Ujjivan Small Finance Bank Annual Report FY08 Notes

This is the second 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.

Letter from MD

Made disbursements of 63.52 cr to 68033 customers with loans outstanding at 36.57 cr with a repayment rate of 99.22%, with help of 551 employees working in 38 branches.

Expect to wipe out accumulated losses in next FY.

1st housing loan disbursed on June 07. Have launched an education loan. Piloting individual business loans for MSME in collab. with Women's World Banking, NY.

We provide complete service to ensure beneficiaries of life insurance get the full benefit. It is a fairly labor intensive process to apply and claim, customer education, processing, renewals ad disbursement. We incur very high servicing costs for which we receive less than negligible reimbursement from LIC (24k in 3 years.) while the estimated cost was 50 lacs.

Formed the Association of Karnataka MFI (AKMI).

Awarded Unitus Accelerator Award, recognized as the fastest growing MFI in Asia by ADB.

Only MFI in India to have ESOPs for all its employees.

Set up regional offices in Delhi and Kolkata to decentralize the leadership.

There is a worldwide challenge to balance between profit-making, attempt to scale for economic sustainability and mission of poverty alleviation. We are trying to understand these major issues concerning the strategic direction of Ujjivan with all our stakeholders and we hope to build an organization which achieves the right balance b/w meeting our financial goals while staying focused on our mission of poverty alleviation.

High inflation is pushing our customers further below the poverty line, the rise in funding cost is shrinking margins. Multiple lending by aggressive and predator MFIs remain a serious problem for the industry as a whole. We are trying to educate our customers on the risks of multiple borrowing and the trap of vicious debt cycle. We face a high cost of operations and need to scale up to remain viable.

Recalibrating the customer induction program to minimize the lower middle class in our customer net. Introducing a pilot program for the ultra poor. This has already been done by BRAC & Grameen in Bangladesh, Jami Bora in Kenya and Bandhan in India.

We look forward to operating in the different segment of the 600 mn unbanked poor in India While we achieve high growth, we are careful to ensure that we do not drift away from our mission to eliminate poverty.

Two customers were paying 10% pm another at 8% pm to a local moneylender before Ujjivan.

Goals:
- Poverty alleviation in 5 years of the 1st loan
- Serve 2000000 customers within 6 years of operations
- Open 500 branches with 4 hubs, Bangalore, Delhi, Kolkata and Mumbai
- Break-even in 3 years and LT ROE of 15%
- A rewarding career to employees
- Partner with the Parinaam foundation for health education, insurance and vocational and entrepreneurship development.

A lot of testimonials from employees are also included, details of which reveal the culture of the organization.

The loss in FY08 increased to 2.968 cr due to company's strategy of building the regional zones in new operational areas to gain crucial 1st mover advantage for these cities. This will build up our capacity for growth.

6.83 cr equity raised at a premium of 2.3 cr, loans increased by 26.77 cr. DE is at 1.71x.

The individual business loan will be a substantial part of the overall portfolio in years to come.

Risks:
- Can't rely solely on term loans to fund growth
- Inflation and rising interest cost is pressuring margins
- High CAR will increase the cost
- Cash handling is risky.

The company engaged Cocoon consulting to restructure the organization to meet its growth and geographical diversification needs. Jobs levels were graded and compensation structures determined.