Analyst Call For Bharat Financial Inclusion Limited. October 28, 2017

Transcription

1 Analyst Call For Bharat Financial Inclusion Limited 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/meet 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. K V RAO CHIEF OPERATING OFFICER MR. ASHISH DAMANI CHIEF FINANCIAL OFFICER MR. R. PRATAP DEPUTY CHIEF FINANCIAL OFFICER MR. VIKAS MUTTOO EVP. OPERATIONS MR. ASHISH PIPALIYA EVP. INVESTOR RELATIONS & NEW INITIATIVES 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 phone. Please note that this conference is being recorded. I now hand the conference over to Mr. M. R. Rao CEO & MD, Bharat Financial Inclusion Limited. Thank you and over to you, sir. M. R. Rao: Thank you all for joining and please accept our apologies for having this call on a Saturday evening. Update on Operations: We had a healthy customer acquisition of 6.3 lakhs in this quarter as compared to 4.2 lakhs in last quarter, which is ~ 50% increase in customer acquisition. This shows customer acquisition momentum has picked up and in the next 6 months, we would see a better customer acquisition rate. We have disbursed Rs. 4,288 crores in this quarter, which is ~ 22% of the annual target and is in line with our historical trend. Gross loan portfolio stands at Rs. 10,597 crores, which is a 10% growth on quarter-on-quarter. Collection efficiency for loans disbursed post 1 st January stands at a healthy 99.8%. Coupled this to the fact that our customer acquisition rate is picking up, as we have said last quarter that the business is back on its feet and demonetization had a one-time impact. Net NPA is 0.3% and the entire demonetization related credit costs have been fully provided. Our marginal cost of borrowing also continues to be less than 9%. The cost-to-income for Q2 is 48.6% and we are in line to achieve a cost to income of 40%, which we have targeted earlier and hope to achieve the same by FY19. We had given about 34 lakhs ESOPs to employees, this will have an impact of ~ Rs. 17 crore in the next quarter. This is a non-cash expense. Page 2 of 11

3 Profit for this quarter is Rs. 119 crores and the profit for the first half is Rs. 82 crores and we are confident of achieving our guidance of Rs. 13,500 crore loan book as well as Rs. 435 crore profit, which we have set out to ourselves in the beginning of this financial year. Rationale for Merger Just a quick mention on the rational for merger, before we open the floor for any questions. Access to savings and deposit products, thereby moving this company from monoline micro-credit company to a full-fledged financial inclusion organization. We get a readymade platform and a significant head start as compared to SFBs. We have seen through our pilot that borrowers who opt for the recurring deposit, the repayment rate is far superior to the non-deposit borrowers in the same branch. For borrowers who have opted for recurring deposits, PAR (Portfolio at Risk) greater than 30 days' is 0.08% versus 4.3% for borrowers, who have not opted for the recurring deposit product. Now, our endeavor is to start these deposit products to all the other borrowers in the BC branches. We are trying to get into a mode, where savings account and recurring deposit account is opened instantly through an Aadhaar based platform. Robust lending platform: once we open accounts for these borrowers and get them to move towards cashless through Kirana store project that we are piloting, we will have lot of data with us to mine and create more secured lending platform based on the cash flows of the borrower, which in turn creates a more robust lending platform for us. We are also piloting the two-wheeler loans and the housing loans and post the merger, we will expand this product further. We will also have access to lower cost of funds. RDSP (Retail distribution service point): cashless collections will lead to lot of data which leads to customer analytics and therefore further enable us offer other products like twowheelers and housing loans. With this, I open the forum for questions. Sure. Thank you very much. We will now begin with the question and answer session. We have the first question from the line of Nidesh Jain from Investec. Please go ahead. Nidesh Jain: Sir, you have articulated that the demonetization related credit cost is over, but do you expect any write-backs on the provisions that we have already made and what would be your guidance for the credit cost for the full year FY18? In terms of provisioning, we have largely provided on NPA book (impact on account of demonetization event). Hence, there could be minimal provision which may come in Q3, but that is due to more of a timing difference. As we are collecting installments from customers, you Page 3 of 11

