Ujjivan Small Finance Bank Annual Report FY16 Notes

This is the tenth 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.

In our everyday lives, we see a lot of people and yet some we don't. In the context of the Indian society, we normally associate poverty with the typical Indian farmer;  talk about urban migration and images of millions of educated young people leaving their homes and villages behind with the aspiration of seeking out bigger opportunities in metropolitan cities flash across our minds. However, there is also a third category of people in our society - masses of impoverished and unskilled migrants, peddlers, construction workers, dhobiwalas, housemaids, wage labourers and many such people - people who once moved to the cities with dreams and aspirations like many of us. People whose dreams remained unfulfilled because they were left behind - unseen. While most of us did not as much as notice or hear them, one particular individual did. Mr Samit Ghosh made it his dream to make millions of dreams come true. He chose to see them for what they are and that is what led to Ujjivan.

Ujjivan started operations as an NBFC in 2005 with the mission of providing a full range of financial services to the economically active poor who are not adequately served by financial institutions. Presently, Ujjivan’s operations are spread across 24 states and union territories, and 209 districts across India, making it the largest MFI in terms of geographical spread. We serve over three million active customers through 469 branches with an employee strength of 8,049. As on March’16, our Gross Loan Book stands at Rs. 5389 cr making us one of the leading providers of MF in India.

We offer a broad range of loan products to cater to the specific requirements of our customers. Our products can be classified into four broad categories, viz; Microfinance, MSE Finance, Agriculture and Animal Husbandry Finance and Housing Finance. MFI loans follow the Grameen model of lending which is a joint-liability group lending model. Depending on the end use, these broad categories of products can be further sub-divided into agricultural, education, home improvement, home purchase and livestock loans. MSE and Housing loans are both secured and unsecured higher ticket size loan products which are available for both existing and open market customers. Ujjivan has adopted an integrated approach to lending which combines a high customer touch-point typical of microfinance, with the technology infrastructure and related back-end support functions similar to that of a retail bank. This integrated approach has enabled it to manage increasing business volumes and optimize overall efficiencies. Ujjivan prides itself on being a customer-centric organization, and this is reflected in our customer retention ratio, which is 86.3%.

We have ranked consistently among the top 25 companies to work for in India by the Great Places to Work® Institute in partnership with the Economic Times. For the year 2015, we were ranked 1st in the microfinance sector by the Great Places to Work® Institute.

On October 7, 2015, Ujjivan received an in-principle approval from the RBI to set up a Small Finance Bank, placing it in a very select group of institutions to be recognized by the central bank for this institution creation. By virtue of being placed in a select group which has been granted this license, Ujjivan will transition from an institution that provided micro-credit for the unbanked and under-banked to offer a broader spectrum of products in the liabilities space such as savings, deposits and insurance, thus offering a full suite of banking products and services.

Letter from MD:

We closed the year with spectacular financial results:

• Profit after Taxes grew by 134% to `177 crores.

• Gross Loan book grew by 65% to ` 5,388.6 crore

• Our Gross Non Performing assets(GNPA) increased marginally to 0.15% of our portfolio with a cumulative repayment rate of 99.81%

• Our Cost to Income Ratio declined from 60.4% to 51% and Operating Expense Ratio declined from 8.5% to 7.5%.

• Return on Asset of 3.7% compared to 2.5% in the previous year.

• Return on Equity of 18.3 % compared to 13.7% in the previous year.

This resulted from achieving economies of scale, a higher level of efficiency and keeping credit costs at a negligible level. We moderated our Gross Loan Book growth to 65% compared 102% in the previous year. This year Ujjivan scaled new heights in financial terms as an NBFC-MFI. However, we measure our success or failure over the last ten years not just in financial numbers but also in terms of our efficient services across major stakeholders.

Customers: This year we crossed the milestone of 30 lakh customers. We acquired more than 10 lakh new customers second year in a row. Customer retention rate has remained at 86.3 %, one of the highest in the industry. This is despite the fact that we had to drop out existing customers to comply with the regulatory requirement that not more than two MFIs can lend to a customer. The high customer retention rate and the new customer acquisition were key factors in our gross loan book growing by 65% to ` 5,389 crores and is a reflection of how well customers value our relationship.

Employee: One of the unique employee benefits is the Employee Stock Option Plan (ESOP) schemes for all employees based on performance. This was instituted in 2006 and the sixth ESOP scheme was launched in 2015. Over 54% of our current employees across the organization are recipients of the ESOP. Post our IPO in April 2016, the employees could for the first time see the market value of the ESOPs they hold and this generated excitement and pride in ownership of the Company.

