Microfinance leaves India's banks in the dust

Ujjivan Financial Services

23/08/2016 03:35

(The author is a Reuters Breakingviews columnist. The opinions 
expressed are her own.) 
    By Una Galani 
    HONG KONG, Aug 23 (Reuters Breakingviews) - Microfinance is 
making India's big banks look bad. Small lenders that help the 
poor buy everything from bicycles to sewing machines are back 
and growing at breakneck speed after the industry nearly 
collapsed six years ago. 
    The last boom ended badly after a number of borrowers 
committed suicide. That prompted authorities in Andhra Pradesh 
to effectively stop micro lenders collecting debts. The state 
once accounted for up to 40 percent of industry loans. The 
Reserve Bank of India has since capped usurious lending rates. 
    India's microfinance firms typically focus on lending to 
women in groups where they act as guarantors for one another. 
That ensures social pressure to repay. Scale, technology, and 
shared credit data has helped the industry to thrive again in a 
segment underserved by big banks.  
    Bharat Financial Inclusion  BHAF.NS  is the ultimate 
comeback kid. The group, formerly known as SKS Microfinance, 
shrunk after the crisis and is now growing fast. Lending rates 
are now below 20 percent - not too far off what big banks offer 
well-heeled unsecured borrowers. 
    Net interest income grew almost 70 percent year on year in 
the first quarter, gross non-performing loans are almost 
negligible at 0.1 percent, and BFI earns a 29 percent return on 
equity.  
    That's much better than India's largest lender, State Bank 
of India  SBI.NS , where interest income is growing at 4 
percent, gross NPLs are 7 percent, and ROE is below 8 percent. 
Other state banks are in worse shape. 
    Banking is a preferred way to bet on rising consumer power. 
But the poor health of India's traditional lenders, after years 
of crony capitalism, has forced investors to look elsewhere. 
That helps explain why BFI shares have risen 50 percent this 
year, while shares in smaller rival Ujjivan Financial Services 
 UJVF.NS  have risen almost as much since it listed in May. U.S. 
private equity group TPG also recently led another fundraising 
for Bengaluru-based Janalakshmi Financial Services  JANA.BO .  
    BFI looks fully valued at almost 4 times book value but 
other measures suggest room to run. Eikon data shows the lender 
trades at just 15 times forward earnings, a measly premium to 
SBI on almost 14 times. Super-fast growth is always risky in 
finance but microfinance firms are well-placed to meet the huge 
demand for credit from India's poor.  
 
    On Twitter https://twitter.com/ugalani 
 
     
    CONTEXT NEWS 
    - Shares of Mumbai-listed Bharat Financial Inclusion, an 
Indian microfinance company, have risen almost 50 percent this 
year. That compares to an almost 9 percent increase for the 
benchmark Nifty index over the same period. 
    - BFI said on Aug. 9 that President S. Dilli Raj was on 
leave for two months due to personal reasons. On Aug. 1, BFI 
said Raj had been arrested by the country's Enforcement 
Directorate relating to a complaint filed against his former 
employer First Leasing Company of India.  
    - The complaint against First Leasing filed by IDBI, a 
listed public sector bank, relates to loans agreed in 2012 and 
2013, six years after Raj ceased to be an employee of the bank, 
BFI added in the Aug. 1 statement, citing his comments from 
October. The investigation does not relate to BFI, the company 
added.  
    - Bharat Financial Inclusion was formerly called SKS 
Microfinance Ltd. 
 
 
     
    - For previous columns by the author, Reuters customers can 
click on  GALANI/    
 
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 
Bharat Financial press release Aug. 1      http://bit.ly/2aCk7mg 
Bharat Financial press release Aug. 9    http://bit.ly/2b0jmkS 
 India's Bharat Financial Inclusion hits over 5-1/2 yr high     
http://in.reuters.com/article/idINL4N1A823L 
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 (Editing by Quentin Webb and Katrina Hamlin) 
 ((una.galani@thomsonreuters.com;  Reuters Messaging: 
una.galani.thomsonreuters.com@reuters.net)) 
 
Keywords: INDIA MICROFINANCE/BREAKINGVIEWS