Geographical concentration risk: Significant portion of loan portfolio originates from South India, Belstar Microfinance’s DRHP
Belstar Microfinance Ltd has disclosed that in the past, it has received an observation from the Reserve Bank of India (RBI) in its inspection report in relation to higher geographical concentration of its loan assets / portfolio in the states of Tamil Nadu, Kerela and Karnataka.
As of December 31, 2023, South India (including Tamil Nadu, Karnataka and Kerala) and Rest of India accounted for 63.94 per cent and 36.06 per cent, respectively, of the MFI’s overall gross loan portfolio (GLP) of ₹8,834.2 crore, per the company’s Draft Red Herring Prospectus (DRHP) filed with SEBI for its upcoming IPO.
“We have responded to the observation and seek to address the geographical concentration risk through our well defined geographic diversification strategies,” per the DRHP.
The company emphasised that while its operations have historically been concentrated in South India, it has in recent years expanded into the rest of India and has a total of 461 branches outside South India as of December 31, 2023, representing 45.69 per cent of its total 1,009 branches as of December 31, 2023.
Additionally, 89.70 per cent of the new branches opened during the nine-month period ended December 31, 2023 are outside Tamil Nadu (TN).
Portfolio concentration in TN
A significant portion of Belstar’s GLP originates from Tamil Nadu, and any adverse developments such as economic slowdown or any other negative developments, including political unrest or other events, in this region may have an adverse effect on its business, cautioned the DRHP.
As of December 31, 2023, 48.46 per cent of the Chennai-based microfinance institution’s overall gross loan portfolio of Rs 8,834.2 crore was derived from loans originating from Tamil Nadu, per the risk factors mentioned in the DRHP.
The MFI highlighted that in the event of an economic slowdown in Tamil Nadu, or any other negative developments, including political unrest or other events, it may experience an adverse effect on its business, financial condition and results of operations, due to, among others, the stress such events cause on the borrowers’ ability to honour their loan obligations.
Geographical expansion
Moving forward, Belstar Microfinance plans to continue to undertake our geographical expansion to four key states, namely Karnataka, West Bengal, Bihar and Uttar Pradesh, with the twin objective of reducing its concentration in Tamil Nadu and to further expand the business in geographies that have more unbanked population, which would allow the Company to gain more market share.
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The company provides Micro Enterprise Loans (93.94 per cent of GLP), Small Enterprise Loans (4.84 per cent), festival loans (0.56 per cent), education loans (0.60 per cent), Consumer Goods Loan (0.04 per cent) and emergency loans (0.02 per cent).
Belstar Microfinance Ltd is planning an initial public offer (IPO) aggregating up to ₹1,300 crore. The IPO will comprise two components — fresh issue (of equity shares of face value ₹10 each aggregating up to ₹1,000 crore) and Offer for Sale (OFS) (of equity shares of face value ₹10 each aggregating up to ₹300 crore).
The selling shareholders in the OFS are: MAJ Invest Financial Inclusion Fund II K/S, Arum Holdings Limited and Augusta Investments Zero Pte Ltd
According to a CRISIL Rating report on Belstar Microfinance, the company was incorporated in January 1988, in Bengaluru. It obtained a non-banking financial company (NBFC) license from the Reserve Bank of India in March 2001, and was reclassified as an NBFC-MFI in 2013. T
The company was acquired by the Hand-in-Hand group, a non-governmental organisation, in September 2008. Muthoot Finance, the largest gold loan NBFC in the country, made an equity investment in Belstar in 2016, and holds a 57 per cent stake as on March 31, 2023.