IPO

The immediate need to do the IPO was to meet the Reserve Bank of India’s pre-requisite that the Small Finance Bank has to be majority domestic owned. In the past, for the microfinance sector equity has been largely funded by foreign institutional investors. Our foreign ownership was in excess of 91%. Given the size of our domestic equity requirement, the only alternative was to raise it through IPO restricted only to domestic investors.

For Ujjivan the IPO has a special benefit for a majority of the employees across all segments of the organization, who are holders of ESOPs which have been issued almost since inception. A large number of these employees are our field staff and their supervisors, who are not familiar with equity markets. After this IPO the employees can exercise their ESOPs and build a ‘nest egg’ for their family.

Ujjivan is not dependent solely on large institutional investors to raise future capital and can freely access the large domestic capital markets. This will provide long-term stability in raising equity capital.

Transformation to Small Finance Bank- Moving to the platform of a specialized banking institution.

Ten years on the NBFC platform with stellar performance brings a close to one of the major chapters in Ujjivan’s history. The RBI opened up a new platform on November 27th, 2014 by issuing guidelines for Small Finance Bank (SFB).These will be specialized banking institutions to provide financial inclusion to the vast un-and under-served sections of our population and not the regular universal bank which largely serves the middle class and affluent in the retail segment and large corporates and institutions in wholesale business. This was done after considerable dialogue with the industry, largely represented by the Micro Finance Institutions Network (MFIN). I had the honour of heading MFIN as the President and worked closely with Alok Prasad who was the CEO during this crucial phase. Much to our delight, on October 7th, 2015, RBI issued an in-principle license for ten institutions of which eight were microfinance institutions including Ujjivan. This will enable us to move to a more stable and less risk-prone structure of a bank. NBFCs come under periodic threats on issues like the state money lenders acts; in general finance companies have much lower stature compared to banks among the public. NBFC-MFIs are dependent largely on a single source of expensive funding from banks and hence vulnerable, and are constantly under competitive threat for their successful line of business from banks. More importantly, the SFB will allow us to pursue our long cherished dream of being able to provide a full range of financial services and after five years of operation convert to a full-fledged mass-market bank.

The legal structure of converting Ujjivan to a holding company and setting up a banking subsidiary with the requisite capital is now in progress. After this is completed and along with a number of other requirements like bank board members, branch opening plan, independent certification of the IT infrastructure etc., we would be applying for the final license.

Meanwhile, the transformation work on the business front is continuing in full force and had commenced before the in-principle license was issued. Ernst & Young was appointed as the consultants for the overall project. On the technology front, key additions to the current infrastructure are in progress. We are in the process of implementing the Finacle core banking and treasury systems from Infosys; CRM solution from CRM-Next; mobility solutions from I-Exceed; comprehensive risk management system from SAS; upgrading the Human Resource module from RAMCO; Oracle Accounting System, hardware from Oracle, CISCO etc.; Wipro has been engaged as the System Integrator.

Competence mapping of existing staff for various positions in the SFB has also been undertaken. Training programs are proposed to be held during the six months prior to the launch. IT training has already commenced. Along with this, we have started a ‘mindset change’ training for existing staff from a loan giving institution to that of an institution which will provide a full range of services including savings.

We plan to consolidate our existing branches and convert them to full-service SFB branches. We will open the required number of new Unbanked Rural Branches (URB) over the year as per the SFB guideline requirement.

In order to provide the customers multiple channels/access points, we will supplement the branches with alternate delivery vehicles like ATMs, phone banking, banking correspondents and also internet banking. This is also being planned to be executed in a phased manner. • On the product side, we have undertaken considerable research on the savings habits, likes and dislikes of the target market customers. We are designing the products and services accordingly. In addition, we are working on remittances and third-party insurance products which will be launched in a phased manner. We are also enhancing our loan products for the SME sector.

The Future

We expect to launch Ujjivan Small Finance Bank in a phased manner in the first calendar quarter of 2017. We expect the first 12-18 months to be a stabilization period for the bank to ensure all systems and processes work smoothly and we do a phased expansion of distribution, channels and products. We expect to start on an accelerated growth after this stabilization period. In five years from the date, we start the Ujjivan Small Finance Bank, we will work towards converting it to a full-fledged mass-market bank.

