Fusion Micro Finance coming with an IPO to raise Rs 1134.85 crore

Fusion Micro Finance

• Fusion Micro Finance  is coming out with a 100% book building; initial public offering (IPO) of 3,08,38,323 Equity Shares of face value of Rs 10 each in a price band Rs 350-368 per equity share.
  
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
  
• The issue will open for subscription on November 02, 2022 and will close on November 4, 2022.
  
• The shares will be listed on BSE as well as NSE.
  
• The face value of the share is Rs 10 and is priced 35.00 times of its face value on the lower side and 36.80 times on the higher side.
  
• Book running lead managers to the issue are ICICI Securities, CLSA India, IIFL Securities and JM Financial.
  
• Compliance Officer for the issue is Deepak Madaan.
  

Profile of the company

The company has been founded with the core idea of creating opportunities at the bottom of the pyramid, and it does so by providing financial services to unserved and underserved women in rural and peri-rural areas across India. Its network and services have improved accessibility to formal credit at affordable prices, thereby positively impacting the lives of its customers in rural India, and it was one of the youngest companies (in terms of getting an NBFC-MFI licence) among the top NBFC-MFIs in India in terms of AUM as of June 30, 2022. It has achieved this through its commitment over the years to its key pillars of growth comprising customer centricity, strategic geographic diversification with a rural focus, embracing technology for growth, emphasis on nurturing and developing its 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.

The company has prioritized organic geographic diversification since its inception in 2010, with a focus on strategic management of state concentration risk by expanding into underpenetrated rural areas that offer significant growth opportunities. As a result, it has achieved a significant footprint across India, where it has extended its reach to 2.90 million active borrowers which were served through its network of 966 branches and 9,262 permanent employees spread across 377 districts in 19 states and union territories in India, as of June 30, 2022. Its significant footprint of active borrowers and branch network puts it in a vantage position to further penetrate and deepen its presence in areas in which it has established branch infrastructure but remain relatively untapped and also to expand into new regions that have significant growth potential. Its extensive and geographically diverse distribution network allows it to offer “last-mile” connectivity to its customers in remote rural areas.

Proceed is being used for:

• Augmenting the capital base of the Company.
  
• Receiving the benefits of listing of the Equity Shares on the Stock Exchanges.
  

Industry overview

The microfinance industry (joint-liability group (“JLG”) portfolio) has recorded healthy growth in the past few years. The industry’s gross loan portfolio (“GLP”) increased at a CAGR of 21% since the financial year 2018 to reach approximately Rs 3.1 trillion in the first quarter of the financial year 2023. The growth rate for NBFC-MFIs is the fastest as compared to other player groups. In the financial year 2021, the industry has been adversely impacted due to the onset of the COVID-19 pandemic. While disbursements came to a standstill in the first quarter of the year, they have picked up subsequently. Disbursements have reached to the pre-COVID levels for NBFC-MFI in the third and fourth quarter of the financial year 2021. In the financial year 2022, the second wave of COVID-19 led to a slow start in disbursements. However, with decline in the number of Covid cases and faster recovery of the industry, the situation started improving from the second half with gross loan portfolio registering 10% growth on-year at the end of the financial year 2022.

Microfinance industry has grown at a healthy pace over the past few years to reach a GLP (credit outstanding) of Rs 3.02 trillion in the financial year 2022 compared to other segments like housing finance and auto finance with credit outstanding of Rs 25.5 trillion and Rs 8.0 trillion, respectively, in the financial year 2022. The microfinance industry growth has been relatively higher despite the impact of various events like demonetisation, farm loan waivers, natural calamities, IL&FS crisis and outbreak of the COVID-19 crisis. Although, India’s household credit penetration on MFI loan has increased to 33% in the financial year 2020 from 23% in the financial year 2017. The penetration is still on the lower side as only 4 states have penetration higher than 40%. There is huge untapped market available for MFI players. As of the end of March 2022, the microfinance industry had grown at a CAGR of 22% since the financial year 2018. In the financial year 2022, the industry grew by 10% year on year to reach Rs 3.02 trillion as of March 2022.

