Industry Language – 10X10Y

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In my previous article, I calculated the Economic Profit of multiple Industries and their segments. The final calculations resulted in the Gold Finance segment emerging victorious in the NBFC space with the highest profitability; an Economic Profit of a stunning 16.82%. This also helped me reach the conclusion on which company i shall be doing my further research on ; Manapppuram Finance, the smaller player in the Doupoly Industry.

The following articles consists commonly used terms in the NBFC industry, specifically the Gold Loan Industry. I have also added their meanings which would make it easier for anyone to read my forthcoming research articles, or even any other NBFC article for that matter.

I have also gone a step ahead and added every term’s reference to Manappuram Finance Limited (a company I shall be extensively researching on).

Here you go :

Asset and Liability Management (ALM) – ALM is defined as the practice of managing risks arising due to mismatches in the asset and liabilities. This mismatch is also called Asset-liability mismatches refers to situations when there’s a disconnect between a company’s short-term assets and its short-term liabilities. 

      IL&FS crisis happened mainly for the reason of its Asset-liability mismatch. It used short-term borrowing to fund long-term lending. Manappuram Finance Ltd., deals predominantly in short-term loans and is therefore comfortably placed in respect of ALM.

Asset Quality –  Asset Quality is an evaluation of a particular asset, stating the amount of credit risk associated with it. Lower the chances of loan(asset) default, higher the asset quality. Assets Quality of an NBFC is determined two key metrics of Gross NPA and Net NPA.

Assets Under Management (AUM) – For an NBFC, Assets under management (AUM) is the total amount of loans disbursed by an entity. AUM is a key metric to analyse any NBFC. Higher the better. Some other names for AUM in the Gold Loan industry are Gold Loan Book, Gold Loan Assets, Gold Loan Portfolio

     Manappuram’s Gold Loan AUM stood at ₹ 16,967 crores in FY20 increasing 30.9% over the previous year.

AUM per branch –  AUM per branch is calculated by dividing the Consolidated AUM by the total number of branches. It is a metric to determine the efficiency of every branch/office. 

     Manappuram Finance in FY20 had an AUM per branch of ₹ 5.58 crores. 

Average Yield – Also known as Average Yield on Advances is used to calculate the returns a financial institution is making on its loans.      Yield on advances= Interest earned/Advances. It is a key metric to judge the company’s performance.

         Manappuram’s Housing Finance subsidiary showed an Improvement in average yield to 15.2% in FY20 from 14.7% a year back.

Basic Earnings Per Share (EPS) – Basic earnings per share (EPS) tells investors how much of a firm’s net income was allotted to each share of common stock. Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock.The higher a company’s EPS, the more profitable it is considered.
      Manappuram had a Basic EPS of ₹14.58 in FY20 vs ₹9.38 in FY19.

Book Value Per Share (BVPS) – The book value is the total equity, or net asset value, of a company. Since public companies are owned by shareholders, this is also known as the Total Shareholders’ Equity or Net Worth. To get the book value, you must subtract all the company’s liabilities from the company’s total assets. This Book Value when divided by the total outstanding shares gives us Book Value Per Share. BVPS increasing at a constant rate is a healthy indicator.

     Manappuram’s BVPS is currently ₹68 and has grown at a CAGR of 15.71% in the last five years. 

Bullet Payments – A bullet is a one-time lump-sum repayment of an outstanding loan, made by the borrower, typically towards the end of the loan tenure. 

           Prior to 2013, Manappuram allowed borrowers to make bullet payments of interest and principal. However, the downside of this became visible in 2013 when there was a sudden and sharp correction in gold prices which led to higher defaults and credit losses. In response, the industry as a whole shifted to periodic (monthly) collection of interest, commonly known as EMIs.

Compounded Annual Growth Rate (CAGR) – Compound Annual Growth Rate (CAGR) is a measure of the average yearly growth over a certain time period.
      Manappuram Finance has delivered compounded annual (CAGR) shareholder returns of 48 per cent during the decade.