4 may see the recovery happening over the next 2 to 3 quarters vis-à-vis the provisioning, although it will be very small. Vikas Muttoo: Just to add to that, we have 82% of our total portfolio which is new portfolio originated post 1 st Jan 17. We don t see too much of an impact on the provisioning side, because in our assessment, based on the present portfolio, it will be very less and it could be spread over the next few quarters, but the new portfolio which we have, may continue to have normal provisioning which is 0.1% or 0.2%, the usual standard that we have been operating before demonetization. Our repayment rate currently is 99.8% on the new portfolio, so we do not see too much of impact going forward. If you see the NPA trends, it has started reversing now. From Rs. 463 crores in June 17, it has reduced by Rs.22 crores to Rs. 441 crores in Sept 17, and this trend should continue. In terms of accounting, it is only Rs.22 crores or 0.3% of net non-performing portfolio. This amount is only on account of timing difference. Even, if we have some part of Rs. 22 crores as a hit next quarter, but that amount should get reversed subsequently in the next 2-3 quarters. We do not expect hit to the P&L on net-net basis in the next 2-3 quarters. Nidesh Jain: Second is in your opening remarks, you mentioned that the customers, those have opened savings or RD accounts with you have a very superior repayment rate. So, the history that we have observed, what is the time period. does the repayment rate was also good during the time of demonetization? M. R. Rao: Yes, exactly. Normally, pre-demonetization, entire portfolio was at ~99.8% collection efficiency right. The fact that there was a one-time hit because of demonetization, the difference we saw post demonetization and its aftermath is that differential repayment between Recurring deposit (RD) customers and non-rd customers and we realized that for RD customers, the repayment rate is far superior to the non-rd customers in the same branch and maybe in the same center. Thank you. We have the next question from the line of Digant Haria from Antique Stock Broking. Please go ahead. Digant Haria: Congratulations to the whole team on two accounts. One on the merger, second on being the first large MFI to come back to profits which are close to pre-demon level. So, congratulations to all of you. My question is on the ground level, what kind of competitive strengths are we seeing that is the competitive intensity down in terms of customer acquisition and two, has the industry adopted that three lender policy across whether it is SFBs, Banks, NBFCs or MFIs. M. R. Rao: At the ground level, some of the smaller players are finding it difficult to come back on to their feet. The bigger players who had bigger problems are kind of slow. People who converted themselves to SFB, their growth rate is also slow. There are small players who are very regional based and so on and so forth. Hence, if you were to look at the competition from a Page 4 of 11

5 demonetization versus post demonetization situation, I think the competitive intensity is much less than what it was before. MFIN has just formalized, what most of the people were doing. On RBI guidelines to MFIs, most companies were not following the practice, but they followed the regulation in the letter. So, if they had one MFI and two banks as lenders, they had lent it as a second MFI. The difference with us is we have taken the policy in spirit and ensured that even if some borrower was borrowing from one MFI and one bank, we refuse to lend to her because we looked at the policy in a spirit and we continue to do that. MFIN has just kind of given a blessing to 3 lenders (2 MFIs +1 Bank) approach and I think some of them become conservative post the demonetization episode and some people are continuing to look at this as an opportunity following the MFIN guidelines. Just to add to that, the important point here is Rs. 60,000 limit has not been changed, whether it is two lenders or three lenders, that is being kept intact by MFIN. Digant Haria: And if you could just give some update on, I think we had the entire NPA or under recoveries were largely concentrated in three pockets which was Karnataka, Maharashtra and Uttar Pradesh. So just what kind of progress or no progress is there in those particular 4 or 5 districts where everybody face problems? Vikas Muttoo: Well, I am not going to specific numbers, I will give you a broad spectrum. If I take UP, we have got back large percentage of the overdue customers on track and even the remaining, there is a healthy repayment rate. Then, MP was a second big pocket. MP has stabilized substantially barring a few districts, which even had a problem prior to demonetization like Sagar. Apart from that, other states have stabilized substantially. Digant Haria: And is that zero collection center, any more number to track? It was 400 last quarter when we had the call. So like is that number down or it is around at 400? K. V. Rao: It is 400 and still the same. Thank you. We have the next question from the line of Ravi Naredi from Naredi Investment. Please go ahead. Ravi Naredi: Sir, we are maintaining heavy cash balance since 3-4 years and after the merger announcement, the cash balance will be now less or it will be maintained at same levels? We look cash balances as a percentage of AUM. So yes, cash balances were high immediately post demonetization, we had been running on some higher cash balances, but if you see the trend, as a percentage of AUM, this has been coming down. Last quarter, we had around 20%. Now the same is at 12% on a daily average balance and this is likely to go further down. We still maintain a healthy cash balances as a percentage of AUM, but certainly as a trend we are Page 5 of 11

