Indian microfinance industry is dominated by NBFCs-MFI with an 88 % share of the market. Though India’s account penetration increased from 35 % to 53 % between the year 2011 and 2014, it is still low when compared to other BRICS countries. RBI guidelines in 2011 stipulate that all for profit microfinance institutions in India should operate as NBFC-MFIs. Not for profit institutions can operate as trusts or Section 25 companies. The microfinance sector in India witnessed rapid growth in the value of outstanding loans post 2000-01 once RBI granted priority sector status to bank loans advanced to MFIs. In Union Budget 2016, the government announced setting up Micro Units Development and Refinance Agency (MUDRA), which will act as regulator for MFIs and also provide them refinancing services. MUDRA will have a corpus of Rs 200 billion and serve as a regulator for MFIs and provide them refinancing services. It will be financing cooperative banks, MFIs, regional rural banks, etc., at cheaper cost than bank funding. Incorporation of MUDRA is expected to be a major growth driver for the industry as it will bring the much needed uniformity in regulations and provide the required funding support at cheaper cost as currently MFIs are heavily dependent on higher cost funds from banks. Government of India, the Reserve Bank of India (RBI) and banking system are striving to further the financial inclusion agenda. The RBI has identified that the strategy to realise this goal will comprise of a mix of conducive policy environment, use of innovative channels-technology and optimal utilisation of the BC model. Financing needs in India have risen with the notable growth recorded by the economy over the past decade. Along with Banks and Financial institutions, NBFCs play a major role in meeting the need for financing needs of entities across the segments. To their credit, NBFCs help fill the gaps in availability of financial services with respect to products as well as customer and geographical segments. A strong linkage at the grassroots level makes them a critical cog in catering to the unbanked masses in rural and semi-urban reaches, thereby enabling the government and regulators to achieve the mission of financial inclusion. The RBI guidelines have been instrumental in restoring confidence in lenders and investors, improving the inflow of both equity and debt to the sector. MFI’s has strong moat due to stringent regulations by the Reserve Bank of India (RBI), which has improved transparency and mitigated political risk. Further, the setting up of credit bureaus and geographical diversification of its loan portfolio has kept credit risk under check. JLG model has tremendous strength of its own, with peer pressure acting as a biggest deterrent for group members to default. Despite pruning its non-AP loan portfolio, collection efficiency in those markets was at 97 %, dispelling ever-greening myth. Currently, the spread is capped at 10 % and operating expenses are very high and, therefore, larger and established companies have an advantage over new entrants, given their scale of operations. With the restriction on lending - like not more than two MFIs can lend to the same borrower - new players will find it difficult if the new territories are dominated by two or more strong players. Also there’s an entry barrier to as the spread is capped at 10 %, it is crucial for microfinance players to contain their operating expenses in order to enjoy decent RoA. Microfinance is a manpower-intensive business involving cash disbursement and collection, and frequent interaction with customers. Given the higher operating expenses involved in loan origination and collection, larger and established companies have an advantage over new entrants; given their operating scale and being adequately capitalised SKS has been able to raise equity capital in a timely manner. Also not more than two MFIs can lend to the same borrower, so the Players intending to enter unrepresented geographies will find it tough to get ample borrowers if new territories are dominated by two or more strong players. As a result large players like SKS with a strong presence across states with a reasonable vintage branch will significantly benefit over smaller players. Even without utilising the forbearance given by the RBI for its AP loan portfolio, its capital adequacy ratio has always been higher than the minimum regulatory requirement of 15 %. RBI has recently increased disbursement and intentness limit, which indicates the regulator is comfortable with the rise in ticket size - for disbursement cap in first cycle earlier cap was Rs. 35,000 now it is Rs. 60,000; for Disbursement Cap in Second cycle first the cap was Rs. 50,000 now it is Rs. 1,00,000; Indebtedness of borrower was Rs. 50,000 earlier now it is Rs. 1,00,000; Annual Income of rural household cap earlier was Rs. 60,000 now it is Rs. 1,00,000 ; Annual Income of urban household ca earlier was Rs. 1,20,000 now it is Rs. 1,60,000; Loan for income generating purpose cap earlier was 70 % now it is 50 %. SKS Micro follows very stringent norms laid by RBI NBFC-MFI which classifies assets as Standard asset for 0 to 90 days whereas SKS compliance standard asset it at 0-60 days; for substandard asset - RBI lays 91-180 days whereas SKS has 61-180 days; for Loss Asset- more than 180 days whereas SKS also has same more than 180 days. For provisioning the norms by RBI for standard asset is 1 % of overall portfolio reduced by provision for NPA (if provision for NPA < 1 % of overall portfolio) whereas SKS has 0.25 % to 1.00 % depending on NPA, or as stipulated by RBI whichever is higher; for Substandard asset RBI has 50 % of instalments overdue whereas SKS has 50 % of outstanding principal; for loss asset RBI has 100 % of instalments overdue which also SKS follows as 100 % of outstanding principle-write off. So being much capitalised and RBI compliant, SKS looks forward for small bank licence, after the final guidelines released by the RBI for small-finance banks, SKS is one of the applicants for getting a licence for small-finance bank under section 22 of Banking Regulation Act, 1949. Given the regulatory requirement that a minimum of 75 % of loans disbursed of a total small bank’s loan portfolio must be priority sector loans, SKS is the ideal candidate for a small bank licence as 100 % of its portfolio complies for priority sector. SKS will benefit in various ways. It can leverage its network and raise deposits, thereby lowering its funding costs and also enable the company to diversify its funding structure. It will also help the company in mitigating political risk by eliminating state government intervention. For SKS rate cuts have been supported by a declining cost of borrowing; the marginal cost of borrowing on balance sheet, including processing fee was 10.9 % as of Q3FY16, a 0.60 % lower than the weighted average cost of borrowing. The drop in lending rates has enhanced the company’s competitiveness vis-à-vis other players. The Fee income from cross-selling and business correspondence grew 8 % q-o-q and 65 % y-o-y. So looking forward SKS Microfinance could have AUM growth over 40 %, and can easily command price to book of 3.5x on book value of Rs. 184 FY18. With successful listing of Equitas Holding Ltd and with forthcoming of another MFI Ujjivan financial services would freshen up the interest in already listed and best performing SKS Microfinance Ltd. Ujjivan financial services Ltd is asking for PE of 19.80 times on FY15 profits, and Ujjivan’s diluted EPS for 9 month FY16 was Rs. 13.37 which takes its annualized EPS to Rs. 17.80 and at offer price of Rs. 210 this translates into PE of 11.80 times. But when we look at the exposure Ujjivan has 28 % rural exposure and 72 % in Urban while SKS Microfinance has 80 % of rural and 20 % Urban, so better rainfall could benefit SKS more. As for Collection Ujjivan does this on monthly basis and for SKS Micro does it on weekly basis, the lending rates is 23 % by Ujjivan and SKS Micro has 20 %. The average ticket size for Ujjivan is Rs. 19,884 while for SKS Micro its Rs. 15,869. At the current market price of Rs. 616.00, the stock is trading at a PE of 26.55 x FY16E and 17.80 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 23.20 in FY16E and Rs. 34.60 in FY17E. The company plans to change its name from SKS Microfinance Ltd to "Bharat Financial Inclusion Ltd", the company's core business has gone into a transformation and the new name will reflect thie new change complementing the role in fulfilling the national priority of financial inclusion, the new name is subect to regulatory approvals.It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.
|SALES (₹ Crs)||524.00||802.70||1,166.10||1,525.40|
|NET PROFIT (₹ Cr)||187.80||295.00||439.00||564.90|
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