Ujjivan Small Finance Bank Annual Report FY12 Notes

This is the sixth 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.

Letters from MD

First, 3 quarters were dismal, as funding dried up and were forced to scale down the business. Have finally put the industry crisis of 18 months behind, crossed 10 lac customers mark, loan book increased by 12.5% to 703.4 cr with 2.19 cr profit.

To operate viably withing RBI regulations of interest and margin caps, we have improved efficiency by reducing branches from 351 to 299 through mergers and reduced employees by 14% to 3449.

Upgraded CBS so that all our branches are online. Financial Literacy Program (FLP) in its 1st phase made our million-plus customers aware of the dangers of over-borrowing and ghost lending. In its 2nd phase which is currently in progress, we are working on increasing numerical literacy, prudent HH and business CF management.

Recognized as the best large MFI in India and received record debt and equity funding.

There is a millennium development goal committed by all countries to achieve financial inclusion by 2020. India accounts a significant portion of the 4 bn unbanked. Financial inclusion does not mean opening 70 mn no frills A/Cs which are not actively used, nor does it mean one or two small MF loans to 45 mn MF customers. We need to gauge its impact on customers after the loan cycles. Customers have said that life is somewhat better, they are no longer afraid of money lenders, but they are not out of poverty.

The government has been actively focusing on financial inclusion since 1947 with lots of incentives but has met with little success. Raghuram Rajan committee in 2008 said it is not possible to achieve financial inclusion (FI) for 600 mn only by regulatory or administrative fiats, but by making FI programs viable for all parties involved.

Till 1985, the middle class in India could only open a savings account and make fixed deposits. They were virtually excluded from all credit products. My father, a government doctor could only have built his home after retiring and getting his end of service benefits. In ten years since 1985, the Indian middle class has access to the entire gamut of financial services. This opened up the purchasing power of the 200  million and created enormous demand for two-wheelers, cars,  white goods and housing. This pushed India’s GDP growth rate from the ‘Hindu Rate’ of 2% to world beater 8-9%. This is one of the major impacts of financial inclusion apart from dramatic improvements in the quality of lives of the middle class.

The biggest challenge today is providing the poor an effective savings product. Critical to use mobile banking for FI. India has 930 mn mobile subscribers of which 313 mn are in rural areas.

Status:

• The regulatory framework is in place to protect MFI and its customers


• MF Bill has been placed in Parliament


• Aadhaar enrollment is in full swing along with the opening of no-frill A/Cs


• 45 mn MF customer's credit records uploaded with credit bureaus and updated monthly


• The regulatory framework in place for funds transfer through IMPS under NPCI. Will make transactions viable and provide remittance services


• Microinsurance for life is already provided by MFIs but needs to extend it to health


• Micro pension scheme has started with govt. support


• Micro-housing institutions have started


• SHG model of MF is one of the largest in the world

As recommended by RR Committee, we need to allow NBFC-MFIs to be BC for savings and tie this up with mobile banking and issue specialized banking licenses for FI. If we are able to do this, we will be able to achieve full FI by 2020.

Same goals as last year. IBL, Housing loan and Bazaar loan are not under PSL and form 15% of the non-PSL book as permitted by RBI.

Standardized logo and brand promise of "build a better life" across many languages.

Corporate stationery has been modernized and standardized.

1st in the industry to have double bottom line annual report - financial and social impact. This year will start mobile communications with customers about information relevant to our relationship with them. Will be the precursor to launching mobile banking in the future.

CBS rolled out in 248 branches and will be complete by June. This will help in an online update of cash transactions, reducing turnaround time, reducing operational errors, customer credit history checks at the branch level, and netting off transactions. Limitations in internet connectivity and power supply were removed by the installation of FOC/wireless and minimum 5 hr power back up through inverters and generators.

Have also begun implementation of a pan-organization Document Management System (DMS) which will include web-based loan application tracker for real-time status checks, information exchange b/w branch and BO. Scan and data entry helps reduce processing time and cost while allowing for quality checks at a mass scale, helps in automation of loan processing and instant check up on customer profile history, integration with CBS and Credit Bureaus helps quick credit approvals. DMS has been implemented in HR, Admin, Audit, Finance and operation departments.

Has a biometric system to track attendance of employees. Running a pilot with Artoo IT solution to use handheld tablet devices by field staff to facilitate MF activities. We saw 35% productivity increase and loan turnaround time decreased by 2 days.

Has 3 repayment windows that customers can choose as per their preference. 3rd - 9th, 10th to 16th, 17th - 23rd. Majority of customers are in the standard window. This improves our branch efficiency and productivity.

Credit Health

Portfolio quality improved during the year and PAR (Portfolio-at risk) decreased to 1.33% (March 2012) from 1.48% (March 2011). Pockets in Tamil Nadu, Odisha and West Bengal which initially exhibited undesirable portfolio trends stabilized during the year. Over-indebtedness as a result of excessive borrowings by customers due to undisciplined lending and excessive competition among MFIs impacted portfolio quality. Branches in Ranchi encountered unforeseen Government demolition drive with adverse impact on almost 1000 customers. Ujjivan was the first organization to extend relief to them in terms of financial support and rescheduling of existing loans. Effective control mechanisms were put in place immediately to curtail the damage. Similarly, branches in Tamil Nadu and Bihar faced with natural disaster (cyclones and floods) impacting the livelihood of our customers. Ujjivan actively reached out to help them by providing food grains and one-month repayment holiday. There was no deterioration in portfolio quality.

To deal with crisis-hit branches we set up a Risk Management (RM) committee, branch wise actions and policies, supervisory level changes, mentorship program for stressed branches, set up collection management teams, re-schedule option extended to customers facing genuine economic distress, fresh loan approvals at credit.

Ujjivan shares customer data with Highmark, CIBIL and Equifax. CBs were under discussion since 2008 but 2010 crisis was the catalyst that made them a reality.

Another key initiative during the year was piloting the My Loan which is an adaptation of the Grameen-II model. The fundamental pillar of the Grameen model – social pressure through group guarantee, turned out to be a huge burden on customers. Our study of distressed customers in higher loan cycles revealed that it is the group which creates tremendous pressure on a defaulting member. This is because it is very difficult for the group to take on the additional burden of servicing loans of defaulting members when the loan sizes are large. This creates tension within the group, aggressive behaviour, and humiliation in front of society for the defaulter. This sometimes leads the defaulting customers to take recourse to drastic measures such as suicide.

Under this pilot, the group's guarantee is limited to only the group ensuring that the members attend the center meetings. The financial liability is not borne by the other members. But what enforces this guarantee? What happens when the group is not able to make the defaulting member appear? Any penalties? If no penalties then beyond a customary notice to come why will group members force someone to come.

Operational Efficiency

52 Branches with less than 25 customers were merged, borrowers per CRS increased by 24%. CBS enabled upload of daily closure information which brought down cash tally updating turn around time to 0. Repayment window extension was a slow process requiring extensive field training, customer buy-in and technical support. It allows CRSs to have a better customer focus, face time, scheduling and route planning. CBS rollout helped save 1.44 cr in employee costs, with a reduction in staff at account maintenance and repayment processing teams in regional offices.

MD&A

We carry an incremental provision of 6.8 cr compared to the existing RBI norms for NBFCs.

Removed JGL in higher loan cycles. Portfolio crossed 700 cr.