Capital Adequacy Ratio (CAR) –  Capital Adequacy Ratio measures how much capital a bank has with it, as a percentage of its total credit exposure. Bank regulators enforce this ratio to ensure credit discipline in order to protect depositors and promote stability and efficiency in the financial system. 
      The minimum capital adequacy ratio an NBFC should maintain is 15%, as per RBI. Manappuram has a CAR of 21.74% as on 31st March, 2020.

Commercial Papers – Commercial paper is a commonly used type of unsecured, short-term debt instrument issued by corporations, typically used for the financing of payroll, accounts payable and inventories, and meeting other short-term liabilities.

      Manappuram Finance raised ₹ 12,966 crores through commercial papers in FY20.

Commercial Vehicle Loans – Commercial vehicle loans are loans offered to borrowers for the purchase of vehicles for commercial or business purposes.

     Manappuram Finance Limited also provides commercial vehicle loans.

Consolidated Assets Under Management (Consolidated AUM) – Consolidated AUM refers to the total AUM of all subsidiary entities and the parent entity added together.

        Consolidated AUM of Manappuram Finance during FY20 was at ₹ 25,230 crores, which included AUM of 16,967 (Gold Loan) and AUM from other subsidiaries such as Asirvad microfinance, Housing finance, Vehicle and equipment microfinance.

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Co-operative banks – Co-operative banks are financial entities established on a co-operative basis and belonging to their members. This means that the customers of a co-operative bank are also its owners.

         Co-operative banks also provide gold loans to its members.

Cost of borrowings – Borrowing cost can be defined as the effective interest rate a company pays on its debts. 

    Manappuram’s Cost of borrowings was 9.46% in FY20.

Debt/Equity (D/E) – The debt-to-equity (D/E) ratio is calculated by dividing a company’s total liabilities by its shareholder equity. 

     Manappuram’s leverage increased D/E to 3.27 in FY2019-20 from 2.9 in FY2018-19.

External commercial borrowing (ECB) – ECB is basically a loan availed by an Indian entity from a non-resident lender. Most of these loans are provided by foreign commercial banks and other institutions.

     Around 63% of the consolidated borrowing (including off balance sheet funding through securitisation and ECBs) was from banks (public and private) and financial institutions.

Employee Attrition – Employee attrition is defined as the natural process by which employees leave the workforce for example, through resignation for personal reasons or retirement and are not immediately replaced. A high attrition rate means that your employees are leaving frequently, while a low rate indicates that you’re keeping your employees for longer periods of time.

    Manappuram’s Employee attrition was around 25% at the field level in FY20.

Fiscal Year (FY) – FY is a one-year period that companies and governments use for financial reporting and budgeting. It’s also known as Financial Year or Budget Year. FY20 refers to year 2019-2020.

Gold Loans – Gold Loans (also called loan against gold) is a secured loan taken by the borrower from a lender by pledging their gold holdings as collateral.

Gold Holding – Gold holding was the gold held by Gold Loan companies which has been pledged by borrowers. 

      Manappuram’s Gold holding in FY20 was 72.4 tonnes vs 67.51 tonnes in FY19.

Gross loans – Gross Loans refers to the total disbursements/AUM. Gross Loan minus impairment loss allowance = Net Loans.

        Manappuram’s Gross Loans in FY20 stood at ₹ 23,530 Crores and Net Loans at ₹ 23,189 Crores.

Interest Rate – The interest rate is the amount a lender charges to borrowers for the money lent, expressed as a percentage of the principal.

      Manappuram charges interest rate between 11%-24% per annum. 

Interest Coverage Ratio – The interest coverage ratio is a metric used to determine how easily a company can pay interest on its outstanding debt. Higher the better. The interest coverage ratio is calculated as EBIT divided by Interest Epense.

         Manappuram’s Interest Coverage Ratio remained in-line with the previous year at 2.21 in FY2019-20 similar to 2.20 in FY2018-19.

