Devesh Sachdev, MD -; CEO, Fusion Micro Finance Limited

16 Dec 2022 , 10:56 AM

The microfinance segment is highly competitive. How does Fusion Microfinance stand out?
 
Our company was founded with the core idea of creating opportunities at the bottom of the pyramid through providing financial services to unserved and underserved women in rural and peri-rural areas across India.
 
We have a unique operational model of joint liability group (typically comprising five to seven members) that provides joint and several guarantees for loans obtained by each member of the group ensuring credit discipline through peer support within the group, making our customers prudent in conducting their financial affairs and prompt in repaying their loans.
 
Our extensive and geographically diverse distribution network allows us to offer “last-mile” connectivity to our customers in remote rural areas.  Our entering markets at an early stage has enabled us to maximize both consumer mindshare and market share as well as develop a deeper understanding of the needs of the customers in these areas, as compared to our peers.
 
Share with us the growth strategy of the company.
 
Our key pillars of growth comprising customer centricity, strategic geographic diversification with a rural focus, embracing technology for growth, emphasis on nurturing and developing our personnel, good corporate governance, stakeholder management and prudent risk management, as well as ability to raise growth capital through the support of marquee investors even during difficult macroeconomic conditions.
 
We generally seek to establish new branches in areas that are adjacent to our existing markets or which may have similar customer demographics and financing needs. In selecting a new business location, we utilize our well-tested area selection analysis that allows us to identify markets where we can most easily replicate our business models.
 
We seek to develop new product adjacencies based on the needs of our customers and that complement our existing loan categories.
 
What are the key macro opportunities for the company?

Growth in rural economy is a big growth opportunity for us. The rural economy is far more resilient today due to two consecutive years of good monsoon, increased spends under MNREGA and irrigation programs, direct benefit transfer (DBT), the PM-Kisan scheme, PM Ujwala Yojana for cooking gas, PM Awas Yojana for housing, and Ayushman Bharat scheme for healthcare. To supplement this, there has been a continuous improvement in rural infrastructure such as electricity and roads. These government initiatives have led to lesser leakages and higher incomes in the hands of the rural populace, thereby enhancing their ability and willingness to spend on discretionary products and services.
 
Within rural areas, states such as Uttar Pradesh, Bihar, Madhya Pradesh, Jharkhand and Chhattisgarh where we have presence exhibit lower CRISIL Inclusix score indicating low financial inclusion. With lower financial penetration, these states present huge untapped market and potential for growth in future for the company, as their GDP gradually increases.
 
According to CRISIL, NBFC-MFI industry   expected to grow at a rate of 20-22% as compared to MFI industry 18-20% CAGR between FY 2022-2025.  
 
How is the company using digitalization to drive growth as well as efficiency?
 
Our technology investments and initiatives over the years have yielded substantial increases in digital customer onboarding and online disbursements as well as a decrease in turnaround times.
 
For the three months ended June 30, 2022 and the financial year 2022, all of our customers were on boarded digitally, and our share of cashless disbursements in total disbursements was 96.27% and 94.38%, respectively, while our average turnaround time for loan approvals decreased from approximately 13.2 days for the financial year 2016 to 5.1 days for the financial year 2022 and further to 3.9 days for the three months ended June 30, 2022.
 
We plan to continue automating and digitizing various aspects of our business, which we believe would allow us to identify and capitalize on cross-selling and upselling opportunities, improve our understanding of customer behavior, develop and implement customer targeting and product personalization strategies, and enhance customer service using predictive analytics.
 
How is the company contributing to ESG (Environment, Social and Governance)?
 
We have established a number of CSR initiatives that are targeted towards the following seven sustainable developments goals: (i) ending poverty, (ii) ending hunger including by achieving food security, improving nutrition and promoting sustainable agriculture, (iii) encouraging good health and promoting well-being at all ages, (iv) providing equitable and quality education and promoting lifelong learning opportunities, (iv) promoting gender equality and empowerment, (iv) ensuring availability and sustainable management of water and sanitation, and (vii) combating climate change and its impact.
 
We have worked diligently towards assisting the communities around our areas of operations, and have established approximately 2,738 initiatives across 329 districts in 21 states, which have benefitted over 667,010 people.
 
Share some insights into the asset quality trends you are witnessing currently.
 
In the financial year 2021, the asset quality of the industry deteriorated quite sharply, reflecting the adverse impact of COVID-19 on the industry. The PAR>30 and PAR>90 for the industry shot up to 16.2% and 11.8%, respectively, as of March 2021.
 
Contrary to financial year 2021, the asset quality improved in the financial year 2022 on account of higher collections and opening of economy. In the first quarter of the financial year 2023, PAR>30 and PAR>90 for the industry deteriorated to 18.7% and 16.0% respectively, up from 15.0% and 12.6% at end of March 2022. This could be attributed to slippages from the restructured book for various MFI players.
 
CRISIL believes that going forward, timely recoveries and controlling incremental slippages would be critical for the MFIs to keep their asset quality under check. It expects the credit costs to decrease gradually in the financial years 2023 and 2024, thereby augmenting profitability of the sector. In this context, the new RBI framework augurs well for MFIs owing to higher income eligibility threshold and enhanced flexibility to price loans, which is likely to aid industry.
 
As far as financials are concerned, what are the company’s key strengths? What are the margin drivers?

Our focus on building a healthy balance sheet with a good mix of assets, liability and equity and a positive net asset position has enabled us to overcome various negative market conditions in the past.

According to CRISIL, our gross loan portfolio in North India grew at a CAGR of 56% between the financial year 2015 and the financial year 2022, outperforming the overall industry CAGR in the region of 58% over the same period. Our number of customers grew at a CAGR of 43% between the financial year 2015 and financial year 2022, which was the highest growth rate among all NBFC-MFIs operating in North India.

We had the sixth lowest gross NPA ratio among the top 10 NBFC-MFIs in India during the financial year 2022, and our average asset quality of 2.4% between the financial year 2015 and financial year 2022 was the lowest among all NBFC-MFIs operating in North India.
 
Our calibrated approach adopted over the years of diversifying our fund raising sources and minimizing our costs of borrowings with prudent asset liability management and effective liquidity management has resulted into our average effective cost of borrowings declining at a steady rate and was 10.10%, 10.43%, 11.23% and 12.33% for the three months ended June 30, 2022 and the financial years 2022, 2021 and 2020, respectively.

With reference to cost to income ratio, growth strategy of targeting underserved and underpenetrated rural areas in both existing markets and new geographies has resulted us to achieved a consistent reduction in our cost to income ratio from 63.35% for the financial year 2019 to 44.27% for the financial year 2022 and further to 44.68% for the three months ended June 30, 2022, which we attribute to being able to derive benefits of operating leverage in our business and digitization.

We had the third highest growth in number of customers among the top ten NBFC-MFIs in India in the financial year 2022.