Three States

A financial drive through Southern India

CONTRIBUTING ANALYSTS
Dipen Sheth, Head – Institutional Research
dipen.sheth@hdfcsec.com
+91-22-6171 7339

Darpin Shah
darpin.shah@hdfcsec.com
+91-22-6171 7328

Vishal Rampuria
vishal.rampuria@hdfcsec.com
+91-22-6171 7325

Pranav Gupta
pranav.gupta@hdfcsec.com
+91-22-6171 7337
Source: http://www.channeltimes.com

Three states
We drove through nine cities in southern India
(across the states of Kerala, TN and Karnataka) to
gauge ground realities in retail/SME credit
segments such as Vehicle finance, unsecured
Retail/Business loans, Housing finance, LAP (loan
against property) and Micro-finance. Higher
financial penetration in southern India (relative to
the rest of the country) is in keeping with the fact
that income (and literacy) levels across the states
we visited are significantly higher (~21% over FY12-
16) than national averages.
We were pleasantly surprised to see that despite
various difficulties and disruptions (such as political
turmoil, drought, demonetisation, GST rollout,
industrial stagnation and allegedly weak business
confidence), credit demand remains healthy.
However, competition is stiff. In addition to banks
and NBFCs, a large number of unorganised players
cater to Tier 3/4 borrowers. Asset quality is mostly
holding up as per formal (and anecdotal) evidence
we gathered. Borrowers’ financial discipline (and
awareness) limited the adverse fallouts of recent
shocks like demonetisation and farm loan waivers,
in contrast with the rest of India.
Our interactions confirm our positive stance on CUB
(City Union Bank), while we continue to like CIFC
(Chola Inv & Fin) in the NBFC space. We also retain
confidence on our constructive thesis on DHFL
(Dewan Housing) and Ujjivan.
Three States: A financial drive through Southern India
Commercial Vehicles (CV)
 CIFC and SUF are highly respected by all players for
their diligence and prudent practices
 Select financiers are resorting to rescheduling and
cash payouts to hide borrower stress
Passenger Vehicles (PV)
 Many players operate primarily in identified niches
(eg. premium cars for Kotak Prime)
 Customers’ preference tilts toward PSBs (particularly
SBI), esp. amongst salaried folks
Two Wheelers (2W)
 Pressure on sales vols in TN owing to regulatory
issues (no sale without driving licence)
 Credit substitution via gold loans, as rates are lower
Unsecured Loans
 Delinquencies are lower than national average,
reflecting evolved credit behaviour
 Rates and policies vary starkly across financiers,
exposing them to differential risk
Housing Loans (HL)
 Growth challenges visible in the face of weak
demand, pricing pressures and high balance transfers
 Large HFCs will benefit due to competitive CoF
LAP/BL
 Competitive market with rates as low as 8.5%
 Some players are providing aggressive loans even on
unapproved structures
Microfinance
 Normalisation across the sector, barring a few
locations
 Use of technology can provide oplev hereon
 Strong focus on individual loans
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 Three States: A financial drive through Southern India

Per Capita Net Domestic Product

Rs Kerala Tamil Nadu Karnataka Avg All India Variance (%)
FY12 97,912 92,984 90,263 93,720 63,462 47.7
FY13 110,314 105,031 102,319 105,888 70,983 49.2
FY14 123,388 116,329 118,829 119,515 79,118 51.1
FY15 135,537 128,385 129,823 131,248 86,454 51.8
FY16 147,190 137,837 142,906 142,644 94,130 51.5
Source: HDFC sec Inst Research

