Sector Update | 19 November 2015
Financials
Please refer our detailed report
AGIC 2015
Financial Deep Dive - Mumbai
MUDRA loans – USD20b cash flow based lending
Non-collateralized lending; focus on micro and small entrepreneurs
Micro Units Development and Refinance Agency (MUDRA) has been established as a
subsidiary of SIDBI to refinance small business loans under the Pradhan Mantri Mudra
Yojana (PMMY). The PMMY is a scheme intended to promote new entrepreneurs
(funding ~58m small business units by providing loans up to INR1m at lower costs).
Access to finance in conjunction with rational price is the unique customer value
proposition of MUDRA.
Our interactions with bank managements suggest that GoI’s thrust on this segment,
refinancing at lower rate and proposed credit guarantee scheme should help increase
disbursements (INR400b in FY15). GoI’s intent is to provide risk capital to micro and
small entrepreneurs. Success of the scheme depends upon proper risk evaluation by
the financial institutions. High disbursements by state-owned banks (PSBs) just to
fulfill GoI targets remain a risk.
GoI has set a target of INR1.2t disbursements in FY16 (3x increase)
v/s
~INR400b disbursed to the target audience (loans below INR0.1m in target
segment) in FY15. If achieved, this is expected to lead to ~15% of
incremental non-food credit growth for banks in FY16. However, as of
October 2015, ~INR402b has been disbursed under these schemes, implying
~20% of non-food credit growth (April-October).
Top five banks account for ~40% of overall disbursements,
with CBK
leading the market share chart (~12% share) followed by SBI Group and
HDFCB (~10% each). Loans disbursed under MUDRA category (less than
INR1m for specific category) do not automatically qualify for refinancing, as
an important condition is lending at BASE RATE (for banks), 3.5% and 6%
spreads at the Mudra refinancing rate for RRBs/Co-operative banks and
NBFCs resp., and cap of 10-12% (as per RBI) for MFIs.
Additional funding source for non-banks; refinancing limited so far by
banks:
Given moderate loan growth and restriction to lend at BASE RATE
(risk adjusted returns are not good), we expect limited refinancing from
banks, especially private banks. MUDRA scheme opens up additional
funding avenues for NBFCs and MFIs apart from bank loans, CPs, bonds,
securitization, etc. Of the refinancing of INR200b expected in FY16.
RIDF to be used as source for funding; pricing also determined:
RBI would
provide INR200b line of credit from the priority sector lending (PSL)
shortfall of banks, which would then be used as a refinancing facility for
MUDRA loans. Funding under the MUDRA schemes would be collateral-
free. Refinance rate would vary from ~6.7% for banks to 10-12.25% for
NBFCs / MFIs. However, overall spreads are capped at 3%. Of the funding
taken from RBI (RIDF bonds-related), higher share of incremental
refinancing is done to NBFCs and MFIs.
Important developments in ensuing quarter: As per press note (Source:
Ministry of Finance)
currently, MUDRA operates as an NBFC registered
under RBI. However, MUDRA Bill is proposed to be tabled in parliament,
which is likely to enable its conversion into MUDRA Bank. It is also proposed
to make MUDRA Bank the regulator for the MFI industry. For further details
please refer Page #7.
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
Dhaval Gada
(Dhaval.Gada@MotilalOswal.com); +91 22 3982 5505
Investors are advised to refer through important disclosures made at the last page of the Research Report, Motilal Oswal
research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

