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Ujjivan Financial Services Ltd.

BSE: 539874 Sector: Financials
NSE: UJJIVAN ISIN Code: INE334L01012
BSE LIVE 15:40 | 16 Aug 323.30 8.25
(2.62%)
OPEN

317.35

HIGH

324.00

LOW

312.20

NSE 15:54 | 16 Aug 323.25 7.90
(2.51%)
OPEN

316.00

HIGH

324.00

LOW

311.55

OPEN 317.35
PREVIOUS CLOSE 315.05
VOLUME 176795
52-Week high 484.00
52-Week low 285.00
P/E 28.26
Mkt Cap.(Rs cr) 3,870
Buy Price 0.00
Buy Qty 0.00
Sell Price 0.00
Sell Qty 0.00
OPEN 317.35
CLOSE 315.05
VOLUME 176795
52-Week high 484.00
52-Week low 285.00
P/E 28.26
Mkt Cap.(Rs cr) 3,870
Buy Price 0.00
Buy Qty 0.00
Sell Price 0.00
Sell Qty 0.00

Ujjivan Financial Services Ltd. (UJJIVAN) - Chairman Speech

Company chairman speech

Dushotsav - Celebration of a decade of serving customers as an NBFC-MFI

We closed the year with spectacular financial results:

• Profit after Taxes grew by 134% to Rs 177 crore.

• Gross Loan book grew by 65% to Rs 5388.6 crore

• Our Gross Non Performing assets(GNPA) increased marginally to 0.15% of ourportfolio with a cumulative repayment rate of 99.81%

• Our Cost to Income Ratio declined from 60.4% to 51% and Operating Expense Ratiodeclined from 8.5% to 7.5%.

• Return on Asset of 3.7% compared to 2.5% in the previous year.

• Return on Equity of 18.3 % compared to 13.7% in the previous year.

This resulted from achieving economies of scale higher level of e iciency and keepingcredit costs at a negligible level. We moderated our Gross Loan Book growth to 65%compared 102% in the previous year.

Our branches grew by 11% and employees by 14%. This year Ujjivan scaled new heights infinancial terms as an NBFC-MFI. However we measure our success or failure over the lastten years not just in financial numbers but also in terms of our e icient services accrossmajor stakeholders.

Customers: This year we crossed the milestone of 30 lakh customers. We acquiredmore than 10 lakh new customers second year in a row. Customer retention rate has remainedat 86.3 % one of the highest in the industry. This is despite the fact that we had todrop out existing customers to comply with the regulatory requirement that not more thantwo MFIs can lend to a customer. The high customer retention rate and the new customeracquisition were key factors in our gross loan book growing by 65% to Rs 5389 crore andis a reflection of how well customers value our relationship.

Employees: Our employee base increased by almost a 1000 this year reaching 8049and our sta retention rate was 82%. We are among the top 3 companies to work for in Indiaand number one in the microfinance sector in the Economic Times and Great Place to WorkInstitute survey.

One of the unique employee benefits is the Employee Stock Option Plan (ESOP) schemesfor all employees based on performance. This was instituted in 2006 and the sixth ESOPscheme was launched in 2015. Over 54% of our current employees across the organization arerecipients of the ESOP. Post our IPO in April 2016 the employees could for the first timesee the market value of the ESOPs they hold and this generated excitement and pride inownership of the Company.

Investors: In the last two years we have been able to provide exit to many of ourearly investors - Rs 300 crore through private placement in the year 2014-15 and Rs 524crore through the IPO in 2016-17. All the divesting foreign investors were able to get areturn on their investments in Rupee terms exceeding 20%. We have enjoyed excellentrelationship with all our institutional investors many of whom have made very valuablecontribution to the Company as members of our Board and also established specialrelationship with our sister organization – Parinaam Foundation. The remainingindividual investors who are largely our angel investors who remained invested for over 10years are overjoyed in seeing their investment grow to 35X at current market prices.