The financial inclusion space has moved very steadily post the Andhra crisis in 2010. However, this is now going to be totally disrupted with major developments which will accelerate the whole process of financial inclusion:

• Entry of eight aspiring Payment Banks especially those with the wide distribution network and mobile technology of TELCOs joint ventures. They will compete hard for the payment and deposit business. However, the viability of this business will depend on creative solutions and add-ons. The wallet business though currently attractive for those who are un-banked will come under serious threat with the new mobile payment systems being developed by NPCI.

• The ten Small Finance Banks who are still in the running will bring about change by providing a wide range of services, each following their DNA. However, the success of the SFBs will depend on the scale and how well they are able to widen the net to include the un- and underserved.

• On the liability side with the extensive seeding of the Aadhar biometric identification system, NPCI’s payment systems and with the reach of mobile technology, as Nandan Nilkeni points out, the portability of savings accounts and balances will increase dramatically using mobiles. This will have a massive disruptive effect which early adopters can take advantage of.

• In India e-commerce has taken off. This allows a large number of Micro, Small and Medium-sized Business Enterprises to sell their goods and services using these platforms. This will generate a wealth of data for future funding institutions and who can use analytics to extend credit. Already fintech companies are trying to capture this business. This will be a huge opportunity on the asset side of the business. Revisit this statement in a few years.

These are some of the major changes which will disrupt the whole financial inclusion space in the next five years thus changing the entire landscape. The winners will be those who remain at the cutting edge and scale their business.

For the first time in Ujjivan’s history, Ujjivan conducted mass-marketing activities throughout the country like wall branding, auto rickshaw branding as well as van campaigns. This new initiative gained Ujjivan a lot of attention resulting in an increased brand and product awareness throughout the country. A significant number of leads were successfully generated providing fresh opportunities for new customer acquisitions.

Micro and Small Enterprise (MSE) Finance

The MSME sector is a major contributor to the GDP and the Government of India has launched a  number of programs to accelerate the growth of the sector. As per reports published by the ministry of  SME and  International Finance Corporation, the bulk of the sector is Micro and Small Enterprises (MSE), the majority of which are unregistered. The MSEs face a lot of issues in accessing institutional finance and continue to be dependent on sources such as moneylenders, pawnbrokers, chits/committees apart from family and friends. It has been acknowledged that lack of institutional finance has stunted the growth of MSE for decades. Therefore, the Reserve Bank of India has mandated the aspirants of Small Finance Bank to focus on MSE as one of the main customer segments.

Additionally,  Government of India has set up a dedicated refinancing agency MUDRA (Micro Units Development and Refinance Agency  Limited.) to facilitate the flow of funds to this segment of customers. The unmet financial needs of MSEs offer a great opportunity for banks and NBFCs to develop a  strong business line dedicated to the sector. However, the banks have not been able to do much due to various structural issues and NBFCs have not been able to provide a complete product suite, apart from term loans. Ujjivan has recognized MSE as its main target segment in line with its mission and also for product diversification and future growth. As a part of its Individual Lending (IL) Program, Ujjivan has financed over 1,10,000  micro enterprises and disbursed approximately ` 660 crores since the program was launched. This was achieved by graduating the eligible customers from Group Lending Program (GL) as well as by inducting new customers from the open market. In last two years, our focus on the open market has increased.

The way forward

A dedicated MSE finance unit has been set up to cater to the needs of the segment. The unit will understand the needs of the customers, the business environment including competition and the risks and mitigations in order to bring out products and services for the micro and small enterprises. The products and services are being kept simple with high technology support in order to ensure fast delivery, quality underwriting and superior customer experience while maintaining efficiency.

The following products will be on offer:

For Unregistered Businesses (mostly micro enterprises):

• Unsecured Business Loan

• Secured Business Loan

For Registered Enterprises (mostly small enterprises):

• Unsecured Enterprise Loan

• Secured Enterprise Loan

• Secured Overdraft

Additionally, the facilities of Current Account, Remittance and Payments, Insurance, Savings and  Investment will be offered (by Ujjivan as an SFB) to the people who are running the MSEs and employed in it. So will they target the employees of the organization they will serve to open savings a/c?

The use of technology will be instrumental in delivering superior customer experience by bringing efficiency in origination and management of loans. Further, technology will increase the reach and profitability of the MSE business vertical by making available reports and MIS. Better customer segmentation, predictive analysis to facilitate target marketing; and credit decision as well as portfolio management will also become possible. MSE Finance will be Ujjivan’s growth engine during the current year and also in the years to come.

