SKS Microfinance

Group-2
Name
Karan Mittal
Abhishek Sharma
Abhiras Sharma
Anant Jain
Shubham

Flow of Content

NBFC
MFI
BFIL overview
Company Valuation
IPO launch
Strategy in 2010 crisis
Performance Analysis
New Initiatives
References

NBFC : Introduction
A Non-Banking Financial Company (NBFC) is
Registered under the Companies Act, 1956
Its principal business is lending, investments in various types of
shares/stocks/bonds/debentures/securities, leasing, hire-purchase,
insurance business, chit business
Its principal business is receiving deposits under any scheme or
arrangement in one lump sum or in instalments

Cont.
Entry Point Norms (in effect since April 1999):
i. All new NBFCs were required to have a minimum NOF of Rs. 2 crore in order to
register with the RBI

ii. Minimum asset size of Rs. 25 crore

iii.Fulfils the Principal Business Criteria (PBC):
a)

A company not accepting deposits, will qualify for registration as NBFC if and when
its financial assets aggregate Rs 25crore and constitute 75 per cent and above of
its total assets and financial income constitutes 75 per cent or above of its gross
income

b)

Financial entities having asset size of Rs.1000crore or above, holding financial

assets which constitute 50% of the total assets OR generate financial income which
as a proportion of the gross income is at least 50%, will need to be registered and
regulated by the Bank

Categories of NBFC
1. Asset Finance Company (AFC)
2. Investment Company (IC)
3. Loan Company (LC)
4. Infrastructure Finance Company (IFC)
5. Core Investment Company (CIC)
6. Infrastructure Debt Fund(IDF)
7. Micro Finance Institution (MFI)

Micro Finance Institution (MFI)

Minimum Net Owned Funds of Rs.5cr ore. (For NBFC-MFIs registered in the
North East Rs. 2 crore )

Not less than 85% of its net assets are in the nature of qualifying assets
Further the income an NBFC-MFI derives from the remaining 15 percent of
assets shall be in accordance with the regulations specified in that behalf

An NBFC which does not qualify as an NBFC-MFI shall not extend loans to
micro finance sector, which in aggregate exceed 10% of its total assets

Regulations for NBFC-MFI

Capital Adequacy ratio:
Maintain a capital adequacy ratio of atleast 15%.
Asset Classification Norms
Standard asset: No default in repayment of principal or payment of interest
Nonperforming asset: Interest/principal payment has remained overdue for
a period of 90 days or more
Standard assets - Overdue for less than 8 weeks
Sub-standard assets - Overdue for more than 8 weeks upto 25 weeks
Loss assets - Overdue for more than 25 weeks
The aggregate loan provision to be maintained by NBFC-MFIs at any point
of time shall not be less than the higher of:
1% of the outstanding loan portfolio
50% of the aggregate loan instalments which are overdue for more than 90
days and less than 180 days and 100% of the aggregate loan instalments
which are overdue for 180 days or more
All NBFC-MFIs shall maintain an aggregate margin cap of not more than

Growth Phases of Indian Microfinance Sector

Phase I Growth

Large availability of funds including debt and equity

Low entry barriers
High Growth period Ended in October 2010

Phase II Volatility

Highly volatile period from October 2010 till 2011

MFIs experienced funding constraints
Deterioration in asset quality

Consolidation phase in operations by MFIs with regulatory

intervention in 2011
Phase III - Curtailed expansion plans and changed business model
Consolidatio
Resumption of funding from banks and equity infusion from
n
PE/social sector funds

Phase IV
Stable
Growth

Stable growth expected with regulatory framework in place

Margins are expected to stabilize and profitability improve

Distribution of MFIs

As of 31st Mar 2016, amongs

MFIs, 12 are small, 22 are
medium, and 22 are large.

Large MFIs account for almost

90% of the industry.

Financials - MFIs

BFIL

Bharat Financial Inclusion Ltd.(BFIL) is a non-banking finance company

(NBFC), regulated by the Reserve Bank of India.

BFIL distributes small loans that begin at Rs. 2,000 to Rs. 12,000 (about
$44-$260) to poor women so they can start and expand simple businesses
and increase their incomes.

Mission is to provide financial services to low-income households.

Vision is to serve 50 million households across India and other parts of the
world and also to create a commercial microfinance model that delivers
high value to our customers.