Financials | Update
MUDRA – flagship plan of Modi government
Funding ~58m small/micro business units
MUDRA targets to provide
~58m small business units
access to institutional
finance
As per RBI requirement,
funding under these
schemes has to be non-
collateralized
The proposal to create a Micro Units Development Refinance Agency (MUDRA) Bank
was floated in Union Budget 2015 under the Pradhan Mantri Mudra Yojana (PMMY).
The idea was to bring focused attention and meet the capital needs of ~58m micro and
small business units (source: NSSO survey 2013), while giving a capital boost to
financial institutions through the INR200b refinance facility (funds to be provided by
RBI through priority sector lending shortfalls (RIDF) of commercial banks).
It is estimated (source: IFC) that the shortfall for loans in the target segment is >INR5t
(>USD80b). These small business units are mostly sole proprietorships (small
manufacturing units, shopkeepers, truck and taxi operators, food processors, street
vendors, among others) with credit requirement of <INR1m.
MUDRA has started operations as a subsidiary of SIDBI
with INR7.5b capital base. It is
expected to become a bank with the passing of the MUDRA Act – likely to be tabled in
parliament with the next Finance Bill.
MUDRA has two main objectives:
(a) providing cheaper refinancing to banks, NBFCs,
regional rural banks (RRBs), MFIs and cooperative banks for the purpose of lending to
micro/small units, and (b) developing new products and improving financial literacy.
As per RBI requirement, funding under the schemes has to be collateral-free.
Direct agri lending currently
excluded in this scheme
Targeting non-corporate small business units
The target borrowers under the MUDRA scheme are non-corporate small business
units’ comprising of proprietorship / partnership firms (small manufacturing units,
shopkeepers, fruit/vegetable vendors, truck operators, food service units, repair
shops, machine operators, small industries, artisans, food processers and others) in
rural and urban areas with financing needs of less than INR1m. Loans under Micro
and Small enterprise (for less than INR1m) category is encouraged to be collateral
free (Source: RBI lending to MSE segment 2010 –
Collateral free loans to MSEs).
RBI
advice is towards commercial banks however, it is silent for co-operative banks and
Regional Rural Banks.
Exhibit 2: Sectoral breakdown of business units
Trading
36%
Exhibit 1: Regional break-up of ~58m small business units
Urban
46%
Manufactur
ing 30%
Rural
54%
Services
34%
Source: MOSL, MUDRA
Source: MOSL, MUDRA
The scheme will offer
special focus to scheduled
castes and scheduled tribes
19 November 2015
Products / offerings of MUDRA
Several schemes / products have been introduced, covering various sectors /
activities of the micro/small enterprises. Following are the interventions of loans
given under various schemes/products:
2

Financials | Update
Three year duration loans
would be provided under
this scheme
Exhibit 3: Products signify the stage of growth and funding needs of small units
Schemes >>>
Shishu
Kishor
Tarun
Ticket size
Internal targets
> INR 0.05m
At least 60% of overall lending
INR 0.05 - 0.5m
INR 0.5 - 1m
Source: MOSL, Mudra
Not more than 40% of overall lending
Minimum of 60% of support would flow to enterprises in the smallest segment.
A broad framework on credit selection has been laid down, where
First time entrepreneurs, youth entrepreneurs (aged up to 30 years) and women
entrepreneurs shall be encouraged along with special schemes being designed
for such entrepreneurs.
Emphasis would be on cash flow based lending and not security based lending.
Repayment obligations are encouraged to remain flexible – framed keeping in
view the business cash flows of the entrepreneur.
Funds for the MUDRA scheme are proposed to come from commercial banks’
shortfalls in priority sector lending (PSL), which typically used to go RIDF and in turn
to NHB and SIDBI. Two mega credit camps were undertaken in September/October
2015 to improve traction in disbursements.
19 November 2015
3

