Has NRB's regulations hurt Business for Microfinance Companies in First Quarter? How have they played out?

Every economic downturn has a negative impact on financial institutions. During the Covid crisis, challenges arose for microfinance companies because of the nature of the business. They provide uncollateralized loans to their customers which could lead to huge losses for the industry if the loans default. During the fourth quarter of FY 2076/2077, microfinance companies had a huge provision in their books which they had to create because of the risk of default from their customers. This led to pressure on its profitability in the fourth quarter.

Talking about the first quarter, a lot of companies have created a huge provision but also written back a fair amount of provisions which has somewhat positively impacted their profitability.

So, let’s dissect the major indicators of the first quarter of all the microfinance companies.

Net Profit:

Deprosc Laghubitta Bittiya Sanstha Limited (DDBL) has reported the highest net profit in this quarter with a total of Rs. 19.80 crores. DDBL is followed by Sana Kisan Laghubitta Bittiya Sanstha Limited (SKBBL) which has reported a total of Rs. 14 crores. Swabhimaan Laghubitta Bittiya Sanstha Limited (SWBBL) has secured the third position with a net profit of Rs. 12.77 crores.

In this quarter 3 companies have reported a negative net profit and 17 companies have reported a decline in their net profit as compared to the corresponding quarter of the previous year.

Provision:

After the pandemic hit the nation, there was speculation as to how the bank would recover their loans since the country was in a lockdown. In the report published by the companies, all the companies have created a provision for the possible loan losses.

As per Q1 of FY 2077/2078, Adhikhola Laghubitta Bittiya Sanstha Limited (AKBSL) seems to have not created a provision account. When we observe the loans of the company, it doesn’t have disbursed many loans which might be a reason for lower/no provision. Mithila Laghubitta Bittiya Sanstha Limited (MLBBL) has created a provision of Rs. 1 Lakhs in this quarter.

The highest provision is created by Deprosc Laghubitta Bittiya Sanstha Limited (DDBL) amounting to Rs. 1.37 Arba.

Paid-Up Capital:

In terms of paid-up capital, Chhimek Laghubitta Bittiya Sanstha Limited (CBBL) and Nirdhan Utthan Laghubitta Bittiya Sanstha Limited (NUBL) has reported the highest paid-up capital amounting to Rs. 1.50 Arba. This is followed by NIC Asia Laghubitta Bittiya Sanstha Limited (NICLBSL) with a paid-up capital of Rs. 1.48 Arba.

The lowest paid-up capital is reported by Samaj Laghubitta Bittiya Sanstha Limited (SAMAJ) amounting to Rs. 2 crores.

Reserve & Surplus:

Nirdhan Utthan Laghubitta Bittiya Sanstha Limited (NUBL) has reported the highest amount of reserve amounting to Rs. 2.27 Arba. This is followed by Sana Kisan Laghubitta Bittiya Sanstha Limited (SKBBL) which has reported a reserve of Rs. 2.10 Arba. Chhimek Laghubitta Bittiya Sanstha Limited (CBBL) has reported a reserve of Rs. 1.77 Arba securing the third position.

Ghodaghodi Laghubitta Bittiya Sanstha Limited (GGBSL) has reported the lowest reserve of Rs. 15.63 thousand.

Borrowings:

Other than equity source and deposit, borrowings are also one of the major sources of funds for microfinance.

Sana Kisan Laghubitta Bittiya Sanstha Limited (SKBBL) has the highest amount of borrowings which amounts to Rs. 18.46 Arba. NIC Asia Laghubitta Bittiya Sanstha Limited (NICLBSL) has the second-highest borrowings amounting to Rs. 10.22 Arba. Similarly, Forward Microfinance Laghubitta Bittiya Sanstha Limited (FOWAD) has the third-highest borrowings with a total of Rs. 6.98 Arba.

Deposit:

In terms of Deposit, Chhimek Laghubitta Bittiya Sanstha Limited (CBBL) has collected the highest amount of deposit from its customers which amount to Rs. 19.89 Arba. CBBL is followed by Nirdhan Utthan Laghubitta Bittiya Sanstha Limited (NUBL) with a total deposit of Rs. 14 Arba. Similarly, Swabalamban Laghubitta Bittiya Sanstha Limited (SWBBL) has the third-highest deposit which amounts to Rs. 9.68 Arba.

RSDC Laghubitta Bittiya Sanstha Limited (RSDC) has no deposit in its books. The company has been disbursing loans from borrowings and equity financing.

