MAS Financial Services Ltd Management Discussions.
After growing at a robust 6.7% in FY 2017-18, the Indian economy achieve broad-based growth in the first three quarters of FY 2018-19, with industrial growth accelerating to 7.9%, services although services decelerated. Agriculture also posted strong growth of four per cent. The last quarter of FY 2018-19, however, has witnessed a slowdown in the growth of consumption indictors as well as a hiatus in business investment activity, as the nation awaits election results. Accordingly, Q4FY2019 is expected to see the weakest growth since mid-2017 and could come in at levels that are almost on par with Chinas growth.
The World Bank (April, 2019) expects Indias GDP to accelerate moderately to 7.5% in FY 2019-20 due to sustained strengthening of investments, particularly by the private sector, an improvement in export performance and resilient consumption.
INDUSTRY OVERVIEW MSME Sector
According to the Ministry of MSMEs (January 2019), there are more than 63 million MSMEs in India, which contribute to 45% of industrial production, 30.5% to services sector output and employ around 110 million people. Spread across the country, these MSMEs produce around 6,000+ diverse products and services for not only the domestic market but global markets too.
Despite Government schemes to promote this growth engine, until recent years, adequate and affordable credit from the formal financial sector was a hurdle. However, an MSME study by TransUnion-CIBIL (2019) states that credit growth to MSMEs remains healthy, while non-performing loans are stable. It also revealed that private banks and NBFCs are continuously strengthening their presence as lenders to the MSME segment, with their market shares increasing by about 400 and 300 bps respectively by the third quarter of FY2019. The report also states that MSMEs account for about 23% of total loans in India, as on December, 2018. These trends point to the immense potential that lies ahead for MSME sector financiers.
The housing finance segment presents a vast opportunity for NBFCs. The investment information and credit rating agency - ICRA - estimates that the average loan size for Housing Finance Companies (HFCs) in India is at approximately र 30 lakh and, with the total housing demand in the range of 12 to 20 million units, the entire housing market potential can be easily valued at over र 28 lakh crore.
According to data from the Ministry of Rural Development between April 2014 and January 2019, approximately 1.37 crore houses were built in the rural areas under two
Government housing schemes - the Indira Awas Yojana (IAY) and the Pradhan Mantri Awas Yojana-Gramin (PMAY-G). The same Ministry data projected that under these rural housing schemes, another 34.55 lakh houses would be completed by the end of the financial year. However, majority of homes in rural areas are kuccha or semi-pucca, lacking either a solid wall, roof or floor, according to the latest round of the National Family Health Survey (NFHS). This need for a transition to better quality homes in the rural areas implies that the demand for rural homes is still largely unmet.
On the urban front, the housing market is currently experiencing stagnancy in housing prices. A report by Liases Foras Real Estate Rating and Research pointed out that five out of eight top cities in India witnessed a drop-in home sales in the March 2019 quarter, with the sharpest drop in the National Capital Region, even as project launches surged and property prices remained steady. This situation of slack property prices, coupled with lower interest rates, tax incentives on housing loans and the Pradhan Mantri Awas Yojana (PMAY) subsidy suggest that the time seems ripe for acceleration in home purchases. Other factors that will drive the demand for housing in the near future are rapid urbanisation, a trend towards nuclear families and a population which comprises around 2/3rd below the age of 35 years. All these trends put together bode well for the housing finance sector.
According to the Society of Indian Automobile Manufacturers (SIAM), the automobile industry in India produced a total 3,09,15,420 vehicles, including passenger vehicles, commercial vehicles, three-wheelers, two-wheelers and quadri-cycles, in April-March 2019 as against 2,90,94,447 in April-March 2018. This translates into a year-on-year growth of 6.26% in FY2019. While this growth is lower than that of previous years, it comes against the backdrop of a 1.1% decline in global automobile production to about 95.6 million units; this is the first time the global auto sector has posted negative year-on-year growth in the past decade. The global slump in auto demand impacted Indian exports of passenger vehicles, which fell by 9.64%. However, domestically production was backed by strong sales, particularly of commercial vehicles, in the first three quarters of FY 201819. In the last quarter, automobile sales put up a dismal performance due to tightening of liquidity which resulted from the asset-liability mismatch crisis in the NBFC sector.
As interest rates continue to be low and trend downwards on account of lower inflation and liquidity returns to the system, growth in the automobile sector is expected to bounce back, especially as customers prepone their purchases to avoid paying the anticipated higher prices that may result from BS-VI emission standards implementation from April 2020 onwards.
MAS has been registered as an NBFC with the RBI since 1995. As a part of the financial services sector for the past 24 years, it has evolved to offer its clients a complete bouquet of retail finance products, including micro enterprise loans, SME loans, home loans, two-wheeler loans, used car loans and commercial vehicle loans. In a growing nation, dedicated to the mission of financial inclusion, MAS is focussed on catering to the borrowing needs of lower income and middle-income groups of the society spread across urban, semi-urban and rural areas, in the formal and informal financial sectors.
