Analyst Call For Bharat Financial Inclusion Ltd

Transcription

1 Analyst Call For Bharat Financial Inclusion Ltd Note: 1. This document has been edited to improve readability. 2. The information contained in event transcripts is a textual representation of the analyst call and while efforts are made to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the discussions held in the analyst call/meet. 3. This document may include forward looking statements, including discussions about the management's plans and objectives and about expected changes in revenues and financial conditions. Forward-looking statements about the financial condition, results of operations, plans and business are subject to various risks and uncertainties that could cause actual results to differ materially from those set forth in this document. You should not construe any of these statements as assurances of financial performance or as promises of particular courses of action. Page 1 of 11

2 MANAGEMENT: MR. M. R. RAO - MD & CEO MR. ASHISH DAMANI - CHIEF FINANCIAL OFFICER MR. R. PRATAP - CHIEF RISK OFFICER & DEPUTY CHIEF FINANCIAL OFFICER MR. SHALAB SAXENA CHIEF DISTRIBUTION OFFICER MR. ASHISH PIPALIYA- SENIOR EVP. INVESTOR RELATIONS & NEW INITIATIVES MR. RITESH CHATTERJEE - CHIEF PROCESS & QUALITY OFFICER MR. SRINIVAS PEDDADA - CHIEF INFORMATION OFFICER MR. SRINIVAS VUDUMULA - CHIEF PEOPLE OFFICER MR. J.S. SAI - CHIEF MARKETING & COMMUNICATIONS OFFICER Ladies and gentlemen good day and welcome to the Bharat Financial Inclusion Limited Analyst Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing * then 0 on your touchtone telephone. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. M.R. Rao CEO and MD, Bharat Financial Inclusion Limited. Thank you and over to you Sir. Good morning everybody. Thanks for taking out time to participate in this call. Let me begin with operational highlights of the last quarter. Operational Highlights: We had a good quarter with healthy customer acquisition of 10.5 lakhs in Q2FY19 as against 6.3 lakhs in Q2FY18, and 10.6 lakhs in Q1 FY19. In next couple of quarters, you would see there might be a temporary blip in customer acquisition due to change in operations, on account of change in regulations pertaining to AADHAR authentication. However, we expect to largely meet our guidance of customer acquisition which we set-forth in the beginning of the year. During the quarter we disbursed ~Rs. 7,049 crores which grew by 13% Q-o-Q and 64% year-onyear. Consequently, the gross level portfolio grew by 46% YoY to Rs. 15,481 crores which is consistent with our medium-term growth guidance of portfolio growth of 40% - 50%, primarily driven by 25% increase in customer acquisition, and marginal increase in ticket size by 10% -15%. Our collection efficiency continues to be robust at 99.6% for all loans disbursed post 1st January As guided, we have expanded our operations in four new states Tripura, Tamil Nadu, Gujarat and Assam. We are just getting our feet wet with 4-8 new branches. Once we are comfortable there, over the next three to six months, we will expand the operations in these states. The idea is, by the end of the year we should open another 40 branches in these four states with an extremely calibrated approach based on the experience that we have in these states. Financial Highlights: The marginal cost of borrowings for Q2FY19 is at 8.7%. The gross NPA and net NPA are at 0.4% and 0.1%. The PAT as per Ind AS for Q2FY19 is Rs. 233 crores (Rs.142 crores in Q1 FY19) and Rs. 135 crores in Q2 FY18. As per GAAP, the PAT for Q2FY19 is Rs. 212 crores as against Rs. Page 2 of 11

3 190 crores in Q1 FY19 and Rs. 119 crores in Q2 FY18. The cost to income for Q2FY19 is at 40% as per Ind AS while as per GAAP it is 42.7% which is also a drop from the 47% in Q1FY19. The efficiencies are kicking in and we will continue to have a sharp focus on efficiencies starting from the center level. We have a positive ALM mismatch for all intervals up to one year. Our asset maturity is about 6.5 months while the liabilities maturity is 8 months. We have comfortable cash position and we have sanctions in hand to the tune of Rs. 2,500 crores which we are planning to draw down as soon as possible. Impact due to Supreme Court ruling on Aadhaar: As per the ruling by Supreme Court on usage of Aadhar, our process of using E-KYCs to authenticate the customer has been disrupted for the moment. Instant loan disbursement has been stopped due to this and we are moving back to our previous manual process of collecting Aadhaar and validating the customer. Instead of instant disbursements, the loan disbursements will get pushed by one week. which is what we followed before technology came in to play. Hence, we just see a postponement of business but not a loss of business. We are also working on solutions, as an alternative to Aadhaar, and hopefully, we should be able to get technology back into play for instant disbursals and also move towards paperless agreements. Well, that is work-in-progress at the moment. For time being our RDSPs operations has also been disrupted due to this ruling. However, what we have learned that we can use IndusInd Bank KUA (which is the licensing for E-KYC validation) and we will be shifting to their license and would resume the RDSP activities in the next 10 to 15 days. Update on change in cross sell delivery process: There is a drop in cross-sell units facilitated from 5.8 lakh units in Q1 FY19 to 3.9 lakhs units in Q2 FY19. This is due to transitioning from a process of delivery of the products at the center meeting, to a direct delivery i.e. at customer door step. We are still in the transition phase and fixing the gaps in the new process, where-ever required. We expect the demand to pick once the process of direct delivery to the borrower s door step by the manufacturers starts seamlessly. Update on Merger: NCLT filing is done. We are awaiting for a written order and as soon as we get that we will keep everybody posted about the date of EGM. Mostly likely this will be in the first week of December 18. Page 3 of 11