Peer Valuations
Mcap CMP TP ABV (Rs) P/E (x) P/ABV (x) ROAE (%) ROAA (%)
BANK/NBFC Rating
(Rs bn) (Rs) (Rs) FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E
ICICIBC # 2,031 317 BUY 364 114 134 151 15.5 13.2 11.7 2.09 1.66 1.48 10.5 10.8 9.5 1.20 1.19 1.18
KMB # 1,978 1,040 BUY 1,179 181 205 235 37.9 31.4 24.8 4.83 4.16 3.52 13.9 13.3 14.5 1.89 1.89 1.94
AXSB 1,341 560 NEU 504 199 234 271 35.9 18.5 13.4 2.82 2.40 2.07 6.5 11.7 14.5 0.58 0.99 1.16
IIB 990 1,663 BUY 1,809 382 444 521 28.1 22.9 18.3 4.36 3.75 3.19 16.2 17.3 18.5 1.79 1.80 1.81
FB 218 112 BUY 137 59 65 72 20.6 16.1 12.9 1.92 1.73 1.55 9.9 10.5 11.9 0.84 0.91 0.97
CUB 106 161 BUY 196 56 66 78 17.9 15.5 13.0 2.88 2.45 2.07 15.5 15.4 15.8 1.58 1.57 1.57
DCBB 59 191 BUY 214 78 88 99 22.5 17.8 14.7 2.44 2.18 1.94 10.9 11.1 12.2 0.97 1.02 1.02
SBIN # 2,907 337 BUY 373 119 157 190 23.4 15.0 8.6 2.04 1.54 1.26 4.5 6.1 10.0 0.29 0.38 0.60
BOB 405 175 BUY 202 97 136 175 26.5 13.9 8.0 1.81 1.29 1.00 4.1 7.4 11.8 0.22 0.39 0.62
AU 189 665 NEU 550 76 89 105 62.4 48.1 35.7 8.81 7.49 6.32 14.2 16.0 18.4 1.78 1.71 1.85
Equitas 49 146 NEU 160 64 67 73 90.3 36.7 21.0 2.28 2.19 2.00 2.4 5.7 9.3 0.54 1.11 1.24
Ujjivan 49 409 BUY 435 146 163 185 371.4 24.2 19.0 2.80 2.51 2.21 0.7 10.9 12.4 0.15 1.90 1.96
LICHF 301 597 BUY 675 242 283 328 14.6 12.5 10.7 2.46 2.11 1.82 17.3 17.6 17.8 1.27 1.30 1.31
SHTF 287 1,265 BUY 1,346 435 501 576 19.8 15.5 12.4 2.91 2.52 2.20 12.2 14.1 15.7 1.83 2.03 2.16
CIFC 198 1,268 BUY 1,427 267 339 422 22.0 17.1 14.1 4.75 3.74 3.01 19.2 20.7 21.1 2.65 2.81 2.84
DHFL 193 616 BUY 685 262 288 320 17.9 14.1 12.1 2.35 2.13 1.93 12.9 15.0 15.8 1.33 1.40 1.39
REPCO 39 625 BUY 770 198 241 278 19.1 16.1 13.4 3.16 2.59 2.25 16.6 16.9 17.4 2.11 2.17 2.20
Source: Company, HDFC sec Inst Research, # Adjusted for subsidiaries value

Page | 3

Disparity in cash collections
Vehicle finance
With widespread presence of large (and small)
private banks, foreign banks, NBFCs and PSBs,
vehicle financing is a very competitive business
across Southern India. Aggression is rising,
especially in PVs. Unorganised financiers are also
thriving. Kerala tilts towards the LCV and SCV
segments, while TN is more broad-based, with HCV
hubs like Salem, Namakkal and Coimbatore. In
2Ws, Kerala is dominated by Scooters, whilst Tamil
Nadu has a more motorcycles in the sales mix.
Regulatory issues (in TN, where 2W sales are
restricted to license holders) have affected sales.
CV finance
 Our branch visits indicated disbursal growth rates of
10-15% YoY (for listed NBFCs) to as high as 25-30%
CIFC customer paying cash (albeit on a smaller base) for unlisted players
 In Kerala, NBFCs believe there is some sanity in yields
and LTVs. The situation is different in TN, where
competition is affecting both yields and LTVs - captive
financiers offer 100% LTV
 TAT has seen some improvement with the
introduction of distributed IT systems by some
players, notably CIFC. Post demonetisation, cash
collection did witness a decline. MMFS reported 30-
45% decline vs. 15-30% for peers
 In contrast with what we saw across UP, loan waiver
announcements did not affect asset quality as most
borrowers (80-90%) were well versed with its
applicability.
 NPA levels are largely in line with the national
average for lenders like MMFS and CIFC.
Three States: A financial drive through Southern India
 As witnessed in our travel through UP earlier this
year, MMFS’ collection efficiency has improved ~300-
500bps, with more employees focusing on collections
than sales. Creation of departments within the
collection team (hard and soft buckets) further
boosted efficiency. Since Apr-17, CIFC has also
witnessed a sharp reduction in NPAs, with improved
collections
 Its commendable to see each CIFC employee talking
about pre-tax RoAA (similar trends witnessed in our
previous yatras to UP and Pune)
 Sundaram Finance and CIFC are highly regarded for
fair practices by almost all their significant
competitors (HDFCB, HDB, MMFS) and even
borrowers
 Private Banks like YES (though a smaller player) and
IIB were repeatedly spoken about for their ‘wrong’
practices (rescheduling, lower rates, cash collections
and payouts to executives, and relatively higher
payouts). Amongst NBFCs, SHTF was repeatedly
mentioned for rescheduling of loans, and providing
loans not only for vehicles, but also for tyres,
insurance and maintenance
 Most of HDB’s hires are from CIFC, similar to what we
saw in UP!
PV segment
 Market size varies across regions, with Trivandrum
having a greater share in Kerala, and Salem (and the
surrounding areas) being a major contributor in the
TN region
 Post demonetisation, the proportion of financed
vehicles has gone up to ~70% vs. 60% earlier
 Maruti is the market leader, followed by Hyundai and
Honda
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 Three States: A financial drive through Southern India