Addressing the credit needs of those in the hinterlands, who have hitherto been underserved or completely bypassed by the formal financial sector, requires very sound geographic and demographic insights. To build a rapport and serve this category of end-clients, MAS has forged very strong value chains by leveraging its distribution network of partner NBFC- MFIs, NBFCs, HFCs and franchisees to extend its financial services to the under-penetrated regions and Bottom of the Pyramid (BOP) segment.
MAS has opened several branches in major cities of Gujarat, Maharashtra, Rajasthan, Madhya Pradesh, Tamil Nadu and Karnataka. These enables the Company to achieve efficient last-mile delivery of credit, right at the doorstep of its customers that have hitherto been underserved or neglected by the formal financial sector.
With its network of 78 branches, as at end March 2019, MAS caters to over 5,00,000 clients in more than 3,300 centres.
Regional NBFO and NBFO-MFI Partnerships
Following its unique model of partnering with NBFCs and NBFC-MFIs for the distribution of its products in far- flung geographies, has delivered good results for both the Company, its partners and clients. While the partners can avail lines of credit offered by MAS as well as the Companys expertise, the target clients gain access to formal sector loans as per their requirement and MAS augments its client base without concomitant investments in physical infrastructure. Additionally, regional players can develop networks and build trust more effectively as well as undertake the last-mile of credit delivery more efficiently, as they are familiar with the region.
As on 31st March 2019, MAS has Assets under Management under MSME Loans of र 4,725.43 crores as compared to र 3,679.61 crores on 31st March 2018. This marked a growth of 28.42%.
MAS Rural Housing & Mortgage Finance Ltd. (MRHMFL), a subsidiary of MAS which serves the middle and lower income segments of the economy, especially in the semi-urban and rural areas has Assets under Management of र 270.24 crores as on 31st March 2019 compared to र 203.34 crores as on 31st March 2018. This translates into a growth of 32.90%.
commercial Vehicle and Two-wheeler loans
The Companys Assets under Management under Commercial Vehicle and Two-Wheeler Loans touched र 612.94 crores as on 31st March 2019 from र 477.42 crores as on 31st March 2018, indicating a growth of 28.39%.
|Particulars||Year Ended on 31st March, 2019||Year Ended on 31st March, 2018||Year Ended on 31st March, 2019||Year Ended on 31st March, 2018|
|Revenue from Operations||57,233.34||45,069.17||60,457.65||47,677.53|
|Profit Before Tax||23,392.95||16,515.72||23,800.81||16,777.00|
|Provision for Taxation (Including Current Tax, Deferred Tax & Income Tax of earlier Years)||8,181.44||6,172.57||8,340.16||6,257.97|
|Net Profit after profit attributable to the owners of the Holding Company||-||-||15,353.69||10,437.97|
|Profit Brought Forward||17,557.38||(4,017.83)||17,754.57||IGHT>(3,845.55)|
|Effect of changes in Groups interest||-||-||586.50||-|
|Profit available for appropriation||32,768.89||6,325.32||33,694.76||6,592.42|
|Transfer to reserve u/s 45-IA of RBI Act, 1934||3,042.30||2,067.48||3,042.30||2,067.48|
|Transfer to reserve u/s 29-C of NHB Act, 1987||-||-||61.28||46.67|
|Final Dividend on Equity Shares||1,180.70||-||1,180.70||-|
|Interim Dividend on Equity Shares||819.93||819.93||819.93||819.93|
|Final Dividend on Preference Shares||-||-||19.09||18.58|
|Dividend distribution tax on Equity Shares||407.35||166.95||407.91||168.00|
|Dividend distribution tax on Preference Shares||-||-||3.95||3.61|
|Conversion of convertible instruments measured at Amortized Cost||-||(14,286.42)||-||(14,286.42)|
|Surplus Balance Carried To Balance Sheet||27,318.61||17,557.38||28,159.60||17,754.57|
Indian financial system went through a tough period in FY2019 as asset-liability mismatches in banks and NBFCs came to light. The fundamentals of companies in the sector were put to test during these tough times. Due to its financial rectitude, MAS could not only navigate through these times but could also raise the requisite liability, as per mandated targets. The Company has experienced, understood and practised the importance of ALM in Liability management.
With its stringent internal systems and processes, the Company considers liability management as a priority. It is the cornerstone on which it has achieved strong performance in the past and created a good reputation for itself of reliability and rectitude. MAS has also made efforts, over the years, to forge strong bonds with leading banks and various financial institutions. It constantly endeavours to leverage its strong reputation and fund management experience and expertise to deliver benefits for its clients and gains for its stakeholders.
MAS works towards maximising returns on capital employed through an efficient capital management strategy. It ensures that this strategy is within the guidelines laid down by the RBI from time to time and conforms to them. The Company constantly endeavours to enhance its capital management practices towards strengthening its balance sheet.
CREDIT AND RISK MANAGEMENT
The vast universe of financially underserved individual and MSME borrowers in the country presents a colossal opportunity for lenders. This opportunity is compounded by the fact that a large proportion of these potential borrowers could be first-time borrowers.