4 With this, we open the floor for questions. Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. We would take the first question from the line of Manish Ostwal from Nirmal Bang. Please go ahead. Manish Ostwal: My first question on the liquidity issue in the NBFC sector and micro finance sector. So do you see the competitions ease out and we will be in much better position in terms of pricing although we have always been in a better position but now the competition will further ease out in the segment. Secondly, do you see efficiency gains in terms of operating efficiency. Most of the gains captured and further improvement cost to asset ratio, cost to income ratio will not be there so these are the two questions. Given the huge demand and supply gap in MFI segment, we have been consistent in saying that while the competition is there, but it does not really play out as much as it is in the urban financial or banking sector like for e.g. what you see in credit cards or car loans. As our presence is far more rural than most of the competitors so while we will have one or two players in the same village or same area that we are operating, it is not that all 17 or 20 players are operating in the same village. On whether the liquidity crisis is impacting others or not (as per a media article some of the MFIs are heavily dependent on commercial papers we do not know who they are), but we do not see this impacting negatively our operations and secondly, we have always been saying that given the huge demand-supply gap we have the capacity to grow even at 80% or 100%. But as a prudent growth strategy we have always said we will grow between 40% to 50%, partly based on marginal increase in ticket sizes and largely based on customer acquisition, which is playing out in this fiscal year as well. Ashish Damani: The efficiencies will continue to play. Given that, our metric of borrower per Sangam manager is still around 616 which we would like to take it to 750 over a period of time. As branches mature you would see that happening, the Sangam managers that we have added will also continue to acquire customers so, this is going to continue, to play out. Our customer acquisition has been very robust and it will continue to be the case and which will lead to increased efficiencies. As far as liquidity is concerned as M.R. explained, we are in a very strong position primarily on account of positive ALM mismatch which is helping us. Our asset maturity is at 6.8 months as compared to liabilities maturity at 8 months on an average basis and second given PSL advantage we continue to borrow funds from the banks. Currently, we do not have exposure to capital market borrowings. Manish Ostwal: And lastly sir, secondly, we are creating a non-mfi book also to cross-sell to existing large customer base so over the three to four years what kind of size of what we can build over there. Page 4 of 11

5 Rather than looking at the portfolio creation we look at it from the need perspective of the borrower. We facilitate products which meets the basic needs of the borrower e.g. solar lamp, mobile phones, water purifier or a bicycle or even a two-wheeler. For us offtake per center is more important rather than portfolio for cross sell products. Today, if you look at the cross-sell products run rate, we are running at an average monthly facilitation of 0.54 units per center which we think is just the tip of the iceberg. We are driving a quality enhancement program across the country where we are ensuring that the members are aware that we are also funding other products. We expect this to go up gradually over a period of time and in the two to three years, we want one product at least to be purchased or financed by us every month per center so the number should go up from 0.54 to 1, which is effectively doubling the number of units facilitated. There is not going to be too much impact on the book because these are mostly 25 week repayment products except for housing loan or a two-wheeler loan which is a two year to five year repayment product. Ashish Damani: Our overall strategies is to get to maximum of 5% of our book in cross-sell business, which should give us 10% in revenues and contribute 15% in terms of earnings. Thank you. Next question is from the line of Kunal Shah from Edelweiss. Please go ahead. Firstly, in terms of the ticket size if we look at the quarter-on-quarter particularly on the disbursement so there has been almost 15% kind of an upside in ticket size, after having been almost like flat for last three odd quarters. So anything specific to read into it and is it more structured than we should see the ticket size is moving up is now almost like Rs. 25,000-odd. Referring to slide #48 on the ticket size, off-take per client has gone up 15% quarter on quarter primarily because the number of cross-sell units facilitated during the quarter have gone down. As we have explained in the beginning of the call, in the cross-sell the average ticket size is around Rs.2,800 and if the contribution of cross-sell in overall disbursement comes down, then the overall ticket size looks little higher. If you exclude the cross-sell on a Q-on-Q basis you will see a 6% increase in the ticket size and 16% increase on Y-o-Y basis. Okay. So in terms of cross-sell so now it is getting. So cross-sell in terms of mobile phones and all is lower sale so it is like it is getting replaced by MFI or something so that is what you are trying to say? In the earlier process all the products were delivered to the center meeting by our staff or for some of the products like sewing machines, where customers used to visit the branch and pick those products. Now we have asked the manufacturers to deliver the products to the customers doorstep, they have tied up with third party vendors to do this. There is a transition in process which is happening as we speak. We expect this to streamline by Dec 18 and I think probably Q4 will be a normal quarter. Page 5 of 11