 Mid-sized vehicles (in the range of Rs 0.5mn to Rs  As witnessed in PVs, competition in 2Ws is restricted
CIFC old vehicle scheme 2mn) form a major proportion of sales, with SBIN to dealer payouts, with IIB, YES and CAFL (in some
being one of the largest players in the region regions) offering 3.5-4%. LTV trends remain largely
similar across players
 SBIN remains competitive across segments, while
KMP caters mainly to Premium cars  Lending rates in the 2W space range from ~18% to
~30%, with SCUF at the higher end and private banks
 In the rural markets (predominantly used cars), both
at the lower end
captive financers and NBFCs are relatively more
aggressive  While demonetisation led to an overall slowdown in
sales, we sensed no major worries on asset quality
 Surprisingly, most players believe that there is sanity
in yields and LTVs; but payouts vary across peers,  Even post demonetisation, cash collection for SCUF
with IIB paying ~3.5-4% (in all regions) continues to be north of 40%
 Lower TAT is a deciding factor for most dealers. Most Extreme competition in the region
PSBs lose here, while digitisation has helped private
players bring down TAT.
 Better asset quality performance, given a higher
proportion of salaried borrowers (especially in Kerala)
 Repossession remains a big challenge in Kerala, owing
SCUF schemes for 2W’s to higher political intervention. With this, SCUF has
stopped PV financing, while SUF is re-entering some
markets
2W segment
 The market size of Kerala and Tamil Nadu put
together is at 0.17 to 0.2mn units/ month, which is
relatively smaller when compared to other states
Extreme competition in the region
 The govt. order in TN prohibiting sales of 2Ws to
people not holding a driving license has adversely
affected sales
 The overall proportion of financing is gradually
reducing, as borrowers prefer taking gold loans that
are available at significantly lower rates to finance
their vehicles
 With Kerala predominantly being a Scooter market,
HMSI has the highest share here. Even in TN, HMSI is
the market leader, followed by Bajaj and Hero

