Notwithstanding temporary setbacks, micro-finance institutions (MFIs) in India that cater to the needs of the weaker sections of the society in remote hinterlands have had a good run in the past decade. In India, the primary channels to provide micro-finance have been self-help groups and MFIs.

But MFIs have played a larger role in providing loans to the weaker sections. They have also been able to do so in a cost-effective way. It is for this reason that a few banks — in a bid to do business in rural markets in a more profitable way — have recently acquired MFIs.

That said, IndusInd Bank acquiring Bharat Financial Inclusion (BFIL) — the largest MFI — last year, has only accelerated the structural change that has been under way in the supply of micro-credit over the past couple of years.

The transition of one of the largest MFIs, Bandhan, into a universal bank, and eight MFIs into small finance banks, has led to a structural shift in the way micro-credit is extended.

Interestingly, since June 2017, banks have become the largest provider of micro-credit, with MFIs slipping to the second slot. With IndusInd acquiring BFIL, banks and small finance banks together constitute about 70 per cent of the MFI industry.

It is against this backdrop that one has to consider the business of CreditAccess Grameen, the third-largest MFI player in terms of gross loan portfolio as of March 2018, according to Microfinance Institutions Network (MFIN).

Given the huge potential for micro-credit in India and the success of the joint lending group model, growth has been robust for most players. For CreditAccess Grameen, too, gross assets under management (AUM) has grown by a strong 57 per cent (compounded annually) between FY14 and FY18. However, the joint lending group model through which MFIs have been lending has proved to be a double-edged sword — containing risks in good times, but triggering large-sale defaults post-demonetisation.

Demonetisation impact

CreditAccess Grameen’s gross non-performing assets (GNPA) ratio went up to 1.97 per cent in FY18 from 0.08 per cent in FY17. This was because the company had made use of the RBI dispensation for deferral of recognition of NPAs in FY17; recognising the pain in FY18 led to increase in NPAs and provisioning.

Higher write-offs and delinquencies also had a bearing on the company’s core interest income. Hence, while the company’s loan book grew by a robust 61.7 per cent Y-o-Y in FY18, its interest on loans increased by a lower 21 per cent.

But as the company had made additional provisioning in FY17 as a prudent measure, the pressure on FY18 earnings was mitigated to a lot extent.

Hence, after a 3.5 per cent fall in net profit in FY17, the growth in profit zoomed to 55 per cent in FY18, aided by a lower base and expenses.

Over a longer period, between FY14 and FY18, the company’s profit has registered a robust 65 per cent compounded annual growth rate (CAGR).

Going ahead, given that the company has taken all the pain of demonetisation on asset quality in FY18, earnings should grow commensurate with the growth in overall loans. CRISIL pegs loan growth at 26 per cent annually in the next two years for the industry (MFI players).


While the company’s fundamentals are strong, systemic and political risks could continue to plague the MFI sector as a whole. While betting on the space through banks acquiring MFIs or small finance banks offer the comfort of weathering sudden shocks better, a lower cost structure and higher returns offered by pure-play MFIs still remain big attractions. The possibility of acquisition by a bank that can peg up valuations is also a big draw. Against this backdrop, the asking price for CreditAccess Grameen IPO is also not very pricey, going by past deals. At the upper band of ₹422, the IPO values the company at about 3.8 times FY18 book (pre-issue) and 2.8 times FY19 book (post-issue).

In the past, Kotak Mahindra Bank and IDFC Bank acquired microfinance businesses at 1.9-2.0 times trailing book-to-value.

Satin Creditcare Network — the second-largest MFI — trades at about 1.5 times FY19 book value, though its returns (three-year average) are lower than CreditAccess Grameen’s and it has a higher cost-to-income ratio. Hence, investors willing to take risks associated with the MFI sector in general and with a long-term horizon can invest in the IPO. A healthy business model, lean cost structure and strong profitability should keep earnings growth on a sound footing. The current IPO is a combination of fresh issue of shares worth ₹630 crore and an offer-for-sale (OFS) of 1.18 crore equity shares.


Sound business

CreditAccess Grameen is headquartered in Bengaluru and focusses on providing micro-loans to women, predominantly in rural areas.

The company mainly provides loans under the joint liability group, and its gross AUM stood at ₹4,974 crore as of March 31, 2018. While the MFI operates in eight States — Karnataka, Maharashtra, Tamil Nadu, Chhattisgarh, Madhya Pradesh, Odisha, Kerala, Goa — and Puducherry, geographic concentration is significant.

As of March 2018, Karnataka accounted for 58 per cent, and Maharashtra about 27 per cent of the company’s gross AUM.

However a district-based expansion helps mitigate the risk to some extent, as district-level risks are more worrisome in the MFI space. The company has presence in 132 districts.