In the money (ITM) – With reference to NBFCs, a loan is in the money, when the outstanding loan principle amount and interest due in lower than the market value of the asset pledged.      

      Lower LTV and rising gold prices enables Manappuram to keep their loans in the money.

Know Your Customer (KYC) – Know Your Client or Know Your Customer is a standard in the investment industry that ensures investment advisors know detailed information about their clients’ risk tolerance, investment knowledge, and financial position

Loan Sell-Downs – Loan Sell-Downs is one of the methods of raising funds and liquidity for NBFCs, wherein they sell a portion of their loan portfolio to investors such as banks. This is done so that NBFCs can get liquidity and free up capital for fresh lending. 

Lenders like SBI can purchase NBFC loan portfolios through two routes—via ‘direct assignment’ and securitisation via ‘pass-through-certificates’.

In the case of ‘direct assignment’ (DA), the bank would buy a loan portfolio from a specific NBFC. It would do due diligence, negotiate a price and move forward accordingly. Portfolios purchased through this route would reflect on the bank’s loan book. The bank would also bear the credit risk that may emerge out of these portfolios.

     Manappuram raised close to ₹ 1,274 crores through direct assignment in FY20.

In the case of ‘pass-through-certificates’(PTC), assets would be pooled together and rated by rating agencies. The pool would then be opened up for investment by banks. Banks who invest in these certificates would show them as part of the investment book.

     Manappuram raised close to ₹ 589 crores through pass-through-certificates in FY20.

Loan Tenure – Loan Tenure is the pre-agreed time period between the lender and borrower, for the borrower to repay the principal and interest in full to the lender.

      The average loan tenure of a gold loan by Manappuram was around only 58 days in FY20.

Loan against Property (LAP) – Loan against property is nothing but a loan which you avail by keeping your commercial/residential property as a collateral.

Loan-To-Value (LTV) Ratio – Loan-to-value (LTV) is the ratio of a loan to the value of an asset pledged.
            For Gold pledged worth Rs.1Lac, Manappuram is allowed by RBI to give loans upto 90% LTV, or in the other words, a maximum of Rs.90,000. Manappuram had an average LTV of around 59% in FY20.

Liquidity Risk – Liquidity risk refers to the risk that a company may not meet its financial obligations. Liquidity risk arises due to the unavailability of adequate funds at an appropriate cost or tenure.

    Manappuram said the following in its Annual Report about its Liquidity Risk that the Group consistently generates sufficient cash flows from operating and financial activities to meet its financial obligations as and when they fall due.

Market Penetration – Market Penetration refers to level of reach of banks to it’s customers. Higher market penetration means a customer can easily access the services provided. 

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     Gold Loan NBFCs have a high market penetration. Manappuram had 4,622 operational branches as of FY20.

Mode of Disbursal – Disbursement is the act of paying out or disbursing money by the lender to the borrower. The mode refers to the method of payment used. 

      Mode of Disbursal for Manappuram is Cash payment up to ₹20,000; above that amount, direct transfer to customer bank account.

Market Capitalisation – Market capitalisation refers to the total rupee market value of a company’s outstanding shares of stock. Commonly referred to as “market cap,” it is calculated by multiplying the total number of a company’s outstanding shares by the current market price of one share.

     Manappuram Finance Limited had a Market capitalisation of ₹ 13,658 crores as on 7th August ‘20.

Microfinance – Microfinance is a way to provide loans/finance to the low-income population of the underdeveloped parts of India, who otherwise would have no other access to financial services except for Gold Loans. 

       Manappuram’s Microfinance business is an industry outperformer with its AUM crossing ₹ 5,503 crores, clocking an increase of 43.3% as on 31st March ‘19.

Microfinance Institutions (MFI) – These are organisations providing microfinance (discussed above). 

     Manappuram’s microfinance subsidiary, Asirvad Microfinance Ltd. is amongst the lowest cost providers of microfinance loans in India.

Non-banking financial companies (NBFCs) – Also known as nonbank financial institutions (NBFIs), are financial institutions that offer various banking services but do not have a banking license.