Product Portfolio
Income Generation Loans (IGL) Aarambh :
Loans range from Rs. 2,000 to Rs. 12,000 for the first loan.
12.5% flat interest rate

Mid-Term Loan (MTL) Vriddhi :

Loan amounts range from Rs. 2,000 to Rs. 10,000 in each annual cycle
12.5% flat interest rate

Mobile Loans :
Loan amounts range from Rs. 1,800 to Rs. 3,000

Cont.
Sangam Store Loan:
Working capital loans ranging from Rs. 2,500.00 to Rs. 12,500.00
Interest free

Housing Loans :
Loans range from Rs. 50,000 to Rs. 150,000
11.9% flat interest rate

Funeral Assistance :
funeral assistance of Rs.1000 is applicable only for members who have paid
insurance premium, and is provided to family of the member if information is
received within 14 days death

Life Insurance :
Weekly payment of Rs. 20 for the term of five years

BFIL Microfinance: Overview

Constraints: (3 Cs)
Lack of Capital
Capacity constraints
High Cost of delivering microloans

Swayam Krishi
1997 Sangam BFIL NGO
1st Loan
1998
2002

Innovative Principles:
Profit- Oriented Model
Leveraging Industry Best
Practices
Technology for Automation

~5000 borrowers

NGO to for profit2005 NBFC

Half a Million
2007 customers
2010

IPO Launch

BFIL Microfinance: Business Model

Group
Formatio
n

Sangam
Size
Increases

Repayme
nt of
Loans

Sangam
Formatio
n&
Borrowin
g

Joint Liability Groups:

Pioneered by Grameen Bank
Lending to individual women, utilizing five
member groups where groups serve as the
ultimate guarantor for each member
High Repayment Ratio of 98% Because of
Social Pressure

Member
invests in
enterpris
es

Characteristics:
Small Ticket loans
Short duration loans
Higher rate of interest
High Frequency of Repayment

Valuation

Requirement of Additional Capital:

Fast growth of customers
Regulations to maintain CAR of 9%
25% of equity should be held by Indian investors

How to set a Valuation for BFIL ?

Use comparable firms
Non-availability
Hire an Investment Banker
Lack of experience in MFI sector

Senior management built their own model to set a value.

Valuation Model
Approach:
Build simple model of branch earnings
Consider how this value will change as branch matures
Estimate growth rate of no. of new branch and HQ expenses to
calculate future earnings
Inputs :
Average size of Loan,
Growth parameters New clients and Branches, Loan Size
Output:
Projected Balance sheet and Income Statement
Challenges:
Difficult to predict forecasting growth rate

Branch Valuation Model

Income:
Expense:
Rate of Interest: Average
Financing Cost:
23.6%
Cost of borrowings: 15% p.a.
Interest Margin: ~ 8%
Provisions for loan loss: 2% p.a.
SG&A Expenses per branch :
Branch Operations:
Assumptions:
Salaries: Rs. 2,28,000 p.a.
No. of Clients: 4000
Bonus : up to 60% of
Avg. Size of loan : Rs. 7000
Loan size growth rate: 0 %
salaries
Other : Rs. 2,49,600 p.a.
Tax rate : 35%
CapEx : Rs. 1,22,000 p.a.
Terminal Growth rate: 5%
HQ operations:
after 2 years
Executive Salaries, MIS, HR
Rate of Discount: 16%
&
Audit
: Rs.WACC
2,16,00,000
p.a.~Rs. 400 mn ($ 8 mn)
Final Value
using
approach:
Based on this primary value, BFIL asked potential investors to bid to get
equity stake.

IPO Launch

Date of the IPO: 28 July to 2 August 2010

First day of Trading: 16 August 2010
Issue Size: US$350 million, of which US$155 million were fresh equity
shares and US$195 million, were stock sales from existing shareholders
representing a combined total of 23.3 percent of post-IPO shares.
Market Capitalization of BFIL: US$1,525 million (as of IPO close on 2
August 2010)
Structure: 60 percent of shares sold to institutional investors, 30 percent
to retail investors, and 10 percent to non institutional investors, primarily
high net worth individuals.
Promoters: MBTs, Kismet, Sequoia Capital and Unitus
Anchor Investors: BFIL secured an initial US$64 million from a group of
18 anchor investors who agreed to buy 18 percent of the offering at the top
of the offering window of INR 985 per share. The anchors included JP
Morgan, Morgan Stanley, India ICICI Prudential, Reliance Mutual Fund, and
George Soros Quantum Fund. They are required to hold the shares for at
least 30 days.
Stock Exchanges: Bombay Stock Exchange (BSE) and National Stock
Exchange (NSE)

2010 Crisis
Factors that led to 2010 Crises :
A hyper-competitive environment devoid of regulation
High interest rates generating abnormal returns
Debt accumulation compounded by multiple borrowing (Average borrowers
debt balance more than doubled)
MFIs focus for-profit mainstream operations did not gel with the claim of
eradicating poverty
Intense Competition and no price war led to process dilution (400-600
companies and everyone was charging 31-32%)
End Result - The entire MFI sector was engulfed in widespread allegations
of harassment of clients by recovery agents and borrower suicides in AP

Dark time for BFIL Microfinance

BFIL saw a 91% erosion of its share value from its peak on 28 September
2010 till 2013
It experienced Drop off in loan collections and a drying up of funding

Its loan portfolio in A.P shrunk to zero in 2nd quarter of 2013 from a high
ofRs.1,491 crore at the start of crisis in October 2010.