Housing Finance

In the year 2012, Ujjivan realized its customers need for housing finance assistance and introduced  Housing Microfinance with a loan amount up to `1,50,000 being offered outside the group loan scheme, through an unsecured lending program.

This amount was not enough to meet larger needs of the customers and the segment that  Ujjivan caters to. To address this, Ujjivan introduced the higher ticket size Secured Home loan product last year to help customers meet their financial assistance for large repair work, construction or purchase of a house.  The lower income segment has been plagued by informal titles, unorganized construction, fluctuating income,  lack of basic technical knowledge on construction and rising cost of raw materials. But despite all the challenges at hand, a strong foundation has been laid in the housing segment since the launch of Secured Home  Loan. The product has been customized as per the segment’s need without disturbing the risk parameters’  fabric. How?

Target Segment • Age: 21-65 years • Monthly Household Income: ` 8,000 –` 50,000 • Occupation: Salaried/Self-employed in formal/informal segment

The number of borrowers is well spread across 4 different repayment windows (weeks) of the month as per their choice, easing caseloads for staff in repayment collections and customer servicing. 28% of borrowers make their repayments during the first week of each month, 35% in the second week, 30% in the 3rd week and 7% in  4th week respectively.

Technology Roadmap for Future Small Finance Bank

Ujjivan Financial Services Limited took another decisive step towards its proposed small finance banking operations by earmarking more than ` 300 crores, to be invested for implementing and integrating its Core Banking Technology for over the next five years.

The best of the breed technology solutions providers for its upcoming bank IT infrastructure includes Finacle Core Banking from Infosys, CRM Solution from CRMNext, Mobile Unified Platform from i-Exceed, Sysarc Loan Origination System, ADF from Pragmatics, SAS complete suite for AML, ALM FTP and Risk and Governance, Ramco HRMS, Oracle Financials, Oracle Hyperion, IBM Cognos for DW and BI, IBM FileNet for Document Management and Workflow systems, IBM Middleware and IBM Enterprise Service Bus to integrate all systems together. All these systems will be in addition to the existing systems which includes BR.net and mobility solutions like Artoo and Truecell. Core Banking and all other systems will run on most secure and robust servers like Oracle Sun SuperCluster, CISCO Blade Servers and Cisco Routers and Switches. More than 125 strong IT professionals will be managing the technology department for the upcoming bank.

Ujjivan will be focusing highly on mobility solutions and will implement mobile technology using mobiles and handheld devices to reach the rural customers. Even today Ujjivan is using the latest mobile technology for customer acquisition, customer support and collection management for its current MFI business. Keeping in mind the need for high security and top of the line disaster management, all IT infrastructure will be hosted in IBM Data Centre at Mumbai and the Disaster Recovery Data Centre will be hosted in Airtel Data Centre at Bangalore. Ujjivan will also be hosting a 3-way Data Centre DC, DR and NDR (Near Disaster Recovery). Ujjivan’s strong management team, with an equally strong consultancy team from EY and good connection with technology partners which includes names like IBM, Oracle, Cisco, SAS, Microsoft, EMC, Craft Silicon and Artoo will support the company to set up a strong technology-driven bank for the future.

“ Unlike other organizations, Ujjivan made it a point to provide ESOP even to the resigned employees who had options vested with them, that in itself speaks a lot about the best policies of the organization. I feel happy  that I was a part of the organization in the past.” (Awneet Choudhary, South) - Ex-employee.

MD&A

Productivity: FY2015-16 saw an all-around improvement in branch and field staff productivity.  Borrower per CRS improved to 761 from 568 in March 2015. Gross loan book per branch increased to 11.5 crores from  7.7 crores. Average GL TAT improved from 5.78 days to 4.32 days while average IL TAT improved from 6.45 days to 6.27  days

Credit Quality: Portfolio quality held up well with PAR at >0.27% in March 2016 against 0.18% in  March 2015. There was an increase in the overall PAR on account of sporadic incidents of over-borrowing in some geographies across the country (MP, Orissa, and Maharashtra), the massive growth of IL portfolio and increased proportion of death cases.