Pros and strengths

Well Diversified and Extensive Pan-India Presence: As of June 30, 2022, the company had 2.90 million active borrowers which were served by its 966 branches and 9,262 employees spread across 377 districts in 19 states and union territories in India. Its extensive geographic presence puts it in a vantage position to lend across the country in a scalable manner while maintaining low operating costs, helps it mitigate any risks arising from economic, political, cultural or environmental factors particular to a specific region, and allows it to offer “last-mile” connectivity to its customers in even the most remote areas. Prioritizing organic diversification since its inception and focusing on developing its experience in difficult markets, especially across North India, have enabled it to experience sustained growth over the last few years as it continuously venture into new states. Between March 31, 2016 and June 30, 2022, its number of active borrowers grew at a CAGR of 33.63% and its number of branches grew at a CAGR of 31.92%.

Proven Execution Capabilities with Strong Rural Focus: The company has been able to achieve significant success with its growth strategy of targeting underserved and underpenetrated rural areas in both its existing markets and new geographies. It has a long history of serving rural markets with high growth potential in the microfinance segment, and have maintained a track record of financial performance and operational efficiency through consistently high rates of customer acquisition and retention and lowcost expansion into underpenetrated areas. Its total AUM grew at a CAGR of 37.17% from Rs 36,065.24 million as of March 31, 2020 to Rs 67,859.71 million as of March 31, 2022, and was Rs 73,890.23 million as of June 30, 2022. Through such growth, it has achieved a consistent reduction in its 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 it attribute to being able to derive benefits of operating leverage in its business and digitization.

Robust Underwriting Process and Risk Management Policies: The company’s risk management division is divided into separate teams that are respectively dedicated to managing and mitigating credit risk, market risk and operational risk, and which are subject to oversight by its Risk Management Committee and its Board of Directors. Its customer due diligence procedures encompass multiple levels of checks and controls designed to assess the quality of customers and to confirm that they meet its stringent selection criteria, and include comprehensive evaluation of repayment capacity and detailed cash flows analysis of the customer as well as thorough group training sessions and knowledge testing. It utilize credit bureau data to verify customer details and obtain information on past credit behavior. Further, it employs proactive practices that involve frequent evaluations of portfolio risk levels on a periodic basis and rigorous monitoring and analysis of cash disbursements and collection, roll rates and customer retention at both branch and head office levels, which minimize the incidence of bad debts.

Technologically Advanced Operating Model: The company’s current platforms support mobile customer onboarding, paperless loan processing, real-time application tracking using barcodes, real-time credit checks, cloud computing, integrated credit bureau data collection, comprehensive online grievance redressal, geographic tagging for center meetings and real time notifications to customers. It adopted cloud computing software as early as 2013, which has provided it with agility, flexibility and improved collaboration in scaling its business in a cost efficient manner. It is of the first few MFIs to launch a mobile-based customer platform, and it is in the process of implementing advanced artificial intelligence (“AI”) and machine learning (“ML”) mechanisms across its operations. Shakti, its centralized online real-time environment (“CORE”) lending system, is a multi-product digital platform providing end-to-end solutions on both its web and mobile platforms. Shakti enables, among other things, real time integration through open API architecture with credit bureaus, bank partners and other third-party systems that facilitate seamless customer information validation and cashless collections.

Risks and concerns

Increase in the level of NPAs or provisions may adversely affect business: The company’s management of credit risk involves having appropriate credit policies, underwriting standards, approval processes, loan portfolio monitoring, collection and remedial management, provisioning policies and an overall architecture for managing credit risk. However, even if its credit monitoring and risk management policies and procedures are adequate and appropriately implemented, it may not be able to anticipate future economic or financial developments or downturns, which could lead to an increase in its NPAs. If its NPAs increase or the credit quality of its borrowers deteriorate, it could have an adverse effect on its business, financial condition, results of operations and cash flows.