6 bringing it down and next quarter you can see that it would be around 10% or a bit lower than that. Ravi Naredi: But the merger with IndusInd Bank has not affected this cash balance, it will not come down drastically. Post the transaction, there will be no excess cash balance as such separately maintained, other than what probably bank is maintaining today. But till such time, we will be maintaining around 10% of AUM as a cash balance. Ravi Naredi: And how this management of our company, Bharat Finance will be merged and incorporated in bringing any idea and timeline? M. R. Rao: As we already announced, the management will continue to operate in the same way that we are operating currently. There is not going to be any change in the management. In terms of timeline, we have actually put out a slide. Page 6, if you look at the presentation, we have given what are the different procedural aspects as well as time which might take to complete those procedures. Ravi Naredi: Sir, one more thing. How much money you have received in this quarter which we have writeoff earlier? If you see our last 3 quarters, we have done incremental provisions, we have not written-off loans. Installments collected from overdue customers goes as a reversal in the provision. But, a typical overdue customer starts repaying with only 1 or 2 installments. Hence, she largely remains in the same bucket and doesn t move to the next bucket of ageing and thus over a period, the gross NPA reduces by these installments and the provisions get reduced. Thank you. The next question is from the line of Nitesh Vora from Mission Holding. Please go ahead. You mentioned that you are also going into housing loan and two-wheeler loans. So is it any change from what our core competence of micro lending. Why this change? M. R. Rao: We have been articulating for quite some time that we would like to address the needs of our borrowers to the extent possible. From our interaction with the borrowers the feed-back is - they need loan for home improvement and two-wheeler. There is no formal financing channel for these products. We see this as an opportunity and we believe that the repayment rates for these products will also be as good as the repayments that we see in the microfinance segment. We started pilot for two-wheelers loans and post demonetization we saw healthy repayment rates for these loans between 99.8% to 99.9%. Page 6 of 11

7 Similarly, Home improvement loan is based on the same thought process as there is also no formal lender to this segment for these loans. We are initiating pilot for these loans and will expand once we are comfortable with the results of the Pilot in terms of process, repayment rate and customer satisfaction. At the same time we are not moving away from our core objective of microfinance to low income customer segment. What sort of ticket size for the housing loan? M. R. Rao: We are not looking at funding purchase of new house. The loans will be given for home improvement e.g. constructing a cemented roof vis-à-vis a thatched roof or constructing a new room or toilet etc. The average ticket size we anticipate from this segment is about Rs. 1,50,000. 1,50,000? M. R. Rao: Yes, its for a Home improvement loan. Two-wheeler funding is also done by IndusInd Bank and similarly they also do housing and other funding? So what is the rationale you also going in because of your branch network, strength of the branch network or what is the strategic fit it has? M. R. Rao: Apart from the branch network which is totally different, I think the segment itself is totally different. I do not think IndusInd today is in the same segment for housing loan and two-wheelers in the way we are looking at this segment. Hence, we will add to their customer base and incrementally add to their book rather than competing with them. But you asked the question on are we moving away from microfinance - No, our strategy is microfinance and will continue to be the main stay for the company currently and in future also. Microfinance is the customer acquisition engine for us and as I said, once we rollout the RDSP and recurring deposits etc, we will have the better information about the transactions or financial behavior of the borrowers and we will mine the data and with better information we could offer other product lines also along with loans for Home improvement and Two wheelers etc. You said Q3 down the line, what sort of book you will lend to microfinance vis-à-vis the others M. R. Rao: Microfinance will remain the core and will continue to be the customer acquisition engine. In terms of customer base, microfinance will be probably 90% of the customers, but in terms of the book given the fact that two-wheeler is Rs. 40,000 average ticket size and housing loan Rs. 1,50,000, the book proportion will be different. So just to throw a number, we hope that we will have ~Rs. 40,000 crore gross loan portfolio in 3-4 years down the line. Out of which, Rs. 25,000 crs to Rs. 27,000 crs will be core microfinance loans and the remaining will be a mix of loans for two-wheeler and housing etc. Two wheelers, how much you are saying? Page 7 of 11

8 M. R. Rao: Portfolio of Rs, Rs crs. Rs Rs crs will be housing? M. R. Rao: Yes. And you also guided some net worth and some Rs. 13,500 net worth? M. R. Rao: Not net worth, its portfolio outstanding of Rs. 13,500 crores by Mar 18. I was wondering why I missed somewhere, portfolio outstanding okay and you also guided profit for this year, is it, 425 crores? M. R. Rao: No, its Rs. 435 crs. So what sort of loan growth you see coming next 2-3 years in this? M. R. Rao: Without getting into specific numbers, considering the huge unmet demand we are fairly confident of growing in the range of 40% -50%. 40% to 50% growth? M. R. Rao: Yes. Lending growth? M. R. Rao: Yes. Thank you. We have the next question from the line of Kunal Shah from Edelweiss Securities. Please go ahead. Kunal Shah: So first in terms of the portfolio ageing analysis which we used to give in terms of maybe 1 to 4 weeks, 4 to 8 weeks, 8 to 25 and more than 25. If we get this number for this quarter end, I think that entire slide is not there in this presentation. So like-to-like basis if you can just share those numbers and also again if the provisioning which we have shared earlier. The impact of demonetization is fully taken into account with net NPA of only Rs. 22 crs as on 30 th Sep 17. We have 99.8% collection efficiency for the loans disbursed between 1 st jan 17 till 15 th Oct 17. We see the collections efficiency back to normal and since the NPA trend is reversing and net NPA is non-material at 0.3%, hence we have not mentioned the detailed breakup. Page 8 of 11