6 Okay. So, then ticket size should again come back to or it should be in this range so how should we look at this? If you exclude cross-sell, the average ticket size is Rs. 28,000 and more importantly outstanding per borrower is Rs.22,000. Now again if your question is, how is it compared to the other MFI players, I think we are still on the lower side of the curve. Yes, definitely. And maybe again in this operating environment do we see the number of players indebted with the customer are coming off and that should ideally lead to some kind of an increase in ticket size over next one, one and a half years? So maybe today when you look at each MFI customer has two or maybe three odd loans even if we include some of the non-mfis lender. So, then do we see it going away at least in some of the few of the regional players? I think there will be a marginal impact because this liquidity crunch that we are seeing will phaseout over the period of time; it is difficult to predict how long will it take. However, as I said given the huge demand-supply gap there is not going to be too much of upside or too much of downside because we know that there is today also liquidity crises notwithstanding, even six months back we could grow at 80% if we choose to because of the huge demand-supply gap. We have deliberately picked our growth rates between 40% and 50% based on the fact that we should acquire 25% to 30% new customers every year and marginal increase in ticket size of 10% to 15% as customers graduate from one cycle to the other. That has been the strategy and that is going to continue to pay up. Ashish will add more color. Referring slide #54, about 98% of the customers overall indebtedness of less than Rs.1 lakh, which you would know is the limit imposed by RBI at customer level. Even if you take Rs.60,000 limit also, the number is 90% i.e.,90% of the customers are still below Rs. 60,000 limit. Yes, so overall they are below limit but the only thing is today it is distributed amongst the financers and now it would get consolidated amongst the top. And since we have significant chunk coming in say from the term loans from banks, when we are approaching today banks are we seeing any kind of stance from banks in terms of maybe reevaluating their NBFC book and there after maybe not so you clearly highlighted that you are planning to draw down the sanctions of 2500 odd crores but is there like we are getting it as fast as it used to be prior to this entire liquidity situation or banks are taking time in terms of disbursals? Ashish Damani: Out of the Rs. 2,500 crores we have already drawn Rs. 1,275 crores and new pipeline has also been built. While there could be a relook at a strategy from the bank side primarily for the players who have relatively less strong balance sheet. We have good track record behind us, we have very strong balance sheet and so we have not seen any impact, of course the pricing in the current market will be slightly bit different. So that is where Page 6 of 11

7 we will have to keep evaluating. However, It is also not as freely available as what you would have seen in let say Q1 or early part of Q2 but yes we are adequately funded. Even for stronger players like us it is not like so failure maybe not timely as such. Ashish Damani: So timing is not an issue like I said we are well planned, we are not having any challenge in terms of the planned funding. But yes the pipeline which used to be very thick that has come down a bit I guess. If you see the off-balance sheet funding, we have a managed book under business correspondent, securitization, assignments that is about 50% of our funding, so that is actually flowing in because banks still have these as PSL targets. No, I am very comfortable with BHAFIN just wanted to get in terms of how banks are looking even the stronger entities like BHAFIN so that was the only question I think maybe for us it is still comfortable but just want to get the sense in terms of how banks are looking at it. Thank you. Next question is from the line of Nischint Chawathe from Kotak Securities. Please go ahead. M.R. you mentioned about change in process that you are doing in terms of delivering of products from customer to customer door step from center meetings. Just trying to understand as to what is driving this change. Loan officer s core competency is customer acquisition, disbursements and collections. we do not see any value add in inventory being handled or delivered by the loan officer and we think it is more efficient for the manufacturer to deliver order with the use of technology. Manufacturers have also realized that it is better to deliver directly. Second, once you take out this non-productive piece from loan officer, we will be able to offer more products in the center, and we can offer multiple options for one product from different manufacturers. E.g. For mobile phones, we tied up with two manufacturers, instead of one manufacturer, we are also giving a choice to the customer and reducing the burden the loan officer with the process of delivery. Let me ask this a little differently, have you seen the attendance in center meetings going down. We haven t seen dip in center meeting attendance, I don t think moving to manufacturer delivery and reducing the burden of the loan officer has anything to do with attendance. It has to do more with the efficiencies, the attendance continues to be around similar levels for the last two to three years, which is typically around 70%. we have tight processes and rules for disbursements, if there is no minimum attendance in the center meeting or the group requisite attendance, we do not disburse loans, we are strict on these things. That is the reason, there is far more discipline in our center meetings vis-à-vis other players. Page 7 of 11

