Ujjivan Financial Services banks on housing, SME segments for coming years

MD and CEO Samit Ghosh explains the company’s road ahead in transforming into a small finance bank

SAMIT GHOSH

MD and CEO, Ujjivan Financial Services

Microfinance firm Ujjivan Financial Services has posted stellar Q1 numbers with profits doubling and income rising almost 50 per cent.

Speaking to BTVI, Ujjivan Financial Services Managing Director and CEO Samit Ghosh explains the company’s road ahead in transforming into a small finance bank. While group loans contribute about 87 per cent of the total business, individual loans, especially housing and SME, will contribute half of the loan book in the next five years, he said. Excerpts:

Your profits doubled in Q1, to ₹71 crore. The net income is up 77 per cent on a year-on-year basis. Can you take us through the key drivers in this quarter?

As far as the profits are concerned, the business is moving as per our plans and the momentum is there. We have had a reasonable growth in our business. However, on the cost side, there is a one-off impact — the funds we received from our IPO are still in this quarter, which helped us reduce the cost of funds. So that has very positively impacted our profit for this quarter.

Along with that, we have also been able to reduce our operating expenses. Our efficiency levels have also gone up. So those factors positively contributed to this quarter’s profit.

Your net interest margin has gone up almost 100 basis year-on-year. Do you see that tapering off going forward? Is it sustainable at 12.96 per cent? Will there be any moderations in the forthcoming quarter?

There will be slight moderation in a sense that it is also affected (has gone up) by the funds we received from the capital infusion. So there will be certain impact from that.

In terms of the asset quality, the gross NPAs are at 0.18 per cent and the net NPAs are at 0.08 per cent. Is this trend likely to continue or do you see some strain on asset quality going ahead?

No, in case of asset quality, we do not foresee a major problem at all. Whatever minor blips are there in some particular parts of the country, we are able to tackle it and resolve it. We do not see the asset quality as an issue. But what would impact our cost is that we are transforming into a small finance bank. A lot of cost — relating to the investments we are making in terms of technology, infrastructure and hiring additional people — will start impacting us the next quarter onwards.

So that will increase our cost, but that really relates not to the regular business, but to the transformation cost of becoming a small finance bank.

Is your operational expenditure likely to go up on the back of the transition?

Yes, it will.

Your provisions are quite moderate — ₹6 crore right now as against ₹8 crore in the previous quarter. Will more stringent provisions be required? How are you provisioning for NPAs right now? How will your provisioning requirements change as you align and transform towards a small finance bank?

In terms of credit provisioning, we already have a very conservative plan. So I do not see credit provision in itself having a major impact when we become a small finance bank because we are already aligned to the RBI requirements for a small finance bank.

Our operating expense ratio is down to about 7 per cent, which is extremely good. Our cost-to-income ratio during the transition period will definitely go up. And that’s what we plan when we start making investment in infrastructure.

What will be your average ticket-size for SME loans?

At present, group loans contribute about 87 per cent of our business while individual, education, housing and SME comprise the remaining 13 per cent. In five years, we expect almost an equal division between group and individual lendings. Largely, the growth will come from housing and micro SME business.

Ratan Tata, Nandan Nilekani and Vijay Kelkar team up for Avanti Finance to provide loans to poor

Ratan Tata, Vijay Kelkar and Nandan Nilekani have started a technology enabled financial inclusion vehicle, Avanti Finance, which will be focused on delivering affordable and timely credit to under-served and un-served segments in India. 

The aim is to leverage on the social sector presence of Tata Trusts and other like minded partners and the rapidly evolving India Stack (Jan Dhan - Aadhar - Mobile), UPI and payments bank ecosystem. Avanti would use this ecosystem and will innovate on product design in consonance with the indigenous needs, to deliver seamlessly for the end consumer, said the statement. 

According to the release, 'the promoters strongly believe that the institutional inequalities and information asymmetries are depriving the target customer segment of access to affordable credit'. The target customer segment over the last few years has displayed very low delinquency rates compared to any other customer segment, but still is charged the highest rate of interest. Avanti's primary objective is to make a difference in this sphere thereby enhancing the prosperity in these communities .. 