Page | 5

MMFS
Driving change from the top  MMFS has discontinued 2W and 3W businesses in
Kerala (owing to higher losses)
 Avg. yields are 14.5-15%; TAT of 1-2 days; payouts at
~1.5-2.5%
 Market share at 30-40% at MM dealership; 12-15% at
Maruti dealership
 ~50% of the customers operate on earn and Pay
model
 Cash collections at 30-45% dipped vs. pre-
demonetisation levels, albeit remain elevated
 Most employees are focused on collection vs. sales
earlier
MMFS collection board  NPAs in the range of 9-10%; MM vehicle contribution
is lower as it has stopped 3W financing
 More focus on collections of current dues (CD, i.e.
30DPD) vs. overdues (OD, +120DPD). Further, the co
now focuses on 12M+ overdue accounts, which were
hardly addressed. Now, the legal team works on
these cases. and is witnessing recoveries
 Collection efficiency: Improvement of 300bps YoY
MMFS encouraging digital  Stock of repossessed vehicles has significantly
payments reduced over the last 6-12 months
 Loan waiver and freebies are of no major concern, as
most NBFCs regularly educate borrowers about the
same. ~60-80% of the borrowers are educated about
loan waivers and the free freebies
 Target: Disbursals growth of ~15% and lower NPAs by
200-300bps
Three States: A financial drive through Southern India
CIFC
 In the PV and 2W segments, the cash purchase
proportion is gradually increasing, as agri and Gold
loans are available at lower rates.
 Demonetisation, GST and BS IV impacted sales of new
vehicles, which has led to a rise in the proportion of
refinance
 Avg. yields at ~15.5-16%%. Segment-wise yields at
2W 20-22%, LCV ~13%, Cars at 10-14%, SCV 15%;
Used/Refinance at 18%, HCV 11%. LTVs of 85-90%
and TAT of ~2 days in most sub-segments
 Payouts at ~1-2.5% (2W 3%, LCV 1-1.5%, Cars 2%, SCV
1.5% and HCV ~1%)
 Avg. tenure of ~4 years; incremental tenures are
increasing, given higher vehicle prices
 Focus on higher cross-selling – HDFC Life and Motor
insurance
 Cash collections vary in the range of ~5-30%
 Sharp drop in NPAs (since April-17), with a focus on
recoveries (collecting more than one EMI)
 Stock of repossessed vehicles has fallen sharply
 No major worries on loan waiver, as a majority (70-
90%+) of borrowers are aware about the details of
loan waivers
 TAB initiative is not successful as of now; having
issues in uploading pictures
 Lenders preferred by dealers based on (1) Payouts,
incl. cash payout to executives, (2) Customer profile:
A-B category HDFCB/SBIN/ICICIBC, B-C category IIB
and CIFC. Others to captive financiers
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 Three States: A financial drive through Southern India

AXSB offers lower rates to gain Unsecured products (PL/BL)

market share
The market for unsecured loans is very fragmented.  AXSB is offering PL at lower rates, in a bid to poach
A further challenge is that customer behaviour (and customers. It does not charge any pre-closure or
hence, risk) differs across the south. Players in the balance transfer fees which entices customers, while
PL space are largely focused on cross selling to their some private banks charge ~4% for pre-closure (incl.
existing customer base, in a bid to curb risk. For BT)
banks, the focus customer segments are salaried  Some regional PSBs are also trying to capture share
people. NBFCs like BAFL/SCUF focus on un-banked by offering lower rates in bigger proposals (loans for
customers. employees of CAT A/B companies)
For most lenders, asset quality is relatively better
than the national average in the segment, despite  Delinquencies in Kerala and Tamil Nadu are lower
higher yields and the inherent risks of unsecured than the national average
lending. Although competition in this segment is  No major collection problems were faced post
relatively benign, we gathered that AXSB is offering demonetisation. However, disbursement growth was
lower rates (similar to the feedback we received in hit, and has only seen some traction in the past few
HDB Customer some regions of UP in our Jun-17Yatra). This has, months
understandably, influenced pricing.
 Growth in Kerala is challenging, as a large portion of
customers are paid their salaries in cash (esp HDB product offerings
government employees). Hence, lack of
documentation is a hindrance in the appraisal
process.
 In the salaried segment, PL yields vary from 10.5-
17.5%, depending on the slab for most players. In
contrast, loans are given in a narrow (and higher)
range of 15-18% for non-salaried borrowers, with
NBFCs pricing loans at the higher end of the band
 Different players operate in identified niche
segments, and are doing well in their chosen areas.
For instance, BAFL is focused on business loans, while
players like ICICIBC, AXSB, YES and IIB are mostly
active in PLs
 Most borrowers cite home renovation, marriage,
education and medical needs as the end use

