A few questions sent to Ujjivan IR team on Sunday, Nov 17 2024 with responses received yesterday (Thursday, Nov 22 2024)

Q1: There have been some reports that there’s a lot of voter ID duplicity that happens. (Moneycontrol Interview of Ms. Padmaja Reddy, Keertana Finserv Pvt Ltd, ex Spandana Sphoorty Financial)
Can you please help understand our KYC procedure and whether it prevents us from falling prey to such illicit means of securing multiple loans by the same individual under different identities.
Do we always insist on Aadhaar with biometric (fingerprint and/or IRIS verification as mentioned by one other NBFC-MFI in their recent quarterly earnings call – Satin Creditcare Network) or is there any alternate means of verification we do? If so, how does that ensure we do not end up giving multiple loans to the same individual/family under different identities?

Response: We have a robust onboarding process compliant with the KYC guidelines. At Ujjivan over 99% of customers (Except branches from assam and Meghalaya where Aadhaar penetration is low) are onboarded through Aadhaar EKYC (Through Bio metric authentication) and we are ensuring mandatory collection of 2 Identity proof documents from our customers in view of enhancing credit bureau matches. In terms of percentage of multiple ID submission, we have 99.8% borrower with dual ID Proofs and 7% of borrowers with 3 ID proofs. PAN is the second largest identity document being collected from the customers with close to 72% penetration (with online authentication facility from Protein) followed by Voter ID with 35% penetration. With higher penetration of Aadhaar and PAN amongst our customers and facility to digitally authenticate the documents helping the bank in safeguarding from identity frauds and avoid funding to same individual with different identities.

At CIC level, micro finance customer had 100% Aadhaar seeding in CIC database before the restriction on sharing Aadhaar number came into effect. In the absence of Aadhaar as a unique identifier in micro finance CIC data, PAN can be the next most preferred ID proof in the CIC eco system in the coming days with appropriate push from the industry association to address the issue of identity duplication.

Q2: Recently RBI, during its FY24 annual inspection of banks and NBFCs, flagged concerns regarding the widespread use of ‘netting off’ in microfinance loans – “netting off” was defined as the practice of extending another credit facility a few installments before the existing credit facility / loan was due to come to an end in order to ensure that customer accounts remain in good standing.
Does this affect us? As a practice, are there instances where we end up giving additional credit to customers a few weeks/months before their existing loan is due to mature – and customers ending up using some portion of these newly extended loans / credit lines to pay off previous loans/credit lines, thereby kinda evergreening?

Response: Netting off as a practice is commonly followed by the micro finance lenders. We are in discussion with the industry SRO MFIN to define standard guidelines on the process of netting off so that it cannot be construed as ever greening by the regulator. A formal Regulatory communication in this regard is also awaited till such time it may not be prudent to comment on the practice.

Q3: There are industry wide concerns around while customers meet the upto 4 (number of) loans and max of 2 lacs (amount of loan) at the time of disbursal but post that other players in the industry end up giving them loan and because of which they breach the MFIN SRO guidelines of a max of 4 lenders / ₹2 lacs loan amt.

• Is it fair to assume that we receive credit bureau information on a regular interval (weekly / monthly) basis that allows us to determine how many of our customers are breaching these limits?
• If so, what actions do we take in such situations to ensure recovery of extended loans and perhaps penalise such behaviour by blacklisting borrowers so we don’t fall prey to such misdoings in future?

Response: Most of the lenders in Micro finance industry are now following MFIN guardrails which restricts lenders to become 5th Micro finance lender and or having MFI exposure greater than Rs 2 lacs. As the new guardrails are implemented from late July and from August 2024 the instances of incremental cases with overleveraging might have declined in the last couple of months. MFIN is also expected to release their quarterly adherence report on the implementation of guardrails with its member institutions for highlighting the instances of breaches if any for necessary corrective actions by the lenders.

• As a prudent measure, we have been doing quarterly bureau scrub for all our customers to understand their borrowing status, levels of indebtedness etc and from this quarter we are doing this exercise on a monthly basis considering the recent stress in the market. For new to bank borrowers, we have a stringent internal guardrail where we can be max 3rd MF lender and or MFI exposure including new loan cannot exceed Rs 1.5 lacs.
• Additionally, the existing borrowers who have breached the guardrails shall not be eligible for further loans until their borrowing limits come down to acceptable levels. Action plans against each such borrowers differ on a case-to-case basis as per our collection interaction.

@Investor_No_1

Asian Paints and Dmart both have enjoyed robust business models and strong moats to their business. That was the reason these companies enjoyed premium valuations.

Asian Paints in particular started having the first hints of competition from deep pocketed guys in form of JSW and Birla. The addressable market seems to be growing at a slower rate as compared to the competition induced market share loss for Asian Paints. Or atleast that is the perception of the markets. Hence it is one stock that is undergoing serious de rating.

Dmart also enjoyed crazy valuations and of late these valuations have been coming off. And inspite of this kind of cut in valuations, it continues to trade at very expensive valuations as commpared to the growth numbers it is reporting.

If I compare competition to Asian Paints and Dmart, I think Dmart is better placed in the physical store retailing. There is always a fear that online retailing will at some point of time hurt Dmart business model, but we need to see how that plays out.

Personally I think with the kind of headwinds these businesses are experiencing, we need to see how far this derating continues. As with all things in the markets, when the pendulum swings, it does not stop at midpoint, which is the equilibrium level. The ride from optimism to pessimism is very painful for those holding the stock.

With the current ongoing correction, I think with some decent homework, there are a lot of better alternatives to make good money. But this is my personal view and I could be wrong.

Now that the issue is serious and an arrest warrant is issued, Adani will go low profile until issue gets sorted and his efforts will be diverted away from business. Congress is gearing up with this for the upcoming parliamentary session. It will definitely impact solar deployments and solar companies – but who will gain and who will lose from this episode?

Found this good analysis of the company on LinkedIn