9 Kunal Shah: And secondly in terms of this entire merger, so now that the thing is also how are we internally reorganizing ourselves either in terms of the employee addition or maybe in terms of getting into the other products for cross-selling? So would any of those may we would be ramping it up or it will be business as usual the way maybe the BHAFIN used to operate till the time this entire process takes place or maybe we would be getting more employees on board to cross-sell that would happen prior to the merger as well? M. R. Rao: The microfinance remains the core customer acquisition engine and the demand generation for additional products such as two-wheeler and home improvement loans will be done from the same customer base. In terms of these new products, the same sangam manager will generate the demand and we do not anticipate a large mass scale hiring to ramp up these products. We will hire as per the specific need e.g., let us say for housing finance, we would probably hire one valuation person for every 5 branches or so. But we are not going to hire an entire field force to market the housing loans. We will use the same microfinance channel to market these loans. Kunal Shah: Sir in terms of next 2 quarters even prior to that, so we are not looking at any kind of an increase either in the employee base or in the cost apart from what you highlighted in terms of ESOPs? We don t plan to hire employees apart from our planned branch addition (which will be more of hiring sangam managers) and for replacements to the extent of natural attrition. Apart from this, we don t see any major employee addition in support staff also. Kunal Shah: It will be normal business as usual, nothing? Absolutely, nothing different. Thank you. The next question is from the line of Rishabh Parekh from Sunidhi Securities. Please go ahead. Rishabh Parekh: I just wanted to check what was the reason for the increase in yield on the portfolio by about 80 basis points because of interest reversal? Referring to slide 61, The interest income reversed on account of NPA recognition in Q1FY18, dragged the yield lower in that quarter. However, in Q2, the impact due to interest reversal was minimal, which is reflected in the increase in the yield. Thank you. The next question is from the line of Ritika Dua from Elara Capital. Please go ahead. Ritika Dua: Sir, just the new line of business in terms of home improvement loans, how confident are we in terms of the asset quality for this segment and the second question is in your experience why we know that it was more because of demon that you had seen a lot of impact. Otherwise, generally what has been the behavior for the customers post because you have seen that your collections have been 99.8% since Jan to now and this is obviously on the new disbursements which you Page 9 of 11

10 have given which is a good trend. In your historical experience, how delinquencies start coming in? M. R. Rao: For home improvement loans, we believe the repayment will be as good as what we see in the microfinance business, that is our belief. That is why we are doing a pilot and same is the case with two-wheelers loans also. In case of home improvement loan which we have initiated as pilot, we are spending a lot of time on the pilot phase, just to understand the business in terms of repayment rate, process, customer satisfaction and are we meeting the customer needs fully and then only, we will scale it up. We are testing our hypothesis that as these are secured loans, so therefore we anticipate the repayment rate to be as good as the microfinance especially in the segment that we are operating. Ritika Dua: But then why do we say these are secured loans. This is nonetheless just a home improvement like is it that easy to really possess these properties because the person is just adding another room or just like some hygiene, sanitation etc. So because you are forecasting like for just to become a big piece as and when we grow into future? M. R. Rao: As I said, we believe that they will perceive this as a secured loan as the property will be mortgaged with us in the case of home improvement loan. We tested this hypothesis in case of two wheeler loan where the vehicle is hypothecated with us and the borrower is aware of the same. As regards the borrower behavior, I think all the loans that we have given from 1 st January, the repayment of 99.8% is a testament to the customer behavior at a ground level. These are all not just new customers, but these are all existing customers also, to whom we have lent the higher ticket size. This is a combination of new borrowers as well as existing borrowers. That is the reason we keep saying that demonetisation was a one-time impact. Thank you. Next, we have a follow up question from the line of Nitesh Vora from Mission Holding. Please go ahead. What percentage of loan originates from the same borrower in the next cycle? Please refer Slide no.80 & 82. The conversion rates are higher in the higher cycles. From cycle 1 to 2 the conversion rate is only 75% (due to group underwriting, the non-repaying customers within the group are dropped out by paying customers, who would have cushioned for her defaults), but as the underwriting standards and comfort between group members increase, the conversion rates in subsequent cycles increases to 83% & above. Page 10 of 11

11 In the initial cycle, the IGL 1 customer can avail MTL post 6 months of disbursement of IGL, and an LTL loan can be taken post 2 IGL cycles. In the overall borrower base today, IGl1 is 33% and remaining are repeat customers. Thank you. As there are no further questions from the participants, I now hand the conference over to Mr. M. R. Rao for closing comments. M. R. Rao: Thank you all for joining and once again please accept our apologies for having this call on a Saturday evening. Thank you so much and our team is happy to get onto one-on-one calls whenever required. Thank you so much. Kindly click the below link to play the Audio File Page 11 of 11