Collection levels in AP dropped to 5%, forcing BFIL to shrink its loan book in
other states and use the money to provide for the AP bad loans.

BFIL reported a loss of Rs 1,360 crore in FY12.

Exit of Vikram Akula after Andhra Pradesh Micro Finance Institutions Act, 2010

Turnaround Strategy

Key focus areas were - Consolidation of its customer base, cross-selling

initiatives and diversification and increased collection efficiency

Limiting Exposure to any single state to 15% of the total portfolio outstanding
and to 50% of the reported net worth - The exposure to AP reduced to Rs 236
crore or 15 per cent of the loan portfolio as of March 2012

Structural ReadjustmentReducing number of branches and employee

headcount

BFIL diversified its lending to include financing of smallkiranas, loans for

purchase of mobile handsets and gold loans and came with insurance products
as de-risk products

BFIL opted not to go in for the corporate debt restructuring package, and repaid
its Rs 3,800 crore debt without delay and raised Rs 230 crore from institutional
investors in QIP

Turnaround of BFIL Microfinance

On account of the turnaround strategy, BFIL Microfinance had four

consecutive quarters of profit -- a profit after tax (PAT) of Rs 1.2 crore in Q3FY13, Rs 2.7 crore in Q4-FY13, Rs 5 crore in Q1-FY14 and Rs 16.3 crore in
Q2-FY14

The lending portfolio grew sequentially by 11 per cent to Rs 1,320 crore from
the non-AP regions in the fourth quarter of 2011-12, with 95 per cent
collections on an average

The collection efficiency in 16 non-AP states has further improved to 99.9%

and cost of borrowing has come down

Financial Performance

Source : Bloomberg

Competition

Source : Bloomberg

Performance: Through
Graphs
Members per Loan Officer

1200
1000
800
600
400
200
0

Employees (000s)
25
20
15
10
5
0

2013 2014 2015 2016

2014

2015

2016

RoE (%)

RoA (%)

Total Revenue (INR Cr.)

1400
1200
1000
800
600
400
200
0

2013

10
0

5
0
-5
-10
2013 2014 2015 2016

Source : Bloomberg

-15

2013

2014

2015

2016

-40
-80
-120

2013 2014 2015 2016

New Initiatives
BFIL currently reaches over 1 lakh villages in India with a presence in 15
states through its 1324 branches, to provide more financial services to the
bottom of the pyramid by leveraging its extensive branch network and
financing ability. In this direction, BFIL undertook various initiatives like1. Solar Lamps Financing Program
2. Mobile Financing Program
3. Gold Loan

Solar Lamps Financing Program

Indian homes traditionally use kerosene lamps to light up their homes

Prolonged exposure to fumes and harmful particles dangerous to health

BFIL partnered with d.light solar to make solar lamps available to its
members

This pilot expansion initiative is estimated to reach 475 branches in FY16

This initiative has not only brightened the homes of Bharat Financial
Inclusion Limiteds borrowers but has also made them more healthy for
their families

Gold Loan

Gold Loan pilot launched in 2011 under the name of Swarnapushpam

Provide personal/business loans to our members for meeting their

short-term liquidity requirements

Loans secured by gold jewellery ranging from Rs.2000 to Rs.1,00,000

Loan repayments can be made in full at maturity, as bullet payments,

equated monthly instalments or quarterly instalments and the
maximum tenure may be up to 12 months at the option of the borrower

The annual effective interest rate for the Gold Loans typically varies
between 18.5% and 25%

Mobile Financing Program

India has High potential in mobile telephony, but high costs deterrent to rural
borrowers of BFIL

BFIL partnered with Nokia India Pvt Ltd. to supply handsets to its borrowers

Loan product has been designed to facilitate the process of disbursement of

mobile handsets

Under this program, BFIL has disbursed 3.5 lakh mobile loans to its borrowers
in 6 states in India

This initiative has instilled confidence in its borrowers and improved their
business through better access to communication

Latest Developments

BFIL announced a reduction of interest rate charged from borrowers by

100 basis points from 24.55% to 23.55%

Rs.400 crore capital raised in May through a qualified institutional

placement (QIP) route

References

Bfil.co.in
Moneycontrol.com
economictimes.indiatimes.com
Micrometer Issue 17

Thank You