Ratan Tata, Chairman of Tata Trusts has been actively engaged in several initiatives of the Tata Trusts since his retirement. His endeavours in the last few years have been focussed on creating a sustainable model for interventions which have lasting impact on communities, especially the under-privileged and the deprived. 

Tata and Nilekani are bringing their investments from their respective philanthropic capital, and any gains will be reinvested in philanthropic causes. Avanti will apply for registration to the Reserve Bank of India in the coming days. 

The founding directors of Avanti are Ratan Tata, Dr. Vijay Kelkar, Nandan Nilekani and R Venkataramanan. A senior leadership team with experience Technology, Microfinance, Enterprise Risk Management, Credit Operations and Customer Service, Leadership and Strategy Consulting, Structured Finance and Investment Banking is in place. 

"Avanti will be a platform to impact the poor through credit at individual and community levels to create a lasting improvement in their livelihoods and standard of living, ushering prosperity. I am thankful to Dr. Kelkar and Nandan for agreeing to be part of this purpose driven initiative", said former chairman of Tata Trusts. 

Nandan Nilekani , co-founder of Infosys stated "I am humbled by Ratan's initiative and his inviting me to be a part of this venture. My participation in Avanti is more driven by social motivation rather than anything else - with a view to serve the underserved and unserved and make the Tata Trusts and other likeminded partners philanthropy more effective. Technology is an important differentiator and allows us to make a difference in many ways than one". 

Avanti will establish operations before the end of the financial year. 

Vijay Kelkar is currently the chairman of the National Institute of Public Finance and Policy (NIPFP), and India Development Foundation. R Venkataramanan is currently the Managing Trustee of Tata Trusts.

Finance ministry releases revised guidelines for public-funded projects

The government in the Union Budget 2016 had announced to do away with plan, non-plan distinction at the end of the 12th five-year plan

The finance ministry has come out with revised guidelines for public-funded projects under which schemes should be designed keeping in view economies of scale and the need to share implementation machinery.

The streamlining of the public-funded projects is aimed at expediting implementation and reducing time and cost overruns, an official said.

The government in the Union Budget 2016-17 had announced to do away with plan, non-plan distinction at the end of the 12th five-year plan.

After that announcement it was imperative that a plan, non-plan neutral appraisal and approval system is put into place, the official said.

The quality of scheme or project formulation is the key bottleneck which leads to poor execution at the implementation stage including time and cost overruns.

“While designing new schemes/sub-schemes, the core principles to be kept in mind are economies of scale, separability of outcomes and sharing of implementation machinery,” the officials said.

“Schemes which share outcomes and implementation machinery should not be posed as independent schemes, but within a unified umbrella programme with carefully designed convergence frameworks,” the official added.

Further, as per the revised guidelines, no new autonomous body, institution or other special purpose vehicle should be set up without the approval of the cabinet. The 12th five-year plan ends next year.

Why did banks ‘over-finance’ road projects, asks Parliamentary panel

SBI submitted before the committee that the projects may be approved only after ensuring 90 per cent of land acquisition is completed.

Observing that loan disbursed by banks in excess of an estimated project cost is “strange”, a parliamentary panel has expressed concern over a large chunk of about Rs 75,000 crore of loans extended to the road sector turning bad. In particular, the panel has raised questions about huge loans advanced to Jaypee Infratech turning into NPAs.

“Some of the banks have given information on total loan (Rs 74,088 crore) given to the road sector… for IDBI, the NPA percentage is as high as 52 per cent of loan disbursed for the road sector. The committee wants to know the reason why this huge amount has become NPA, that too to a single concessionaire, Jaypee Infratech Ltd,” the panel chaired by Kanwar Deep Singh said in its latest report.

Seeking full details of the project awarded to Jaypee, the 33-member standing committee on transport further observed that State Bank of India has lent Rs 19,502 crore out of which Rs 1,986 crore has slipped into NPAs. SBI submitted before the committee that the projects may be approved only after ensuring 90 per cent of land acquisition is completed.