Page | 7

Home loans
Housing demand in TN and Karnataka continues to
be sluggish. The impact of demonetisation, along
with sticky and unaffordable property prices,
continues to pose demand challenges. However,
demand for affordable homes is good, with the
segment growing at 20-25%. The registration issue
in TN and sand mining restrictions (along with
political instability) pose housing supply
bottlenecks.
Given the overall weak demand, competition is
very high, with large HFCs as well as banks offering
very competitive rates. The home loan rate war
commenced in Jan-17, with PSU banks offering very
attractive interest rates starting at 8.35%. With no
prepayment penalty under RBI/NHB rules, the
balance transfer/takeover of loans has substantially
increased subsequently, leading to industry-wide
compression in lending rates. While this holds true
for high-ticket loans, we discovered that even low-
ticket sized loans (under Rs 2.5mn) are being taken
over. Large HFCs and banks are very active in the
balance transfer space across all ticket sizes. Asset
quality, however, remains stable. Implementation
of the PMAY subsidy scheme remains muted in this
region.
 Most South Indian branches of HFCs are reporting
YoY disbursement growth of 15-20% (for the large
players) and 5-20% (for the smaller players). Demand
for high-value houses (above Rs 4-5mn) is sluggish;
property prices continue to be unaffordable, with a
huge supply of stock
 Demand for affordable housing (Rs 1 to 2mn) remains
in a sweet spot. Many private players are jumping
into the fray to build affordable houses, given
Three States: A financial drive through Southern India
incentives provided by the Central govt. and strong
demand. However, the supply of affordable housing
from the state govt. remains on the lower side
 LTVs remain stable at 70-80%
 An aggressive pricing war and takeover of loans is
visible, with interest rates starting at 8.35%
 Some players like SBI, DHFL are offering takeover
and top-ups at the same interest rates
 Contribution of takeover of loans within
disbursements has increased; it contributes 15-20%
and 40-50% for small and large lenders respectively
 While large HFCs and banks are gaining from balance
transfer, smaller players are net losers, owing to
competitive interest rates offered by the biggies,
including banks
 Prepayment rates have increased for many lenders to
12-20%
 Success of the PMAY subsidy scheme is not high (5-
10% of eligible borrowers). Reasons attributed for
this are complying with the criteria and conditions of
the subsidy like area, size of the house, etc
 Post demonetisation, almost all lenders are insisting
on ECS payment
 Delinquency and stress levels are different across
regions. While places like Madurai and Trichi have
good asset quality, cities like Coimbatore have high
NPAs. It seems that the higher domination of
industrial activity in Coimbatore vs. Madurai and
Trichy (which are dominated more by Agri-related
activity) has led to a cyclical income downturn
 RERA implementation is creating short-term hiccups,
as many projects are yet to be registered
Page | 8
 Three States: A financial drive through Southern India

DHFL

DHFL is part of the Wadhawan Group, with a pan-

India presence. It has a market cap of Rs 193bn, and
an AUM of Rs 941bn. During FY17, the AUM loan
book grew 20%, and ROA improved 1.57%, owing to
a drop in the cost of funds. During 1HFY18, its
disbursement grew 42% leading to 25% growth in
AUM. We have a buy Rating on the stock which
trades at 2.1x FY19E BV.
 DHFL is one of the fastest-growing large HFCs in the
south
 Despite a sluggish external environment, REPCO HOMES
disbursement growth is at 50-80%. Realignment of
Repco Homes is a south-focused mid-sized HFC,
the sales area and strengthening of channel partners
with an AUM of Rs 90bn. The company largely
are helping to generate large leads. An upgradation in
processes is helping improve the turnaround time focuses on the self-employed, who have no access
to formal credit. Over the past year, it faced
 Home loans and LAP split is 90% and 10%; Home challenges in disbursement growth owing to
loans is a key focus area unregistered land woes and asset quality stress,
especially in the LAP book. During 2QFY18, the loan
 Blended yield on Home loans is 9.6%
book growth rate was muted at 10% but NIMs were
 Self-construction, along with plot purchase steady. We have a BUY rating on the stock which
constitutes 50-60% of the demand trades at 2.6x FY19E BV.
 20-25% of the disbursement is the takeover of loans  The proportion of the self-employed and salaried
classes is 60:40, in-line with the company’s overall
 Loans under the assessed income category have 1-
mix
2% higher rates
 The average ticket size is Rs 1.4mn for Home loans
 The proportion of the self-employed and salaried
class (including govt employees) is 40:60  Home loan interest rates for the salaried class are
between 8.75 and 9.75%, and for the self-employed
 With the average ticket size at Rs 1.2-1.5mn, strong
between 10.25 to 11.25%. LAP is between 12-15%,
growth is witnessed in the Rs 1 to 3mn range of
and the average yield is 10.3%
property
 With stress levels prevalent in high ticket-sized loans,
 80% of loans are sourced through DHFL’s employees
the focus is on lower ticket-sized loans (below Rs
 PAR>30 is 1.5-2%, NPA is 0.8% 7.5mn)

