About Bharat Finance Inclusion Ltd.
Microfinance has become an effective tool that can help bringing economic equilibrium and reduce poverty. Bharat Financial ltd is one company that spread economic opportunity by giving poor people access to financial services, such as credit and insurance.
Bharat Financial Inclusion is the largest microfinance company in India in terms of gross loan portfolio. The company’s core business is providing small value loans and other basic financial services to its customers, who are predominantly located in rural areas. The company provides loans mainly for use in small businesses or for other income generating activities and not for personal consumption. BHARAT FINANCE has an AUM of over INR8500. CRS, with active customer base of over 5 MILLION and over 1,000 branches.
Bharat Finance Methodology & Process
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. Their micro-enterprise range includes:
- raising cows and goats in order to sell their milk
- opening a village tea stall
BFIL uses the group lending mechanism where poor women guarantee each other’s loans. Borrowers are provided financial literacy training and must pass a test before they are allowed to avail loans. There are weekly meetings with borrowers which follow a highly disciplined approach.
Re-payment rates on our collateral-free loans are more than 99% because of this systematic process. BFIL also offers micro-insurance to the poor as well as financing for other goods and services that can help them combat poverty.
a) Income Generation Loans , Mid-term Loans, Long- term loans : These provide self- employed women financial assistance to support their business enterprises, such as raising livestock, running local retail shops called kirana stores, providing tailoring and other assorted trades and services
b) Loans are offered to members for purchase of products like cook-stove/ solar light/ water purifier/ mobile phone/ bicycle and sewing machine to enhance their productivity and income generation ability.
2) Distributor Products:
Life insurance – A weekly payment of Rs. 20 is to be made for the term of five years. Upon death, disbursement made to the beneficiary for the full sum assured of Rs. 5,000 plus the account value, which is equal to the aggregate of the premiums paid plus interest accrued, if any, less any charges for the administration of the policy .In the event where the death is deemed an accidental death, the beneficiary receives Rs. 10,000 plus the account value.
Major Findings from Analyst Meet:
The states where there was no external interference the collection efficiency disrupted for a while due to demonetization, but in many states like Bihar, Chhattisgarh, Jharkhand and Orissa it got restored to normalcy at 99% plus.
States having external interference along with the impact of demonetization, the collection efficiency got impacted which was quite evident in places like UP, Maharashtra districts bordering Maharashtra and Karnataka, and parts of Madhya Pradesh where few women have not paid their installments on time.
That is in our view not due to any cash shortage at the village level or at the borrower level but on account of local level interference – misrepresentation of the RBI circular of 90-day dispensation on the provision. Subsequently because of elections lot of these local politicians encouraging women not to pay promising them that they would get them their loans waived.
Despite this, we see collection rates to the north of 80% in these states. Post the elections we expect situation to normalize in couple of months in these states.
Disbursements got impacted due to – non-availability of the cash in the system, imposed restrictions on withdrawls from current account and self imposed norm i.e disbursement to the centres with 100% collection efficiency. The above factors led to de-growth in the portfolio by 6% QoQ.
However, disbursements have recovered back to pre-demonetisation levels. In February, 2017, the Company reported disbursements of Rs.1358 crores as compared to Rs.1188 crores in October, 2016.
3) Borrowing Cost:
The positive side to demonetization was that banks have materially cut their MCLR which will lead to reduction in Company’s cost of borrowing anywhere between 35 to 50 basis points. The Company operates at 19.75% interest rate being the lowest amongst the Private sector MFIs and we are operating at a spread of 8.7% vis-à-vis 10% stipulated by the RBI. Hence it can retain the benefit due to the reduction in cost of borrowing, in forthcoming financial year.
4) Net Interest Margin (NIM):
NIM is down from 10.6% to 10.1%, primarily on the account of Rs. 14 crores loss on short collections, which was reduced from the excess interest spread of securitizing transactions. However if the same is added back, the Company will have a flat NIM on Q-o-Q basis. In fact, the difference between the marginal cost of borrowing and the weighted average of cost of borrowing, is about 40-50 bps. So, there is a positive gap there, which is going to play out in the next 2 to 3 quarters in NIM with the exception of loss on short collections on off-balance sheet.
Guidance from Company’s Management:
1) Market leadership: The Company is the second largest MFI in India by Gross Loan Portfolio. The Company believes that its consistent position among the leading MFIs in the microfinance sector enhances its reputation.
2) Lowest cost lender: The Company has the lowest lending rate (19.75%) amongst private sector MFIs. The lending rate of the company is lower by 2.25-4% than the lending rate of other major NBFC-MFIs in India.
3) Improving profitability, stable financial condition and emphasis on asset and liability management: Although the Company’s financial condition deteriorated in the aftermath of events in Andhra Pradesh and the Company incurred losses during FY12 and FY13, the Company satisfied all its debt repayment obligations even during the Andhra Pradesh microfinance situation, that is, in FY12 and FY13, and thereafter. Its revenues grew at a CAGR of 55.3% from FY13 to FY16, and the Company reported a profit of 303 crores for FY16, the third consecutive year of profit post the turnaround.
1) Political Risk - The Company recognizes political risk as one of the major risks facing the industry and believes that political risk can be mitigated through Responsible lending and fair pricing.
2) Concentration Risk - The Company aims to avoid unbalanced concentration in both its loan portfolio and borrowings. To mitigate the concentration risk, the company has well defined Geographic & Borrower dependence norms.
Borrowing dependence norms – In order to reduce dependence on a single borrower, the Company has adopted a cap on borrowing from any single credit granter at 15%. The share of borrowing from top 3 banks reduced significantly from 61% in March 2013 to 34% in March 2016.
3) Liquidity Risk - The Company places significant importance on liquidity management and has a bias for liquidity mainly to address operational requirements and corporate commitments
On 28th March 2017, Bharat Finance Inclusion Ltd. share price is trading @ Rs. 746, P/E 17.40 (Industry P/E 30). We recommend BUY in Bharat Finance Inclusion Ltd with the target of Rs. 910 (Short term) & Rs. 1,150 (Long Term). It is a Multibagger Stock recommended by Dynamic Levels.
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