The panel said, “The committee finds it strange as to how the concessionaire who has got a project for Rs 1,000 crore gets Rs 1,400 crore for the same project.” It also asked: “Why the concessionaire has been given a free hand to get the bank’s loan as per their wish?” It instructed NHAI to keep a watch on the excess loan amount obtained by the developer.

Incidentally, former road transport and highways secretary Vijay Chhibber has remarked that aggressive lending by banks which were “happily over-financing even non-serious highway players without assessing risks has virtually killed the sector”.

He told media, “The concessionaires and bankers are not realising that we are reaching a stage of impatience, and people who are users of these roads are not going to be waiting anymore.” Projecting that total NPAs of Rs 2.6 lakh crore may go up to Rs 4 lakh crore because of defaults, the panel recommended that banks be empowered more to make recovery of bad debt.

Asking the government to consider empowering the banks adequately to make recovery of bad debt easier, it said, “For example, in the case of a default, the banks may be allowed to take over the entire company.”

It also noted SBI’s contention that all approvals from statutory authorities and clearances from government agencies should be obtained before a particular project is sent for bidding. “Another area of discord is the project cost estimated by NHAI and the concessionaires, which results in lending delay by financial institutions,” the committee said.

$1 billion fund in the works for stressed assets, renewable projects: Piyush Goyal

Piyush Goyal

The power ministry plans to set up two funds of $1 billion each to enable alternative financing options for stressed power assets and renewable energy projects. The two funds have been proposed under the ambit of the National Investment and Infrastructure Fund (NIIF). 

"NIIF is the fund of funds within which we will set up a sub-fund which will focus on renewable energy projects and give investment support for faster ramp up of renewable energy. It is under our active consideration and we may launch it in the near future," power minister Piyush Goyal told ET in an interview. "We are also in dialogue with certain bankers to see if we could look at a stressed power asset fund. It may take us some more months to put its framework in place."

 
Asked about the size of the funds, Goyal said, "Each of these funds could easily be of the size of $1 billion." The government set up the Rs 40,000 crore NIIF in December as an investment vehicle to fund commercially viable greenfield, brownfield and stalled projects. The power ministry's renewable energy fund will be seeded with initial capital from a few state-run companies and will be driven largely by the private sector. 

"It will be run and managed by an investment manager who will be chosen through international bidding. We would like to keep the entire fund very professionally managed - something like a Temasek or a GIC model. We have the entire framework in place. We have also got investment commitments of REC, PFC and NTPCBSE 0.76 % already lined up. This fund can be launched quickly," Goyal said. Temasek and GIC are Singapore government-owned investment firms. 

Finance Minister Arun Jaitley had sought investment from Singapore in NIIF at a meeting on Friday with visiting Deputy Prime Minister Tharman Shanmugaratnam. 

Goyal said the Centre is working on a mega investment plan for the power sector that includes extending investment support to the tune of Rs 1.1 lakh crore to states under the Deen Dayal Upadhyay Gram Jyoti Yojana and the Integrated Power Development Scheme. Additional investments worth over Rs 1 lakh crore will materialise through the implementation of four planned ultra mega power projects of 4,000 MW capacity each. 

Goyal said the recent rationalisation of rail freight rates for coal transport and the cut in prices of higher-grade coal will help to ease costly imports of the fuel. "We have also regulated coal output in the past few months, resulting in some depletion of stocks at coal mines and power stations," he said. 

The minister said he hoped distribution utilities in Haryana would start reporting profits next year and Rajasthan discoms would turn profitable in 2019 with the implementation of the Ujjwal Discom Assurance Yojana scheme. 

The minister said he hoped distribution utilities in Haryana would start reporting profits next year and Rajasthan discoms would turn profitable in 2019 with the implementation of the Ujjwal Discom Assurance Yojana scheme. 
He said controversy over electrification of Nagla Fatela village in Hathras district of Uttar Pradesh was a "blatant attempt by the state government at misleading the centre." 