        Few listed NBFCs are Manappuram Finance, Muthoot Finance, CanFin Homes, etc.

Non-Convertible debentures(NCDs) – NCDs are a financial instrument that is used by companies to raise long term capital. This is done through a public issue. NCDs are a debt instrument with a fixed tenure and people who invest in these receive regular interest at a certain rate.

     Manappuram Finance Limited’s subsidiary, Manappuram Home Finance Ltd. raised about ₹100 crores via Non-Convertible Debentures (NCDs) in FY20.

Net interest income (NII) – Net interest income is a financial performance measure that reflects the difference between the revenue generated from a bank’s interest-bearing assets and expenses associated with paying on its interest-bearing liabilities. Simply put, Net interest income = Interest earned – Interest paid. 

       Manappuram’s NII is FY20 was ₹3,633 Crores 

Net interest spread – Net interest spread refers to the difference in borrowing and lending interest rates of financial institutions. 

     Manappuram’s FY20 Consolidated Net interest spread was 15%

Net Profit Margin – A net profit margin ratio is a profitability ratio that measures the amount of net income earned with each rupee of sales generated. Net profit margin is an indication of how effective a company is at cost control. The higher the net profit margin is, the more effective it is at converting sales into actual profit.

    Manappuram’s net profit margin improved from 23.1% in FY18-19 to 28.5% in FY19-20 as the lower tax rates and improved business volumes resulted in higher profit in relation to the turnover.

Nidhi Companies – Nidhi Company is a non-banking financial business structure. Nidhi Company performs the functions of lending and borrowing of money within its members. Nidhi Company promotes the art of saving and utilization of funds within its member community. These companies are more popular in South India, and 80% of Nidhi companies are located in Tamil Nadu.

    Nidhi Companies also provide Gold Loans and are considered to be part of the Organized Gold Loan industry. 

Net Realisable Value (of gold) -. Net realizable value (NRV) is the value of an asset that can be realized upon the sale of the asset, less a reasonable estimate of the costs associated with the eventual sale or disposal of the asset. Gold should be valued at prevailing market price.

Non Performing Asset (NPA) – As per guidelines issued by the RBI, banks/NBFCs classify an account as NPA only if the interest due and charged on that loan account is not serviced fully within 90 days from the day it becomes payable.

          Gross NPA – Gross NPA is the summation of all loan assets that are classified as NPA as per RBI guidelines (mentioned above). Gross NPA Ratio is the ratio of total gross NPA to total advances (loans) of the bank. 

          Manappuram’s FY20 Gross NPA (consolidated) was 0.88%.

           Net NPA = Gross NPAs – Provisions.

            Manappuram’s FY20 Net NPA (consolidated) was 0.54%.

Organized Industry and Unorganised Industry – Organized Industry is a sector where companies are registered by the government and have to follow rules and regulations and vice-versa for the unorganised industry.
    The organised Gold Loan industry is where companies like Manappuram Finance and Muthoot Finance operate whereas the unorganised Gold Loan industry is where local moneylenders and pawnbrokers operate.
    As on 31st March ‘19, the Gold loan sector continues to be dominated by unorganised players who still command an estimated 65 percent market share and just 35% by the organised players.

Outstanding Loan Amount – Outstanding amount is the loan amount which has to be repaid by the borrower to the bank on a particular date. It is the sum total of principal amount plus interest charged to the loan account then and there less the principal and interest repaid by the borrower till the date of calculation outstanding balance.

Personal Loan – Personal Loan is an unsecured credit provided by financial institutions based on criteria like employment history, repayment capacity, income level, profession and credit history. Personal Loan, which is also known as a consumer loan is a multi-purpose loan, which you can use to meet any of your immediate needs.

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Pre-Provisioning Profit – Pre-provision operating profit (PPOP) is the amount of income a bank or similar type of financial institution earns in a given time period, before taking into account funds set aside to provide for future bad debts.