Page | 9

 Loan melas, held twice a quarter, are significant
contributors to demand/leads
 Registration issues for unregistered plots and political
inaction in TN have created supply hurdles, impacting
demand
 Disbursement growth in TN continues to face
headwinds, and is between -5% and 20%. Balance
transfer has increased in the last 4-5 months.
Customers have been given lower interest rates, and
are being poached by large players; 15-20% balance
transfer rate
 Delinquencies and NPAs remain divergent
 Branches in Coimbatore continue to face stress,
with PAR and NPAs exceeding 9% and 4-5%
respectively. This is owing to large exposure in 4
to 5 construction, paper mills and money lending
accounts
 However, the branch in Madurai has good asset
quality, PAR>0 of 7% and NPA at 0%
Three States: A financial drive through Southern India
DHFL VYSYA HOUSING
DHFL Vysya, an unlisted HFC, is part of the
Wadhawan Group. The company has a focus on
housing, with customers largely in the low and
middle-income segment. As on 1QFY18, it has an
AUM of Rs 19.2bn.
 Home loan and LAP is 90:10
 Yield on HL is 11.75% and LAP is 13.5%; average yield
at 12%
 Average ticket size is Rs 1-1.2mn
 75% is the salaried class, 25% non-salaried
 Disbursement growth rate is 40-50%
 PAR>30 days is 3%, GNPA 1.4%
 Beneficiaries of the PMAY subsidy are few, owing to
urban areas not being included in the PMAY-Urban
Scheme. Also, many properties are not qualifying,
owing to larger sizes
Page | 10

Secured products (LAP/BL)
The LAP market is very aggressive. The presence of
a spectrum of players like private banks, HFCs and
NBFCs has led to highly competitive interest rates.
Weak credit demand is countered with balance
transfers and offers of higher LTV and lower
interest rates.
Some players are reportedly considering
unapproved structures for sanctioning of loans.
Though overall stress levels are stable, they are
high in pockets like Coimbatore, with a high
proportion of the self-employed and small-scale
industries. GST has created a higher level of formal
credit demand. Formal credit and GST are leading
to higher disclosed revenues. Given the lack of LAP
products in many PSU banks, most NBFCs poach
customers from them.
 LAP/BL is highly competitive, with rates as low as
8.5%, and a tenure of up to 15 years for high ticket-
size loans
 Balance transfer is high, at ~25-30% of
disbursements. Lenders will avoid sanctioning of
loans in an individual’s name, which allows them to
levy pre-payment charges and retain borrowers
 Demand is increasing owing to GST, owing to the
need for money that is accounted for
 Client feedback has prompted lenders to believe that
retailers have adjusted to GST, though the wholesale
channel continues to be impacted
 LTV is in the range of 50-60%. However, the provision
of loans against unauthorised structures has led to
above-100% LTV loans
 Stress levels are lower for loans under Rs 10mn, as
compared to those above this slab
Three States: A financial drive through Southern India
 Some NBFCs offer products according
quantity/quality of information available
to
 Most players are focused on smaller ticket-sized
loans
 PNBHF is offering sub-10% interest rates, and
executes maximum BT cases
 Many players are inflating property valuations,
leading to effective LTVs in excess of 100% (Tata and
Bajaj Fin in Kerala). In some regions of TN, Hero
Fincorp and L&T Fin are following similar practices.
CAPF provides additional PLs to existing LAP
customers (thus having overall LTVs in excess of
100%)
 Most large proposals come through the DSA channel,
and are traditionally more prone to asset quality
issues and higher payouts
CIFC
 Area covered is within a distance of 20-40kms/
branch
 Sourcing is a mix of DSA and the internal sales force,
varying from region to region
 Customers are mostly retailers and traders
 Avg fee is at ~2%; below Rs 5mn – Rs 2,950 + 1.5%;
between Rs 510mn – Rs 5,900 + 1.5%, and above Rs
10mn – 1.75%
 LTV ranges from 50-60%, depending on the type of
property (SORP or commercial). LTVs were higher
before demonet
 Payouts are in the range of 0.5-1%, lower as
compared to peers
 Avg yields differ from customer to customer, and
depend on documents available. CIFC lends at rates
as low as 11.5%, and can go up to ~14%. Average
tenure is 8-10 years
Page | 11