RBI measures need more heft to help corporate bonds

Steps such as granting more freedom to insurers and retirement funds to buy securities are needed, say investors

 The central bank’s latest measures to deepen the corporate bond market may not be enough and may require more steps including granting more freedom to insurers and retirement funds to buy the securities, investors say.

On Thursday, the Reserve Bank of India (RBI) announced a set of measures to encourage companies to borrow from the bond market, allowed lenders more freedom to give credit enhancements to lower-rated issuers, permitted foreign investors to trade directly in bonds and introduced a repurchase facility for corporate bonds. 

While these measures will have a positive effect on turnover and transparency in pricing for corporate bonds, more steps may need to be taken to deepen the market to the desired level, bond market participants said.

“There is no magic wand for the bond market and things cannot happen overnight. This is a start and many more steps are required,” said Ananth Narayan, regional head of financial markets for South Asia and Asean (Association of Southeast Asian Nations) at Standard Chartered Bank. 

For instance, RBI’s rule to make bank loans expensive for so-called specified borrowers will prod these companies to meet their funding requirements through corporate bonds. Specified borrowers are companies that have aggregate sanctioned credit limit of more than Rs.25,000 crore from banks in fiscal 2018. But to soak up this extra supply of bonds, the current set of investors may prove inadequate. 

What is required to create demand for this supply is allowing insurance companies and provident funds more leeway to buy bonds. 

“The rules of the other regulators (such as insurance, pension, provident fund) have not changed. What is required is the enhancement of buying power of the likes of Life Insurance Corp. of India and Employees Provident Fund Organization,” said a banker, requesting anonymity. 

Insurance firms, provident and pension funds are barred from buying bonds rated below AA. Also, the aggregate investment of these entities is also limited by respective regulations. 

RBI has, however, allowed banks more freedom in giving partial credit enhancements, a step that will help improve the rating of corporate papers of these companies and consequently improve their ability to access the bond market. Bond traders believe this is one of the most effective measures announced by RBI. 

Credit enhancement is essentially a way to improve the credit rating of a bond issue. This is done by structuring the bond sale in such a way that the bank provides a source of assurance or guarantee to service the bond. 

“The easing of partial credit enhancement for banks is a positive and will help low-rated companies to access the market easily. Of course, there is a price element to it,” said Sujata Guhathakurta, head of debt capital markets at Kotak Mahindra Bank. 

However, RBI still stipulates that a single bank cannot give credit enhancement of more than 20% of the issue size and enhancement of up to 50% of the issue size can be given by the entire banking system. 

Bond market participants have long complained about a narrow investor base, especially for low-rated bonds. With more freedom to give credit enhancements, banks will help such issuers get investment interest from long-term investors such as insurance companies and provident funds. 

In fiscal 2016, firms raised a record Rs.4.6 trillion by privately placing bonds, according to data from the Securities and Exchange Board of India. Fund raising by bonds has been rising every year since fiscal 2014. 

Another measure by RBI which aims to make it easier for banks to raise capital by issuing Tier-I and Tier-II bonds to overseas investors may not benefit banks that are in dire need of funds.

Moody’s Investors Service said in a note dated 26 August that although this opens up an alternate funding route for banks, overseas investors will be reluctant to buy Tier-I bonds given the lack of liquidity of these papers in the domestic market. 

“Banks’ capital requirements are large with the masala route providing an alternative. That said, these bonds are not an end in itself. Credit-challenged banks will find it difficult to raise funds through masala bonds,” said Amrish Baliga, head of structured origination at Deutsche Bank’s India unit. 

In a nutshell, the measures ease the fund-raising process for many companies and even banks, but not for all of them. The biggest measure is still awaited: RBI accepting corporate bonds as collateral in its liquidity operations. In its Thursday release, RBI said it was “actively considering” it.