Processing Fee – Processing fee are the charges levied on the borrower by the bank to provide the services or initiate the process be it a loan or credit card transaction.

     Gold loan NBFCs charge Nil or minimal processing fees.

Priority Sector Lending (PSL) – Priority Sector Lending is an important role given by the (RBI) to the banks for providing a specified portion of the bank lending to few specific sectors like agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections. .

PSU (Public Sector Undertaking) – A state-owned enterprise in India is called a public sector undertaking (PSU) or a public sector enterprise. Those companies are owned by the union government of India or one of the many state or territorial governments or both. The company stock needs to be majority-owned by the government to be a PSU.

    Few PSUs are BHEL, BPCL, ONGC, SAIL, etc.

Public Banks/Public Sector Banks – Public sector banks are those where majority of the stake in the bank is held by government. Where as in private sector bank/private banks, majority is held by shareholders of the private bank. 

           SBI is a public bank and ICICI is a private bank.

Repayment –  Repayment is the act of paying back money previously borrowed from a lender. 

Return on assets (ROA) – ROA is an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company’s management is at using its assets to generate earnings.

      Manappuram reported ROA of 5.7% for FY 2019-20.

Return on equity (ROE) / Return on Net Worth (RoNW) – ROE/RoNW is a measure of financial performance calculated by dividing net income by shareholders’ equity. It is a key metric for judging how well the company can use it’s shareholder’s money to make profits. Higher the ROE, the better.

     Manappuram’s consolidated ROE was 28.16% in FY20.

Regulatory Body – These are independent governmental bodies established by the government in order to set standards in a specific field of activity, or operations and then to enforce those standards.

   RBI is the Regulatory Body for Gold loan NBFCs.

Reserve Bank of India (RBI) – The Reserve Bank of India is India’s central bank, which controls the issue and supply of the Indian rupee. RBI is the regulator of the entire Banking in India.

Repayment Plans – A repayment plan is a way to pay back a loan over an extended period of time. 

     Gold Loan NBFCs earlier predominantly worked in Bullet Repayments schedule (discussed earlier), but has now shifted to EMIs

Sister Concerns –  Sister Concerns are two or more separate enterprises owned by the same owners/Corporates. One parent company can have one or many subsidiaries , which all are sister companies to each other.

Small Finance Bank (SFB) – Small Finance Banks is a specific segment of banking created by RBI under the guidance of Government of India with an objective of furthering financial inclusion by primarily undertaking basic banking activities to un-served and underserved sections including small business units, small and marginal farmers. Ex. – Ujjivan Small Finance Bank, AU Small Finance Bank, Equitas Small Finance Bank, etc.

Self-help group (SHG) – An SHG is a financial intermediary committee usually composed of 10 to 20 local women or men who are on daily wages. They form a group and from that group, one person collects the money and gives the money from their collective savings to the person who is in need, in times of emergency or financial scarcity. 

      SHG along with MFI and Gold Loans are the few methods for the Low income households to take loans.

SME – SME stands for Small and Medium Enterprises. A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore and a medium enterprise is an enterprise where the investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore.

Ticket Size – In NBFC industry language, this refers to the average amount of loan disbursed to borrowers. 

   Manappuram had an average ticket size of about ₹ 38,500 in FY20.

Turnaround Time – Turnaround time is the time from the point the application for a loan is submitted by a customer until the final disbursal of the loan amount.

       The Turnaround Time for Gold Loans NBFCs is 5 to 10 minutes for Gold Loans compared to 1 Hour for Banks providing the same.

Trailing 12 Months (TTM) – Trailing 12 months (TTM) is a term used to describe the past 12 consecutive months of a company’s performance data, that’s used for reporting financial figures. The 12 months studied do not necessarily coincide with a fiscal-year ending period.

This post will be a work of continuous modification as and when i come across new Industry Terms. 

Thank You.

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Moulik Jain

Moulik Jain

Moulik is 24, an Entrepreneur, and a successful Angel Investor at Beardo (exited). He is currently one of India's youngest Angel Investors.
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