 Though the focus is on lower ticket-sized loans (Rs
3.5-4mn), CIFC is also dealing in large-ticket loans,
albeit to a lesser extent
 Apart from a couple of regions (particularly Salem),
asset quality is largely below company averages. The
negative effects of demonetisation and GST are still
visible in certain regions
Three States: A financial drive through Southern India
 Competition is fierce. Many players are offering lower
rates, higher LTVs (by inflating valuations or including
unapproved constructions), and longer tenures CIFC
is continuously losing deals to PNBHF, owing to
undercutting in terms of yields and LTVs
Page | 12
 Three States: A financial drive through Southern India

Microfinance FULLERTON
Fullerton is owned 100% by Temasek. It has a pan-
The demonetisation impact is now negligible on
India presence, with a network of 437 branches as
MFIs. Collection efficiency has recovered, and is on March 31, 2015. FICCL’s loan portfolio was Rs
~96-97% in most pockets. However, a few affected
86bn as on FY15, comprising Personal loans
districts continue to report high PAR (15-17%). The
(37.9%), Mortgage loans (23.6%), Rural Financing
number of non-paying customers has also reduced
(18.7%), SME Financing (14.5%), Vehicle loans i.e.
notably. Most MFIs are focusing on disbursing
2W, Car loans and CV loans (5.2%).
Individual loans to customers who have a good
credit history, or secured loans.  Offers Microfinance, 2W loans, Growing Enterprise
loans, Equipment loans and Mortgage loans
 Our interactions reveal that collection efficiency has
improved to 90-98%. However, urban centres in
 70% MF and 30% non-MF loans
Bangalore continue to report weak collections. The  Collection efficiency has returned to normal levels of
farm loan waiver has had no impact, with the 99%+
borrower understanding the difference. Many players  PAR is 1%, while GNPA (120 days) is 0.5%
resorted to top-up loans to help customers clear past  Cashless disbursement since April 2016
dues  One credit officer covers 30-40 groups. He interacts
 Players like Bandhan and Janalakshmi are aggressive with every customer. There is a 3-day education
in providing very high-ticket-sized loans, even to programme, followed by a group recognition test
delinquent customers. Many players are now  Fake IDs are minuscule
focussing on disbursing individual loans to good
customers
 Possession of an Aadhar card is compulsory for new
loans, which is expected to remove duplicate and
fake customers from the system over a period of
time. The overall write-off from current delinquencies
is expected to range between 4-5%
 We believe MFIs play an important role in financial
inclusion of the bottom-of-the-pyramid by providing
capital for income-generating purposes. Many players
have moved or are moving to superior usage of
technology via E-EYC and Instant Pay. This is expected
to strengthen the business model, and also lead to
lower opex costs. Many players are now focussing on
individual loans outside the JLG for customers with a
good credit record, or those who can provide security