8 The other thing is on the Aadhaar process, I am not fully on the top of this so if you could just explain as to what needs to change and how are we really copping up with maybe just start from the basics. Ritesh Chatterjee: We started accepting Aadhaar as KYC in line with the other MFI players of industry, and it remains voluntary for customer, we haven t made it mandatory. Second is, we started using E-KYC based authentication services, which is a substitute for data entry and makes the process more efficient. Till recently, we were using E-KYC for enrolling new clients, but for existing clients we were using it as an additional verification service from credit bureau etc. Now basis the fact that, we are not allowed to use authentication services, Aadhaar remains as one of the KYC, which we will use on a voluntary basis, so there is no change in that policy. Second is the authentication services are replaced by our normal verification process, which we were following, before we switched over to these services. The manual process as in what, it is exactly? Ritesh Chatterjee: It is paper based, there are two parts of manual process, one is, use the QR code as a substitute for data entry for enrollment of a new client. UIDAI has also recommended to use QR code for everyone. Secondly, we can take the KYC during the loan application process, but for existing clients, we don t need to verify again, because we already have a verified KYC. Hence the main impact is in terms of slight increase in the time only for the on-boarding of new clients, but for existing clients we don t see much impact. Sure. And just finally on the timelines of the merger. What time are we really looking at the merger to finally be completed. We are awaiting NCLT order. Once we receive the order, we are confident that this EGM will be conducted in the first/second week of December. Once that is done, I think it will take another two more months to complete the formalities. So, we are expecting the merger to be done by March. And just looking at a hypothetical scenario in case the merger does not go through for whatever reasons then is there any breakup fee that has to be paid. If the merger gets delayed, we will continue to do what we are doing, continue to have investor calls every quarter and continue to deliver good results. And just one thing very basic question. How does it work in terms of, in case of BFIN and IIB be both in terms of percentage of both needed for the merger to go through. Sorry come again. for both BFIN and IIB in terms of what is the extent of percentage of votes that are required for the deal to go through. Page 8 of 11

9 75% of the equity shareholders, who participated in the voting. And the promotor of IndusInd can vote is it? All shareholders can vote. Thank you. We would take the next question from the line of Kashyap Jhaveri from Emkay Global. Please go ahead. Kashyap Jhaveri: With respect to one of the earlier question I was going back to slide number 54 where you presented the Equifax data, now if I look at this chart which is on the left hand side top, there are four lenders percentage of borrowers which is at 3% and I also look at percentage of borrower by the indebtedness this is more than Rs.100,000 odd. Now if I look at the collection efficiency ratio that MFIs have posted historically above 99% any continuance of this 3% in terms of total number of lenders at four or probably people having indebtedness more than Rs.100,000 odd can that 99% plus the collection efficiency ratio in future can probably be lower at about 97-98% is that a possibility. We are talking about industry numbers in slide 54, 98% of borrowers have indebtedness of less than Rs. One Lac. We don t have a specific data on default rate on the customers, who have taken loans from four lenders. The way we see today is anyway, only 3% of borrowers have loans from 4 lenders. RBI regulations say that a customer cannot borrow from more than two MFIs. We have seen people taking loans from two MFIs and one loan from bank. But there is no change, or no impact on the credit quality, because if you look at the ticket sizes, the average ticket size for the industry is about ~Rs.25,000, even if someone has taken loans from 3 lenders, but the indebtedness is <= Rs.80,000, which is within the Rs.1 lakh limit of RBI. We do not envisage any issues in terms of customer default because of two lenders or three lenders. Kashyap Jhaveri: So you do not foresee any chances that 0.5% to 1% credit cost across probably last including DEMON and everything that is our chance to getting into about 1.5 to 2% odd for the industry level as such. We have very stringent policy. We follow two lenders rule for IGL one i.e. first-time customers with company, and for the customers who are from cycle two onwards, we follow three lender norms which is two MFIs plus one more entity, which is a bank. We haven t seen any deterioration in the credit quality even after this change. We have a very differentiated model, if you see the entire industry and if you look at us, we are the only ones who follow 100% weekly collection of loan installments. Credit bureau data shows difference in credit quality between weekly and monthly model and the weekly model turns out to be better. Ashish Damani: Just to add, even in first cycle we look at only 60,000 as overall indebtedness not 80,000. Page 9 of 11