Loan Book Drivers

Akarshan loans, a higher ticket offering targeted at attracting new customers with good credit history from other institutions, was instrumental in acquiring new customers in highly competitive areas. Additionally, expanded working area for increased penetration and rewards and recognition programs were the key enablers for the increase in new customer acquisitions in mature branches. We added 12 lakh, new customers, crossing the 10 lakh mark for the second consecutive year. Our commitment to quality customer service, better  customer connect, reducing loan turn-around time and wait time at the branch for disbursement ensured good persistency  and healthy repeat conversions

Our second year of the loyalty program, a limited period offering specially designed for existing customers with good credit track record to enable micro trade facilitation during the festive season, successfully added `  445 crores of business.

Our core GL business contributing 87% of our Gross Loan Book grew 60% over that in the previous year. We launched a new product called Agriculture and allied loan to meet loan requirements for activities such as crop cultivation, purchase of small equipment and animal husbandry etc. for the marginal and tenant farmers under  Group Lending. We raised the ticket sizes of the loans going up to ` 30,000 allowing the customer an option to repay in 1 or 2 years depending on her repayment capacity in line with revised RBI regulations.

Taking off on the big leap last year, our Individual lending Business registered a collective growth of  102% constituting 13% of our Gross Loan Book. This year, we looked beyond converting the captive eligible pool of higher vintage group loan customers and focused on open market business to expand our outreach and ramp up our volumes. The open market business contributed to 22% of our overall volumes this year compared to 10% last year while GL to  IL conversion contributed to 60% of our overall volumes this year compared to 75% last year. Focus on process efficiencies, reduced loan service time and product level initiatives ensured better persistency. Repeat IL Business contributed to 18% of overall volumes compared to 15% last year. Our client outreach increased from 71 thousand active borrowers in March 2015 to 151 thousand active borrowers in March 2016. Our Individual Lending Business is operational in 374 branches. The offering was rolled out in 69 additional branches during the year.

Our Secured Housing Finance Business, piloted in January 2015 gathered momentum, amassing a  portfolio of ` 21 crores with 703 active borrowers across 109 branches. Another product innovation launched this year was the introduction of Priority Sector Lending (PSL)  compliant variant of Individual loans – Pragati Loans with lower interest rates and simplified procedures. The Product contributed a third of overall volumes and Individual Lending borrower base.

Our marketing initiatives helped create better brand and product awareness while fostering stronger customer connect. Our evangelical marketing initiatives at over 100 locations saw the participation of thousands of customers. The evangelical campaigns celebrated the success stories of existing customers and shared them with potential customers.

Others include Agri, Animal Husbandry and Higher Education Loans. Livestock loan is the key component of the segment, constituting 90% of the portfolio. The livestock loans grew by 163% over last year to close at a Gross Loan Book of ` 153 crores. Higher Education Loans and Agri Loans are seasonal in nature and were both piloted in FY2014-15. Agri-Business grew from 2 crores in March 2015 to ` 8.5 crores of the portfolio while the Higher Education  loans grew 151% over last year to close with a gross portfolio of ` 7.7 crore

Improving Productivity

A key focus area for this year was the improvement of branch and field staff productivity. Enhanced targets were set to raise the bar on performances of our matured branches. We stopped adding more than 8 field staff for branches handling less than ` 10 crores of the portfolio. A key initiative this year was the extension of the repayment window from 3 weeks to 4 weeks, easing caseloads for staff in repayment collections and customer servicing. Our Borrowers/CRS increased to 761 in March 2016 against 568 in March 2015 while our Gross  Loan Book/Branch increased to 11.5 crores per branch in March 2016 from 7.7 crores in March 2015.

Our continued focus on cashless disbursements has helped us build efficiency. 61% of our total disbursements (in terms of monetary value) were effected through the cashless route. 16.65lakh loans were disbursed to the bank accounts of the customers compared to 9.76lakh last year, a 71%  growth. Our Average GL TAT improved from 5.78 days to 4.32 days while average IL TAT improved from 6.45 days to 6.27  days. Our Fresh Loan TAT is at 7.02 days, 63% of the loans are disbursed under 7 days.

Independent Credit function is unique to Ujjivan. We have a strong team of over 400 spread across operating geographies, giving us real-time insights on the portfolio. It is responsible for developing credit policies, monitoring portfolio quality and driving collection initiatives to ensure healthy portfolio growth. Group lending business is supported with centralized credit decisions, it reviews every application independently along with bureau reports and ensures adherence to internal credit policies and guidelines. In case of Individual  Loans, an independent credit check on field forms an integral part of the loan underwriting process.