MAS follows the dictum of extending credit where it is due. Being a company in the business of lending, it ensures that it manages risks effectively, rather than avoiding them. As these risks could emerge from within the Company, due to its operations and strategy, or from external factors, the Company has in place tried and tested risk mitigation policies and structures, such as robust credit models and operational systems, to successfully manage these risks.
The process of receivables management is inherently exposed to various risks. To avoid or minimise these risks, debtors are under the Companys surveillance and regular follow-ups for collection are executed. Further, to mitigate the risk of volatile interest rates, MAS maintains sufficient spreads, offers relatively short tenure loans and resets lending rates from time to time.
The Stage III Asset Net of Provisions of the Company is 1.14% of total AUM as at the end of FY 2018-19. The Company extends loans for an average tenure of 26 months.
The Company has a diversified portfolio of borrowers within its segments of operation. The inter-segment and intrasegment diversity applied to a very large market size, serves as a very potent protection against market risks that could occur due to various macro developments. However, the Company is constantly alert to changes in the market space and takes pre-emptive action, from time to time, to ensure that these changes do not impact the operations of the Company.
OPPORTUNITIES & THREATS
MAS has achieved consistent and sustained growth over the years on the back of its choice of markets to cater to and products to offer. It has assiduously gauged which segments offer promise for lenders and what the needs of these segments are, in terms of lending structures. Accordingly, it has met with great success so far while catering to the MSME sector and serving the hinterlands, through various offerings, namely two-wheeler loans, commercial vehicle loans and the newly introduced segment of used car loans. The size of these financially unserved markets presents a huge opportunity.
Over the years, MAS has understood that an opportunity is nothing without sound execution. The most significant threat for any lending activity is to constantly exhibit operational excellence and contain the loss given defaults within the acceptable limits. The Company believes that this task is to be worked upon continuously through a very sharp learning and unlearning in order to achieve operational excellence.
INTERNAL CONTROL AND SYSTEMS AND THEIR ADEQUACY
MAS constantly strives to improve its internal control and systems and operational efficiencies to enhance the quality of its portfolio still further. Realising that the impact of internal risks could easily outweigh those of external risk as personnel of a company have the potentiality to influence larger number of loans as compared to a single borrower, the internal control at MAS is a constantly-evolving process.
There are adequate controls right from tracking the originators activities, quality of logins and stringent credit checks and appraisal, which are evaluated on the basis of the quality of the portfolio. The Company takes a holistic view of the credit assessment process by framing credit screens based on reliable demographic data and strict adherence of the same with an element of adaptability. At the same time, there is no compromise on the fundamentals of extending credit where it is due.
The internal audit department comprises of both an internal as well as an external team to highlight the gaps whereas the risk and monitoring department is expected to constantly scrutinise various trends of the portfolio behaviour and also the macro developments from time to time.
The other significant internal control at MAS comprises constant monitoring of operational expenditure with an endeavour to bring it down through better efficiencies rather than just focussing on curtailing the expenditure.
The adequacy of internal controls and their execution are driven by an ethos of constantly endeavouring to improve.
MAS believes that human resources are the foundation on which it can achieve its aspirations and objectives. Accordingly, the Company selects its human resources very judiciously, ensuring that they conform to the Companys culture and follow its values and belief system. The promoters constantly ensure that good governance is a priority and are involved in the management of the company, with strategic inputs from a well-diversified and competent board.
The core management team at MAS, which comprises an adept group of committed resources, is well-equipped to design strategies and execute them so that the Company achieves sustainable growth. A large part of this team has been with the Company since its inception, constantly extending its unstinted efforts as they align their personal objectives with those of the Company.
MAS is constantly looking at strengthening its human resources at every level and ensures that its work ethic permeates to the every employee of the Company.
As on 31st March 2019, MAS had total team strength of 1499.
DETAILS OF SIGNIFICANT CHANGES IN KEY FINANCIAL RATIOS
During the year under review, there were no significant changes (changes exceeding 25% or more as compared to the immediately previous financial year) in Key Financial Ratios.
Details of change in Return on Net Worth:
The return on Net Worth of the Company for the current financial year is at a robust 18.07% in spite of a broader capital base as compared to 21.83% in the previous financial year. The profit after tax in the current financial year grew by 47.06%. (The Company went for an IPO in the previous financial year and raised fresh capital of र 233 crores).
The countrys demographics and stage of growth suggest that there is a huge unfulfilled demand in the housing finance, vehicle finance and MSME finance spaces. These sectors have been financially under-served or, in some ways completely neglected by the formal financial sector. As a result, their development has been stymied. The situation is fast changing as NBFCs, private banks and private equity have begun to flow into these sectors to tap the vast potential that they offer. They have begun to approach their target customers with innovative and customised lending products. Using data, information and technology, they are also able to overcome issues of the past - such as proof of creditworthiness - that presented hurdles in the past. The Government and RBI are also making efforts to institute policy reforms that will facilitate lending to these segments.
As a result, there has been a flood of new players who have entered this space. Although this market is vast enough to accommodate them, companies that have garnered expertise through years of experience will always enjoy a competitive advantage.