Ujjivan Small Finance Bank Annual Report FY10 Notes

This is the fourth 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

The start-up phase where the mantra was to grow, grow, grow and breakeven, has been achieved.

Ujjivan now ranks among the top ten last 5 years, Microfinance Institutions (MFIs) in India in terms of size.

Mass default in a pocket in Karnataka showed the importance of geographical diversification in our business model. Our total portfolio was very marginally affected.

This year's profits have wiped out the accumulated losses of the 4 startup years.

Gave a bonus to employees who have built the co. over 5 years, 31.5 lacs allocated to social development fund, declared a maiden dividend of 2%.

MFIN has been established with 30+ NBFC-MFIs, will be an SRO, will rules against overextension of credit, transparency, collection and HR practices. Initiated the process to provide services of 2 credit bureaus to all MFIs. Aims to provide full financial inclusion to 100 mn poor households by 2020. Which means at least 3 of the 4 financial services, loans, savings, remittances and insurance.

Launching in Mumbai is a goal for this year. The focus will be on managing each branch as a business unit for profitability, customer retention, & service quality. Will also focus on remedial measures in branches where we face portfolio problems which is inevitable in the nature of the business.

The regulator is nudging to pass on scale benefits to customers through reduced rates. We will certainly do that. Expect turbulent times in near future with pressure on interest rate margins, changes in funding, bad press from poor business practices & governance of some MFIs. We also expect disruptive reactions from those who have vested interests in maintaining the status quo. If we are not able to change many of our practices in customer selection, an extension of credit and collection it will create a climate of mass defaults from our customers.

Goals same as last year.

Started charging a processing fee of up to 2% for most loans.

Offers group life insurance with ICICI to all customers, with a value of 30k in case of death. Provides 2000 in cash as an advance from the claim amount receivable from ICICI for funeral arrangements of all insured. Mortality rate was 0.13% last year.

Flood in Karnataka, rural agrarian communities worse hit. Some employees were affected. Created a relief fund of 8 lacs with employees and rebuilt homes.

MD&A

The number of customers more than doubled to reach 620,624. The cumulative disbursements were Rs. 9319 Million st and the loan book grew to Rs. 3707 Million as at 31 March 2010. PAT at 9.64 cr.

The Company has seen a robust growth in terms of the number of branches increased from 127 to 230 during the financial year. Opened 11 branches in Mumbai.

30% of customers are located in poor districts as classified by SA-DHAN.

Raised term loans of 37.15 cr and utilized 25.65 cr. D/E at 2.24x. Has plans to diversify funding into NCDs, subordinate debt and securitization.

CAR at 27.04% against 12% required.

Have 3 lac customers who have completed 2 cycles with Ujjivan. It is important to retain and deepen the relationship to enhance the profitability of mature branches.

Credit Risk

Mass defaults rise from communal organizations (KTK), state govt. actions (AP) and customer center leaders (WB). The root cause is an overextension of credit and coercive collection process. We screen customer for those who understand their responsibilities as our customers. Have restricted branch opening in areas of severe competition from MFIs, will not lend to customers with more than 2 MF loans. We provide training programs for our field staff to handle default situations. We are a leading member of AKMI and MFIN. Working on sharing information of intentional defaulters, fraudulent staff and customer data through credit bureaus.

Operational Risk

Will start using 3rd party cash management services from this year.

Industry Risk

Regulatory pressure to pass on scale benefits. As MFI industry gains scale, we will be fighting parties with vested interests, regulatory changes in PSL norms for banks.

The Company has changed its estimate with regard to provisioning for non performing assets, which has resulted in provision being higher by Rs. 5,016,350/- (P.Y.487,565) and profit for the year is lower to such extent.

Also contains case studies on how MF has impacted the lives of their customers.

Average monthly household income improved by 10.5% b/w 1st cycle and 3rd cycle loan customers. 2/3rd said there was a +ve change in their wellbeing after 3 loan cycles. Self-employed customers saw the biggest gain in their MHI. 66% customers said their HH savings increased by the 3rd cycle. Only 1% said their food consumption habits have worsened by the 3rd cycle.

Insights on Impact of Ujjivan/ MFI Loans

Loans from MFIs minuscule when compared against existent levels of indebtedness, Loans from MFIs used to retire high-cost loans, Loans from MFIs as cash flow solutions, MFIs cannot replace Money Lenders - Because of urgent needs, Loans not always used for the purpose originally intended.

Indications of Prosperity in a Household:

A woman in multiple jobs suggests that she is in a weak economic position. Alternatively, a woman who does not work suggests that the household is in a relatively better economic position.

Expenses related to healthcare can cause an otherwise stable household to regress into poverty due to unmanageable levels of debt.

An increase in conveyance expenses, particularly non-work related expenses, could mean that the household is moving towards prosperity. Expenditure on the conveyance is largely kept to a minimum in households.

Households that have a son are relatively more prosperous that households that do not. In many families where the first two off-springs are daughters, couples have more children in an attempt to have a son even at the risk of having another daughter. Such households end up poor not because they have daughters but because they have more mouths to feed. On the other hand, couples who have a son as a first or second born, stop having children after the birth of one or two off-springs. Interestingly, most Ujjivan customers fall in the latter category rather than in the lot with many daughters.

The more prosperous a household, the wider the age-gap between generations.

Changing Trends:

Many customers did not seem to discriminate between the educational needs of a daughter and a son anymore. It is believed to be a social stigma not to get one’s daughter married. While unmarried daughters are not looked upon favourably, abandoned or divorced daughters were often taken in by the parents’ household and seemed to be accepted in society.