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EQUITAS
Equitas Holdings, headquartered in Tamil Nadu, is a
lender to underserved segments in urban, semi-
urban and rural India. With an AUM of Rs 72bn, it
Equitas-Centre meeting provides Microfinance, Used CV loans, MSE and
Housing Finance loans. Its ROA dropped from
3.05%in FY16 to 2% in FY17, owing to its conversion
to a SFB from a NBFC-MFI. Currently, we have a
Neutral rating on the stock which trades at 2.2x
FY19E BV.
Non-vehicle branch in Madurai
 The branch is 10 years old, and the current AUM is
split into MF/M-LAP/other loans
Ujjivan-Centre meeting
 Collection efficiency is 99.5%, with PAR>0 of 1%
 It is targetting 20-25% growth rate in the loan book
 It operates in the radius of 30 kms, focussing on non-
MF loans like M-LAP, Business loans, Housing loans
etc
Vehicle branch in Trichy
 Loan book grew 30% last year, and continues to
expand at the same rate
 PAR>0 in the used CV segment is 20%, GNPA is at 4.5-
5%, and has remained stable
 LTV stands at 65%
 Lending rate is 20-24%
 Provides top-up loans, if 30% of the principal has
been repaid
Three States: A financial drive through Southern India
UJJIVAN
Ujjivan Small Finance Bank is an NBFC-MFI-turned
SFB. It commenced banking operations in February
2017, and has a pan India presence. Its market cap
is Rs ~40bn and has an AUM of Rs. ~64bn.During
FY17, the AUM loan book grew by 18%. 95% of the
loan book comprises Microfinance loans (JLG+
Individual). We have a BUY rating on the stock,
which trades at 2.5x FY19E BV.
 PAR >0 is in the range of 15-17%; pre-demonetisation
it was lower than 1%
 During demonetisation, collection efficiency was
down to 60%. It has now recovered to 90%+
 Non-paying customers have reduced considerably,
and now stand at 6-7%. However, there is little hope
of recovery from non-paying customers. Women
cannot be forced to repay, and there is interference
from local politicians/workers too
 Offers JLG loan at 21.25% and non-JLG at 23.25%.
Ujjivan continues to maintain its lending rate, which
is helping it overcome burgeoning opex witnessed
during SFB conversion
 No fresh loans are issued without an Aadhar card. Old
loans were issued against ration cards, driving
licenses, voter ID cards etc
 Top-up loans were given to customers who started
repaying loans
 Disbursement is completely cashless
 Credit bureau checks are strong, with no loans given
to delinquent customers. There were complaints
about a few NBFCs not reporting to the credit bureau
 Focusing on Individual loans, based on credit history
in the JLG format
 Plans to start the secured lending book
 The bank branch is six months old, and has
CASA/RD/TD of Rs 3.3/5.3/6.5mn respectively
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 Three States: A financial drive through Southern India

FEDERAL BANK Federal bank offerings

In its stronghold region, FB is performing well.
Despite chunky exposure in the Corp segment
(largely the Kerala govt), asset quality remains
stable. (Though below the overall banks’ level).
Though FB faces stiff competition in some Retail
loans (HL, PV and LAP, owing to higher payouts by
other banks), the bank continues to hold on to its
share without diluting risk. While the Kerala
business is highly skewed towards deposits, TN is
heavily tilted towards advances. Maintain BUY with
a TP of Rs 137 (2x Sept-18 ABV of Rs 68).
 FB has made some operating changes, which have
helped optimise performance
 Setting up credit hubs for credit appraisal and
better underwriting
 Bringing in the RM structure across products, and
offering tailor-made solutions to large
enterprises, and strengthening relationships
 Exclusive tie-ups with the Kerala government for
remittances. Presence in all payment gateways will
also aid fee income
 Advances growth in Tamil Nadu has been mainly
owing to the SME portfolio being driven by higher
ticket-sized loans. Though growth in the SME slice has
shot up, credit underwriting is being given special
attention
 Retail growth was hit owing to certain bottlenecks
(namely ambiguity in business licenses). Mgt believes
that these should ease off hereon
 Major competition includes AXSB and SBIN (only in
HL), and regional banks like KVB and LVB

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 Three States: A financial drive through Southern India

CUB Customers CITY UNION BANK CUB’s gold loan offering

CUB’s focus on building strong relationships with its
customers has enabled the bank to grow at a
steady rate and also maintain asset quality. CUB’s
offerings are largely in line with other private
banks, so customers are comfortable with higher
perceived rates Iron, steel and textiles are the main
contributors of NPAs. Maintain BUY with a TP of
196 (2.75x Sept-19E ABV of ~Rs 72).
 Focus on customer retention, steady growth and
maintaining asset quality
 CUB also offers a variety of personalised services
 The contribution of transactions via alternate
channels has been increasing in all branches
 CUB is poaching customers not only from PSBs, but
Motivational meets by Dr Kamakodi
also from large private banks. Customers of e-SBH are
unhappy with SBIN’s service, and are being poached
by the bank
 CUB largely focuses on granular loans. However,
exposures to the Iron & Steel segment has impacted
NPA levels
 Top mgt is committed to giving the greatest
satisfaction to both customers and employees.
Digitally advanced (Monetary: salary, ESOPs and performance bonuses)

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 Three States: A financial drive through Southern India

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 Three States: A financial drive through Southern India

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