Ujjivan’s Initial Public O ering

Ujjivan’s Initial Public O ering (IPO) was a great success and it is covered in aseparate section. In this letter I will focus on the objectives of the IPO. The immediateneed to do the IPO was to meet the Reserve Bank of India’s pre-requisite that theSmall Finance Bank has to be majority domestic owned. In the past for the microfinancesector equity has been largely funded by foreign institutional investors. Our foreignownership was in excess of 91%. Given the size of our domestic equity requirement the onlyalternative was to raise it through IPO restricted only to domestic investors. Thedomestic market is limited in terms of institutions mainly to insurance companies andmutual funds. The high net worth individuals and public were an uncertain segment due tolimited familiarity with the sector. Though finally both these groups very activelyparticipated in the IPOs of both the microfinance institutions the journey waschallenging and required a lot of sessions to bring about familiarity of prospectiveinvestors.

The journey became more di icult with the announcement of large NPAs by banks andconsequent impact on the entire BFSI sector. The results finally indicated that investorsare optimistic about the new type of financial institution initiated by RBI - the SmallFinance Bank and are not colored by the dismal financial performance largely of thepublic sector banks. For Ujjivan the IPO has a special benefit for majority of theemployees across all segments of the organization who are holders of ESOPs which havebeen issued almost since inception.

A large number of these employees are our field sta and their supervisors who are notfamiliar with equity markets.

After this IPO the employees can exercise their ESOPs and build a ‘nest egg’for their family.

Finally it is always our long term objective to have a well-diversified ownershipstructure. Two years before the IPO the top ten institutions owned over 91% of Ujjivan.Just prior to the Pre-IPO and the IPO top ten institutions owned more than 81% of theinstitution. Currently we have more than 41000 investors in Ujjivan. The institutionalinvestors are balanced between domestic and foreign. More importantly Ujjivan is notdependent solely on large institutional investors to raise future capital and can freelyaccess the large domestic capital markets. This will provide long term stability inraising equity capital.

Transformation to Small Finance Bank- Moving to the platform of a specialized bankinginstitution.

Ten years on the NBFC platform with stellar performance brings a close to one of themajor chapters in Ujjivan’s history. The RBI opened up a new platform on November27th 2014 by issuing guidelines for Small Finance Bank (SFB).These will be specializedbanking institutions to provide financial inclusion to the vast un-and under-servedsections of our population and not the regular universal bank which largely serves themiddle class and a luent in the retail segment and large corporates and institutions inwholesale business. This was done after considerable dialogue with the industry largelyrepresented by the Micro Finance Institutions Network (MFIN). I had the honor of headingMFIN as the President and worked closely with Alok Prasad who was the CEO during thiscrucial phase. Much to our delight on October 7th 2015 RBI issued an in-principlelicense for ten institutions of which eight were microfinance institutions includingUjjivan. This will enable us to move to a more stable and less risk prone structure of abank. NBFCs come under periodic threats on issues like the state money lenders acts; ingeneral finance companies have much lower stature compared to banks among the public.NBFC-MFIs are dependent largely on a single source of expensive funding from banks andhence vulnerable; and are constantly under competitive threat for their successful line ofbusiness from banks. More importantly the SFB will allow us to pursue our long cherisheddream of being able to provide a full range of financial services and after five years ofoperation convert to a full-fledged mass market bank.

The transformation requires intense preparatory work to convert to a bank. First thecapital and legal structure needs to be changed. The capital issue was completed with theIPO. The legal structure of converting Ujjivan to a holding company and setting up abanking subsidiary with the requisite capital is now in progress. After this is completedand along with a number of other requirements like bank board members branch openingplan independent certification of the IT infrastructure etc. we would be applying forthe final license.