Requires to maintain minimum capital to risk-weighted assets ratio: As an NBFC-MFI, the RBI requires the company to maintain a minimum capital to risk-weighted assets ratio (“CRAR”) consisting of Tier I and Tier II capital of 15.00% of its aggregate risk weighted assets on-balance sheet. Further, the total of its Tier II capital cannot exceed 100% of its Tier I capital at any point of time. Its ability to support and grow its business would become limited if its CRAR is low. As it continues to grow its loan portfolio and asset base, it will be required to raise additional Tier I and Tier II capital to continue to meet the applicable CRAR with respect to its business. It cannot assure that it will be able to raise adequate additional capital in the future on terms favorable to it, and this may adversely affect the growth of its business. In addition, any changes in the RBI or other government actions in relation to securitizations or assignments by NBFCs in general or MFIs specifically, including if any assignment is held unenforceable under applicable law, could have an adverse effect on its assignment and securitization plans in the future. 

Face most significant organized competition: The company faces its most significant organized competition from other MFIs, banks and state-sponsored social programs in India. In addition, many of its potential customers in the lower income segments do not have access to any form of organized institutional lending, and rely on loans from informal sources, especially moneylenders, landlords, local shopkeepers and traders, at much higher rates. Many of the institutions with which it compete may be larger in terms of business volume or may have greater assets, higher geographical penetration and better access to, and lower cost of, funding than it does. In certain areas, they may also have better brand recognition and larger customer bases than it. It anticipate that it may encounter greater competition as it continue expanding its operations in India, and this may result in an adverse effect on its business, financial condition and results of operations.

Rely on third-party service providers: The company enters into arrangements with third-party vendors and independent contractors to provide services including, in particular, technology and software services. It also enters into agreements with credit bureaus for availing credit assessment and other services. It cannot guarantee that there will be no disruptions in the provision of such services or that these third parties will adhere to their contractual obligations. If there is a disruption in the third-party services, or if the third-party service providers discontinue their service agreements with it, its business, financial condition and results of operations will be adversely affected. In case of any dispute, it cannot assure that the terms of such agreements will not be breached, and this may result in litigation or other costs. Further, it finances loans for purchase of products such as mobile phones, bicycles, kitchen appliances and other items from third parties. Any defects or deficiencies in the products sold by such third parties may impact repayment of the loans provided by it.

Outlook

Fusion Micro Finance as an organization was set-up in 2010 & is a registered NBFC –MFI which operates in a Joint Liability Group lending model of Grameen. Its clients comprise mainly of women living in rural and semi-urban areas. Its focus is reaching out to unbanked and providing financial services to women entrepreneurs belonging to the economically and socially deprived section of the society. Its responsibilities are not restricted merely to financial support but also to acquaint the clients to manage their financials by disseminating Financial Literacy to them. Fusion believes in robust business practices, transparent policies expressed in its Customer Centric efforts towards its Clientele. Fusion aspires to create value and balanced growth for all its stakeholders while keeping clients at the centre. Over the years, it has greatly focused on attracting and building a talent powerhouse as its people are key to its success as an MFI. Its senior management team comprises experts and professionals heading various functions with an average of 17 years of leadership experience in their respective fields. On the concern side, the company may face adverse asset-liability mismatches in the future, which could expose it to interest rate and liquidity risks. The NBFC-ND-SI Master Directions require every loan above Rs 30,000 issued by an NBFCMFI as part of its “microfinance loans” to have a minimum maturity of 24 months, for which a matching funding source of similar maturity may not be available to it.

The issue has been offered in a price band of Rs 350-368 per equity share. The aggregate size of the offer is Rs 1079.34 crore to Rs 1134.85 crore based on lower and upper price band respectively. On performance front, total income increased by 37.60% to Rs 1201.34 crore for the financial year 2022 from Rs 873.08 crore for the financial year 2021 due to increases in revenue from operations and other income. The company’s profit for the year decreased by 50.49% to Rs 21.75 crore for the financial year 2022 from Rs 43.94 crore for the financial year 2021. Meanwhile, it plans to further grow its business operations by mining deeper and attracting new customers in its existing markets that remain relatively untapped as well as by entering new regions where borrowers are underserved and there is lower penetration by microfinance companies. It also plans to continue automating and digitizing various aspects of business, which would allow it to identify and capitalize on cross-selling and upselling opportunities, improve its understanding of customer behavior, develop and implement customer targeting and product personalization strategies, and enhance customer service using predictive analytics.