Complacency in global markets

If you are a global investor, the responsible thing to do is cut risk and raise cash, no matter how painful it may be in the short term

Markets, globally, are showing signs of extreme complacency. Volatility has collapsed across markets. The past 30 days in US markets have seen the least volatility of any 30 day period for more than 20 years. Only on five days in the past month have we seen a move of more than 0.5 per cent in either direction for the S& P 500. Realised volatility for the S& P 500 has been lower only a dozen times in the past 50 years. We have seen this drop in volatility despite Brexit, the coming US elections in November, the upcoming Italian constitutional referendum and the possibility of helicopter money and other unconventional monetary experiments. This does not look like a low- volatility environment does it? Is there truly no reason to worry on any of these events or factors? There seems to be tremendous faith that central banks have the back of investors and will not allow large losses. The danger is that this complacency is not about markets, but rather the power of central banks and their ability to prevent a sharp downturn. It is quite astonishing that almost every asset class is up after Brexit! Most investors have taken it (Brexit) as a positive as it gives central banks even more of an excuse to continue or even accelerate their extreme monetary accommodation.

While we have this veneer of calm and low volatility in markets, below the surface, cracks are starting to appear. In equity markets, valuations seem high on certain longer term measures and earnings are under pressure. However it is in the fixed- income markets where there are more worrying signs. There are clear signs of dysfunction. Old rules of thumb and correlations are breaking down and most of the old hands are all at sea as to how to navigate this new world of never- ending monetary accommodation.

At turning points, the fixed income markets are normally more sensitive to change, and are a leading indicator for equities. One ignores their message at one’s own peril.

While clearly macro factors have become more important these days, should they have greater relevance than at the height of the financial crisis? Work done by the quant team at Citibank seems to indicate that macro factors today explain about 80 per cent of equity market variance. Macro is currently overpowering the micro fundamentals. This is also leading to herd- like behaviour by investors, as there is little micro- level stock or security- specific market differentiation.

Credit markets no longer seem worried by defaults. S& P has pointed out that defaults year- to date have equalled last year’s total and are at the highest run rate since 2009. Normally, such acceleration in defaults would have led to a widening of spreads, as credit risk gets priced in, but in 2016, we have seen a negative divergence between spreads and default rates.

AKASH PRAKASH

There has also been a strong positive relationship between corporate spreads and leverage. Higher leverage at a company, leading to higher credit costs, perfectly rational. This relationship has also broken down.

It also seems as if policy uncertainty no longer matters. Citibank measures various policy uncertainty indices; they have historically had a very strong correlation with spreads, again perfectly rational. Yet, today, even this relationship has broken down. With policy uncertainty nowhere near as low as current spreads would seem to imply.

Other long- held relationships have also broken down in the fixed- income markets. Drops in inflation expectations used to be bad news for spreads, which has reversed. Credit spreads also were negatively correlated with rate movements. Good economy was good for spreads but bad for rates and vice- versa.

This has now reversed to whatever is good for rates is positive for equities and credit markets as well. In the past, whenever markets all moved together, it would be in response to some macro event and volatility would rise sharply. Today, all markets are correlated, but volatility has shrunk.

Global liquidity seems to be the reason all these relationships are breaking down. With negative rates pervasive across sovereign markets, this is also changing across asset relationships. The markets seem to no longer be heterogenous, everyone is on the same side and looking at the same central bank put, playing the short- term liquidity. Without heterogeneity in markets, short term liquidity overpowers everything else.

With all these relationships breaking down it is no surprise that many investors are confused, doing badly and very worried. I have very rarely seen so many top quality investors all so bearish, across all asset classes, at the same time. Whether it be Soros, Druckenmiller, Singer or others, most of the people with really good long- term records are asking you to exit the markets entirely.

As is typical, markets will keep us guessing, and test the conviction of the bears. I would not be surprised to see continued market gains globally driven by the liquidity. However, be rest assured, this will end badly, and when it does no- one will have time to react. The prudent thing would be to slowly take risk off the table, knowing that one may hurt returns in the short term, but preserve capital for the inevitable bust. If you are a global investor, the responsible thing to do is cut risk and raise cash, no matter how painful it may be in the short term.

India is in a structural bull market, but will also correct if global markets turn turtle. Any correction in India remains a buying opportunity.