10 Thank you. We would take the next question from the line of Nilesh Parekh from Goldman Sachs. Please go ahead. Nilesh: Just coming back to the Aadhaar issue. So, just the understanding that we had was, it was also helping in terms of duplication which was actually prevalent earlier now if this we go back to the old practice, I am just here I am actually talking about the industry maybe not specific to you guys but, due you think that issue again crops up in terms of multiple loans been given but the different IDs do you think it kind of creates that kind of uncertainty. We just break this into two parts, one is existing customers and second is new customers. Existing customers who are already onboarded about ~83 lakh customers, we have KYC of these customers and we can give them incremental loans to these customers. The new customers who contribute to ~25 to 30% of our enterprise loans disbursements going forward, for them we are moving from an instant authentication process to a paper base process; when we say paper-based process, we still take Aadhaar as KYC and then do credit bureau checks and give them loan. In fact, there is a discussion with IndusInd Bank for the BC branches, bank is allowed to authenticate the customers, if we can open the savings account for these customers with DBT instruction, we can also give a loan for customers through savings account authentication. Ritesh will add more to that. Ritesh Chatterjee: Are we moving away from Aadhaar, no we are not. We will continue to accept Aadhaar as KYC, but on voluntary basis by customers. Today it has become the most convenient KYC for customers to give it voluntarily, they will continue to give Aadhaar, unless they insist on giving some other Id. Nilesh: Okay. But if they give say another form of Id which obviously they would be also giving out. In terms of the process does it actually change materially for us like in terms of the time taken or the in terms of the intensity of the process for identification and all that. Ritesh Chatterjee: Three years back the MFI industry has moved to two mandatory KYCs, which we also have been following. Our database is linked with 100% Aadhaar and ~90% with voter id; for the entire MFI industry, Aadhar seeding is ~ 95% and voter id seeding ~ 80%, so the Credit bureau quality also doesn t change, it is only the convenient method of getting the demographic data stops, otherwise it is all the same. Thank you. Next question is from the line of Nischint Chawathe from Kotak Securities. Please go ahead. Just a follow up on the Aadhaar part and I guess this is more of a thought process, I just want to understand the thought process that the industry is following. In the scenario where a customer sort of refuses to submit Aadhaar and I believe the proportion would be very less, but still if he does then what really happens, is the pricing different and obviously in terms of KYC convenience it is going to change things. So, what are the industry thought process around this. Page 10 of 11

11 We cannot speak about the industry. we will be doing more dedupe check and so on and so forth if there is no repetition. So, instead of giving a loan in a week probably, we might take two weeks because the process of trying to validate a voter Id and doing dedupe will be bit more tedious than it would be based on Aadhaar. The pricing may not be different? No, it is difficult to have differential pricing in this segment at a center level. Sure and currently within the industry Aadhaar would be like what proportion. Ritesh Chatterjee: It is ~ 95%. Thank you. Next question is from the line of Prashant Shah from Macquarie. Please go ahead. Prashant Shah: Just any qualitative color you can give on the new states that you are entering into what is the competition there like and what is giving us the courage to, or what is giving us the interest to enter into these states. There is huge demand and supply gap in almost all the states. It is too early to give a color on these states, but this has been for quite some time post MFI crisis and our consolidation, we have not ventured into new states and we thought this is a good time given that the merger is also around the corner for us to expand our footprints into four more new states. But we have been very slow about our expansion plan because we want to get very comfortable with the customer behavior, which is typically actually uniform across the country in terms of center attendance or discipline. But given that it is a new state, we need to get the correct staff, who know the local language, local culture. That is going to take some time. Currently this is too premature to talk about any insights into these specific needs. Thank you. Ladies and gentlemen this seems to be the last question for today. I would now like to hand the conference over to Mr. M.R. Rao for his closing comments. Thank you for your time. And we will keep you updated as soon as we get some news from NCLT. Thank you very much. Ladies and gentlemen on behalf of Bharat Financial Inclusion Limited we conclude today s conference. Thank you all for joining us. You may disconnect your lines. Click here for Q2-FY19 Transcript Audio Page 11 of 11