries.

Ujjivan has conducted a market research and published the studies in a research book titled, "A Study of Economically Active Poor Women in Bangalore 2006".

Growth Opportunities and Risk Mgmt.

The Company has launched housing loan products in April 2007, which are of higher loan size. Ujjivan has partnered with a leading housing finance company to fund the housing portfolio.

Second and third cycle loans have higher ticket sizes as compared to the initial loans offered to the new customers. To mitigate risk, higher loan sizes will only be given to customers who have maintained a strong track record with Ujjivan in their previous loan cycles and are able to demonstrate sufficient cash flows.

The above measures, aimed at increasing the average loan size and the number of customers, boosting efficiency, fulfilling unmet customer needs, responding to competition, and mitigating against risk while growing loan disbursements are expected to bring down the loan servicing costs and help the Company attain the desired operational self-sufficiency moving forward.

The co. has an audit committee under the chairmanship of an independent director who is a qualified chartered accountant. This committee oversees both field and internal audit. In the retail loan business operations, the risks associated with cash transactions are being verified and controlled by the Risk and Fraud Control Group and timely action is taken for ensuring the safety of the liquid assets.

All contingent liabilities are accounted for.