Meanwhile the transformation work in the business front is continuing in full forceand had commenced before the in-principle license was issued. Ernst & Young wasappointed as the consultants for the overall project. On the technology front keyadditions to the current infrastructure is in progress. We are in the process ofimplementing the Finacle core banking and treasury systems from Infosys; CRM solution fromCRM-Next; mobility solutions from I-Exceed; comprehensive risk management system from SAS;upgrading the Human Resource module from RAMCO; Oracle Accounting System hardware fromOracle CISCO etc.; Wipro has been engaged as the System Integrator.

• Extensive work is in progress on the Human Resources side where key managementpositions at the leadership level has largely been filled and the second level recruitmentis in progress. Competence mapping of existing sta for various positions in the SFB hasalso been undertaken. Training programs are proposed to be held during the six monthsprior to the launch. IT training has already commenced. Along with this we have started a‘mindset change’ training for existing sta from a loan giving institution tothat of an institution which will provide a full range of services including savings.

• We plan to consolidate our existing branches and convert them to full serviceSFB branches. We will open the required number of new Unbanked Rural Branches (URB) overthe year as per the SFB guideline requirement. Considerable research and planning has goneinto the location of the URBs. We see this as a new business opportunity. These brancheswill be designed to meet the requirements and aspirations of our target customers. Thephysical infrastructure of all these branches will require considerable investment andtime.

We understand that the RBI is planning to come up with a comprehensive policy on newbranches later this year.

We hope this will give us leeway to pace our branch conversion to ensure that we can dothis in a feasible and viable manner.

• In order to provide the customers multiple channels/access points we willsupplement the branches with alternate delivery vehicles like ATMs phone banking bankingcorrespondents and also internet banking. This is also being planned to be executed in aphased manner.

• On the product side we have undertaken considerable research on the savingshabits likes and dislikes of the target market customers. We are designing the productsand services accordingly. In addition we are working on remittances and third partyinsurance products which will be launched in a phased manner. We are also enhancing ourloan products for the SME sector.

The Future

We expect to launch Ujjivan Small Finance Bank in a phased manner in the first calendarquarter of 2017. We expect the first 12-18 months to be a stabilization period for thebank to ensure all systems and processes work smoothly and we do a phased expansion ofdistribution channels and products. We expect to start on an accelerated growth afterthis stabilization period. In five years from the date we start the Ujjivan Small FinanceBank we will work towards converting it to a full-fledged mass market bank.

The financial inclusion space has moved very steadily post the Andhra crisis in 2010.There has been disciplined growth by the microfinance sector under the regulatoryoversight by the RBI and self-regulation especially by MFIN. However this is now going tobe totally disrupted with major developments which will accelerate the whole process offinancial inclusion:

• Entry of eight aspiring Payment Banks especially those with wide distributionnetwork and mobile technology of TELCOs joint ventures. They will compete hard for thepayment and deposit business. However the viability of this business will depend oncreative solutions and add-ons. The wallet business though currently attractive for thosewho are un-banked will come under serious threat with the new mobile payment systems beingdeveloped by NPCI.

• The ten Small Finance Banks who are still in the running will bring about changeby providing a wide range of services each following their DNA. However the success ofthe SFBs will depend on scale and how well they are able to widen the net to include theun- and underserved.

• On the liability side with the extensive seeding of the Aadhar biometricidentification system NPCI’s payment systems and with the reach of mobiletechnology as Nandan Nilkeni points out the portability of savings accounts and balanceswill increase dramatically using mobiles. This will have massive disruptive e ect whichearly adopters can take advantage of.

• In India e-commerce has taken o . This allows a large number of Micro Small andMedium sized Business Enterprises to sell their goods and services using these platforms.This will generate a wealth of data for future funding institutions and who can useanalytics to extend credit. Already fintech companies are trying to capture this business.This will be a huge opportunity on the asset side of the business.

These are some of the major changes which will disrupt the whole financial inclusionspace in the next five years thus changing the entire landscape. The winners will be thosewho remain at the cutting edge and scale their business. Both RBI and the Government arebeating the drums of financial inclusion and ushering in the change.

Samit Ghosh

June 12 2016.