Financials | Update
Ambitious targets – PSBs to drive growth
Scheduled commercial banks to disburse 80%+ of loans
As per MUDRA Ltd,
~INR400b was disbursed to
the target audience in FY15
Disbursed to the target audience of MUDRA in FY15 were ~INR0.4t (less than INR0.1m
– Collateral free for entrepreneur purposes). GoI has set a target of INR1.2t
disbursements (3x of last year), which could lead to ~15% of incremental non-food
credit growth for banks in FY16. As of October 2015, ~INR402b has been disbursed
under these schemes, implying ~20% of non-food credit growth (April-October 2015).
Public sector banks (PSBs) continue to drive the government’s financial inclusion
agenda, with ~60% share in overall disbursements of less than INR0.1m (only part of
which is qualified for refinancing under MUDRA). However, like private banks, PSBs
have also achieved just 30% of the set target as of October 2015.
Overall, top five banks account for ~40% of overall disbursements, with CBK leading
the market share chart (~12% share), followed by SBI Group and HDFCB (~10% each).
The share of low ticket ‘Shishu’ loans stood at 23% of overall disbursements v/s at
least 60% target share. We expect this scheme to gain traction as banks conduct loan
melas
(carnivals) and other promotional activities for achieving set targets.
Importantly, our interactions with bank managements suggest that despite the
MUDRA loan scheme, 50-60% of the loan disbursements would have taken place in
the normal course of business.
Exhibit 5: However, as of Oct-15, ~INR0.4t was disbursed –
~33% of the set target (INR b)
NBFC-MFI
2
RRBs
61
FBs
0
Exhibit 4: GoI has set a target of INR1.2t by Mar-16; PSBs are
expected to achieve 50%+ of the set target (INR b)
RRBs
220
PBs
300
PSBs
700
PBs
93
PSBs
245
Note: No target has been set for co-operative banks or NBFCs.
Source: MOSL, MUDRA
Note: This does not include ~INR200b disbursements in 1HFY16 by
MFI industry as per MFIN micrometer.
Source: MOSL, MUDRA
Exhibit 6: Five entities account for ~40% of overall
disbursements till October 2015 (%)
CBK
11.9
HDFCB
9.3
Exhibit 7: Share of ‘Shishu’ loans remains way below target
(%)
Shishu
Kishore & Tarun
40%
Others
59.0
SBI (C)
10.5
IIB
5.0
77%
60%
23%
Current (Oct-15)
Target (Mar-16)
Source: MOSL, MUDRA
ICICIBC
4.3
Source: MOSL, MUDRA
19 November 2015
4

Financials | Update
Refinancing rates vary across financial services
MFIs and wholesale funded entities to be main beneficiaries
MUDRA’s goal is to provide cheaper refinancing with the intention to lower borrowing
costs for end borrowers (micro and small enterprises).
Commercial Banks will have to lend at BASE RATE for loans to be qualified for
refinancing under MUDRA. Refinance rate would vary from 6.7% for commercial banks
(75bp above MUDRA refinancing rate), 9.5-10% for RRBs and co-operative banks
(spreads capped at 3.5% of the MUDRA refinancing rate)
Refinancing rates for NBFCs effectively works to be 10-12% as spreads are capped at
6% above MUDRA refinancing rate. MFIs refinancing rates governed by RBI directive of
spread of 10-12% (depending upon the size).
MUDRA will borrow money from RBI (INR200b line committed for FY16) at ~6%. RBI
would provide funds out of RIDF bonds. So far, only INR10-12b worth of refinance has
been provided.
Working on the premise that the cost to the ultimate beneficiary should be reasonable and
affordable, MUDRA’s cost of funds should be 100-150bp below the benchmark repo rates
(currently borrowing at ~6% v/s 6.75% repo rate). This appears feasible, as the government is
willing to support MUDRA in mobilizing low cost funds through refinance support from RBI
(via providing funds from PSL shortfall of banks). MUDRA will have to adopt a cost-plus
approach for pricing its offerings. Cost of refinance for MFIs would be higher than banks,
pricing in the risk of stability.
Exhibit 8: Refinance rates vary from 6.72-12.25%; overall spreads capped at 3%
MUDRA's cost of funds: 5.97%
SCBs
Spread charged by Mudra
Cost of Borrowing
Lending rate caps
0.75%
6.72%
Base Rate /
10.25% #
NBFC
4.03-6.28%
10-12.25%
MUDRA Refinance
Rate (+) 6%
MFIs
4.03-6.28%
10-12.25%
Margins (10-12%)
stipulated by RBI
# Note: Lending rate cap for SCBs are applicable only in case of banks who have opted for refinance;
10.25% for RRBS/Co-operative banks
Source: MOSL, MUDRA
Exhibit 9: MFIs and NBFCs to be biggest beneficiaries of MUDRA scheme
12.8
11.011.0
Cost of funds (%) - FY15
9.9 9.7
7.6 7.5 7.3 7.3 7.3 7.3 7.2 7.2 7.0
6.7 6.2
5.9 5.8 5.8 5.8 5.8 5.7
4.7
Source: MOSL, Company
19 November 2015
5