The stellar portfolio performance is an outcome of the sound Credit Policy Framework and robust Loan underwriting process at Ujjivan. This has not only helped us acquire quality customers but also maintain a healthy portfolio quality. As we continue to scale up our Individual Lending business, we plan to adopt a customized Credit Application Score to further enhance our loan decision process. We also took another significant step towards prudent risk management by introducing a Branch Risk Scorecard. The scorecard jointly developed by Credit, Audit and Vigilance aims to monitor, manage and mitigate internal and external risks proactively. This scorecard also helps in integrating all elements of risk and provides a comprehensive view of branch risk. In its pursuit of process advancements, Ujjivan has embarked on various key projects.  Ujjivan was the first in the MFI industry to be on-boarded by UIDAI as an Authorized User Agency (AUA) and KYC User  Agency (KUA). This will allow us to undertake E-KYC authentication for Aadhar IDs submitted by our customers in real-time, thus helping us to improve our efficiencies and prevent identity frauds. We are also one of the first in the MFI industry to automate collection process through the Collection Software. This will make overdue collection processes and related activities real-time and system-driven, thus allowing better and timely operational control. Other key technological development envisaged is the implementation of Business Rule Engine that will automate the credit check and credit decision process.

Operational Risk

High staff turnover and Cash Handling risk remain critical influencing factors in this service industry.  Ujjivan has successfully contained attrition at 18.4% with several employee engagement and retention initiatives. To minimize cash handling risk, we have focused on cashless disbursements and cashless collections. This year 61% of our disbursements were effected through the cashless route, and 38% of our the collection proceeds were channelized for cashless disbursements. 92% of the high risk centres in Bihar and Jharkhand and UP have been secured through customer carrying repayment to the branch to minimize cash handling risk. 56 branches have been brought under CCTV surveillance and Safe vault grouting (strong room alternate) have been completed at 30 high-risk branches. Fraud Containment Unit (FCU) has been set up in all regions from July’15.

Sector Outlook

The sector reported significant growth in the last year with 65% growth in disbursements, 84%  growth in portfolio and 44% growth in client base, reflecting all-round growth and momentum in the sector. The NBFC-MFI Guidelines released in April 2015 by RBI allowed an increase in the permitted limit of indebtedness from ` 50 thousand to ` 100 thousand, relaxation in income generating assets norms from 70% to 50%.  The RBI increased the maximum borrowing limit from MFIs to ` 60 thousand in the first disbursement cycle and ` 100  thousand in consecutive cycles (compared with ` 35 thousand and ` 50 thousand earlier). The RBI also increased the cap on the borrowers’ maximum household income to ` 120 thousand in rural areas and ` 160 thousand in urban areas  (vis-à-vis) ` 60 thousand and ` 120 thousand respectively, earlier).

Further, the RBI Notifications of Nov 2015 allowed an increase in maximum loan amount for a tenor less than 24 months to ` 30 thousand from ` 15 thousand. The revised regulations will open up avenues for product innovation, expand customer base and keep demand for Microfinance loans high as lending rates reduce in line with reducing borrowing costs by MFIs.

Financial inclusion efforts received a big fillip with the launch of the PMJDY and Micro Units  Development and Refinance Agency (MUDRA). The setting up of MUDRA has been a positive step for the MFIs. It is believed that, MUDRA will be able to provide funds at 100-300 basis points cheaper than bank funding. This will pull down MFIs’ cost of funds depending on the extent of MUDRA funding. MFI borrowers will also benefit as a result.

The eight MFIs cumulatively accounted for about 26% of assets managed by the industry as of  2014-15. As they exit the industry, after metamorphosing into SFBs along with Bandhan (which converted into a universal bank and accounted for 20% of March 2015 Gross Loan Book), the MFI industry size will halve.

Transitioning into an SFB will allow the MFIs to reduce their dependence on bank borrowings and provide them with access to a wider range of funds, including savings products and diversified base of customer deposits. The additional funding sources will enable SFBs to broaden their funding sources and access funds at a lower cost,  thereby enabling them to offer loans at competitive rates. Multiple licenses granted to payment banks, SFBs and other universal banks may enhance the threat of competition.

The transition will entail massive investment in branch up-gradation, branch infrastructure, technology and processes, the hiring of people with expertise and upscaling the existing staff which will depress the margins of the new SFBs in the short term. The biggest challenge will be quickly garnering a strong retail liability base and growing the loan book in the face of stiff competition from other SFBs and existing commercial banks.

Mr Samit Ghosh finally is not part of the remuneration committee from this year.

Won the 3rd best place to work in India for 2016.