Loans and Advances:

As of the first quarter of the fiscal year 2077/2078, Chhimek Laghubitta Bittiya Sanstha Limited (CBBL) has disbursed the highest amount of loans to its customers which amounts to Rs. 22.03 Arba. Similarly, Nirdhan Utthan Laghubitta Bittiya Sanstha Limited (NUBL) has reported the 2^nd highest amount of loan amounting to Rs. 20.43 Arba.

Till this quarter of Fiscal year, a total of Rs. 2.40 Kharba of loan has been disbursed by all the microfinance combined.

Net Interest Income:

In terms, of Net interest income, Nirdhan Utthan Laghubitta Bittiya Sanstha Limited (NUBL) has earned the highest net interest income with a total of Rs. 43.82 crores in this quarter. NUBL is followed by Chhimek Laghubitta Bittiya Sanstha Limited (CBBL) which has earned a total of Rs. 43.22 crores. Similarly, Deprosc Laghubitta Bittiya Sanstha Limited (DDBL) has earned a net interest income of Rs. 36.35 crores.

The industry average net interest income stood at Rs. 8.89 crores.

Earnings per share (Annualized):

As of the first quarter, Deprosc Laghubitta Bittiya Sanstha Limited (DDBL) has reported the highest number of earnings per share of Rs. 78.81 per share. Samaj Laghubitta Bittiya Sanstha Limited (SAMAJ) has reported the second-highest eps of Rs. 78.18 per share. Similarly, Forward Microfinance Laghubitta Bittiya Sanstha Limited (FOWAD) has reported an EPS of Rs. 71.48 per share.

The average EPS of the industry stood at Rs. 26.87 per share.

Net worth per share:

In terms of Net worth per share, Swabalamban Laghubitta Bittiya Sanstha Limited (SWBBL) has reported the highest number with Rs. 312.87 per share. This is followed by Sana Kisan Laghubitta Bittiya Sanstha Limited (SKBBL) with a net worth per share of Rs. 310.82 per share. Similarly, Forward Laghubitta Bittiya Sanstha Limited (FOWAD) has reported a net worth per share of Rs. 302.57 per share.

Out of 50 microfinance, 33 companies have reported below industry average net worth per share of Res. 166.45 per share.

Non-performing loan:

In terms of the non-performing loans, first microfinance Laghubitta Bittiya Sanstha Limited (FOWAD) and RMDC Laghubitta Bittiya Sanstha Limited (RMDC) has reported an NPL of 0.00%. This is followed by Samaj Laghubitta Bittiya Sanstha Limited (SAMAJ) with an NPL of 0.04%.

The highest NPL is reported by Samudayik Laghubitta Bittiya Sanstha Limited (SLBSL) with an NPL of 16.08%.

Capital Adequacy Ratio:

RSDC Laghubitta Bittiya Sanstha Limited (RSDC) has the highest CAR of 27.22%. This is followed by RMDC Laghubitta Bittiya Sanstha Limited (RMDC) with a CAR of 26.24%. NIC Asia Laghubitta Bittiya Sanstha Limited (NICLBSL) has reported a CAR of 20.60%.

Price to Earnings Ratio:

In terms of price to earnings, Deprosc Laghubitta Bittiya Sanstha Limited (
DDBL) has the lowest P/E of 10.77 times followed by Mithila Laghubitta Bittiya Sanstha Limited (MLBBL) with a P/E ratio of 14.33 times. Nadeep Laghubitta Bittiya Sanstha Limited (NADEP) has a P/E of 14.50 times.

The average P/E for the industry stood at 49.53 times. Out of all companies, 33 companies have reported a P/E below industry average in this quarter.

NOTE: Investors are requested to consider the current market price to calculate the latest P/E rather than using the P/E mentioned in the above chart for an investment decision.

Wrapping Up:

It is obvious that the financial sectors have been hit quite badly in this pandemic which can be seen from the reports. From interest rate slab 15% for microfinance to high provisioning has really had a major impact on the profitability.

Also, according to NRB's regulations, those with a lower capital base have to depend on mergers with other companies rather than the issuance of bonus shares and right share. However, this will play out better for the industry because the competition will be much lower than before.

Since the microfinance companies have a relatively higher risk of credit than other class of financial institutions, it is key for investors to frequently look at how the management of each company manages their asset quality.

So, considering all the factors how do you think the microfinance industry will play out?