Financials | Update
Can this lead to further asset quality pressure?
Success would largely depend on the proposed credit guarantee scheme
Proposed credit guarantee product by the government would be one of the key
interventions that will bring down the cost of funds for the end beneficiary and
improve risk-adjusted returns for the lender.
While so far there have been no specific guidelines on underwriting standards on the
proposed disbursements by NBFCs and MFIs, to avoid reckless lending and ensure that
MFIs undertake proper credit appraisal, proposal of only certain proportion of loans to
be guaranteed through the credit guarantee fund is under consideration. The
remaining risk would be borne by the lender. Overall nitty-gritties are still being
worked out.
GoI is expected to create a
credit guarantee corpus of
INR30b through budgetary
allocations
Proposal to create credit guarantee scheme (CGS)
Historically, financing in India has followed the asset-based approach, giving primary
emphasis to collateral rather than cash flows. To promote lending at lower costs to
micro units, GoI has proposed to create a credit guarantee corpus of INR30b.
However, options are being explored on credit guarantee / risk sharing by banks and
GoI/MUDRA on portfolio of homogenous loans instead of a scheme for individual
loan-by-loan guarantee. This is likely to create administrative efficiencies and
increase the receptiveness of CGS. The guarantee product would be one of the key
interventions proposed to bring down cost of funds for the end beneficiary and
improve its creditworthiness. In our view, this would also improve risk-adjusted
returns for lenders.
The corpus proposed for the CGS is expected to be regularly augmented with a
charge on the outstanding loans under refinance. The same would be utilized for
providing first loss guarantee / credit enhancement for securitized portfolio loans.
19 November 2015
6

Financials | Update
Thin spreads, low cost; fees may surprise positively
Can this be 2%+ potential RoA generating entity?
Until the bill is passed, MUDRA will operate as an NBFC and would be governed by RBI
guidelines (i.e. 15% CAR and 12% tier-1 ratio).
Hence, deposits placed with scheduled commercial banks will attract no risk weights,
while those placed with NBFCs and MFIs would attract 100% risk weight.
MUDRA charges certain percentage processing fee on refinance given to NBFCs/MFIs.
While overall margins are likely to remain thin (75bp spread on refinance to
commercial banks); lower operating costs are likely to lead to healthy core operating
performance. Limited credit risk is likely to result in lower provisioning costs and
higher RoAs.
MUDRA operating as an NBFC – to become bank once the bill is passed
Role of MUDRA is likely to get clearer once the MUDRA Bill is passed by parliament.
As per media reports, the bill is likely to be introduced in the budget session.
Currently, MUDRA operates as an NBFC registered with RBI. The conversion from an
NBFC into the MUDRA Bank is likely to take place through the bill.
One of the important things to watch for is whether MUDRA Bank is given statutory
status to act as a regulator for MFIs. Other items discussed include rating of MFIs by
MUDRA Bank, laying down policy guidelines for micro enterprise financing, etc.
Key takeaways from Press Note being floated by GOI (Link)
GOI proposes to set up Micro Units Development and Refinance Agency
(MUDRA) Bank through a statutory enactment (Mudra Bill) which as per media
reports is likely to be introduced in budget session of parliament (early 2016).
MUDRA Bank is expected to be regulator and refinancer for MFIs which are in
the business of lending to micro/small business entities engaged in
manufacturing, trading and services activities.
Bank will be responsible for laying down policy guidelines for micro/small
enterprise financing business, accreditation /rating of MFI entities amongst
other activities.
Bank would also be responsible for formulating and running a Credit Guarantee
scheme for providing guarantees to the loans which are being extended to
micro enterprises.
INR200b would be allocated to MUDRA Bank from the money available from
shortfalls of PSL for creating the refinance fund.
Further, INR30b would be provided to MUDRA Bank from the central
government budget to create a credit guarantee corpus for guaranteeing loans
being provided to the micro enterprises.
Proposal to provide credit enhancements (link)
Credit enhancements by way of first loss guarantee / collateral would be provided
by MUDRA for securitization pools from the non-corporate small business sector
(NCSBS) asset class to be originated by MFIs and other intermediaries. MUDRA’s
support to such transactions will facilitate improvement in credit rating of such asset
pools and hence securitization deal flow in the sector.
19 November 2015
7

Financials | Update
NOTES
19 November 2015
8

REPORT GALLERY
STRATEGIES
Financials | Update
COMPANIES
SECTOR UPDATES
19 November 2015
9

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