RSDC Laghubitta Bittiya Sanstha Limited (RSDC): A Twelve - Year Financial Performance Review (Q4 2071/72 to Q4 2082/83)

Background of RSDC Laghubitta Bittiya Sanstha Limited (RSDC)

RSDC Laghubitta Bittiya Sanstha Ltd. (RSDC) is a national-level "D" class financial institution, registered under the Company Act-2063 and the Bank and Financial Institution Act-2063. It is licensed by Nepal Rastra Bank and stands as the third institution of its kind, as well as the first and only wholesale microfinance institution with its registered office outside the Kathmandu Valley. RSDCMF began operations on 26th Bhadra 2070 (11th September 2013) from Butwal, located in western Nepal. At its inception, the institution had an authorized capital of NPR 20 crore, issued capital of NPR 10 crore, and paid-up capital of NPR 6 crore.

Currently, the ownership structure of RSDCMF consists of 51% capital held by its promoters and 49% allocated to the public as ordinary shares. The major promoters include the Rural Self-Reliance Development Centre (RSDC), Global IME Bank Limited, and individual investors from various districts across Nepal.

It is one of Nepal's wholesale microfinance institutions. Its business model involves borrowing funds from upper-class BFIs and Property alleviation and lending them to retail microfinance institutions. It plays the role of a financial funding intermediary. The organization has completed 12 years of operation. This article evaluates its 12-year financial journey and performance over the period from Q4 2071/72 to Q4 2082/83.

Balance Sheet Analysis

Assets

The total assets of RSDC have followed a steady growth pattern. As of Q4 2071/72, total assets stood at Rs. 54.62 crore, increasing to Rs. 5.66 billion by Q4 2082/83. Over the review period, total assets recorded a median annual growth rate of 23.41%. The trends of the major asset components are discussed below.

1. Cash and Cash Equivalents

Cash and cash equivalents increased from Rs. 3.39 crore to Rs. 1.18 billion. Holding cash and cash equivalents above the regulatory requirement is generally not considered efficient for banks. It reached maximum on Q4 2081/82 at value Rs. 1.83 billion.

2. Loans and Advances to MFIs & Cooperatives

Lending to MFIs and cooperatives has successfully expanded RSDC's core lending business. Loans and advances recorded a median annual growth rate of 23.29%, increasing from Rs. 50.71 crore in Q4 2071/72 to Rs. 4.24 billion by Q4 2082/83. During the 12-year review period, RSDC achieved its highest lending portfolio of Rs. 6.73 billion in Q4 2079/80. Since then, the lending portfolio has been on a declining trend.

3. Total Assets

Within total assets, loans and advances to MFIs accounted for 92.84% in Q4 2071/72, decreased to 74.91% by Q4 2082/83. Meanwhile, cash and cash equivalent has higher proportion in total assets as of Q4 2071/72 it was 6% to total assets and increased to 20.87% as of Q4 2082/83.

Liabilities

Total liabilities (excluding equity) stood at Rs. 47.67 crore in Q4 2071/72. They increased by 9.04 times, reaching Rs. 4.31 billion by Q4 2082/83. Borrowings, the institution's core liability, grew at a median annual rate of 27.05%, increasing from Rs. 47.49 crore to Rs. 4.20 billion. Meanwhile, total liabilities and equity combined increased from Rs. 54.62 crore to Rs. 5.66 billion. The major liability trends are discussed below.

1. Borrowings

Borrowings from upper-class BFIs and other institutions increased at a median annual rate of 27.05%. Within total liabilities (excluding equity), borrowings accounted for 100% in Q4 2071/72 and remained almost unchanged at 98% by Q4 2082/83. This indicates that the institution remains highly dependent on borrowings and may need to diversify its funding sources by utilizing other financial instruments.

2. Other Liabilities

Other liabilities showed a steadily increasing trend throughout the review period. From Q4 2071/72 to Q4 2082/83, they increased significantly from Rs. 18.06 lakh to Rs. 4.77 crore. This category reached its highest level in previous year Q4 2081/82.

3. Total Liabilities

Total liabilities followed a trend similar to borrowings, recording a median annual growth rate of 10.78%. Since borrowings constitute the largest portion of total liabilities, their growth closely mirrored the overall liability trend.

4. Equity Analysis

Total equity of RSDC increased at a median annual growth rate of 10.78%. During the same period, share capital grew at a median annual rate of 9.00%, while reserves increased at a median annual rate of 13.22%.

Profit and Loss Analysis

1. Interest Income and Interest Expense

Interest income and interest expense represent the institution's core revenue-generating activities and the cost of funding those assets, respectively. Interest income declined after reaching its peak of Rs. 94.86 crore in Q4 2079/80. Thereafter, both interest income and interest expense decreased steadily. By Q4 2082/83, interest income had fallen sharply to Rs. 41.47 crore.

Notably, during the declining interest rate environment, RSDC reduced its funding costs more rapidly than its lending yields. As a result, the net interest margin did not decline in the same proportion. This was mainly because wholesale microfinance institutions were able to obtain borrowings at relatively lower costs from upper-class BFIs due to excess liquidity in the banking system.

2. Operating Profit and Net Profit

Operating profit reflects the institution's profitability before taxation and provisioning, while net profit represents earnings attributable to shareholders.

RSDC recorded its highest-ever net profit of Rs. 14.66 crore in Q4 2070/81. Overall, the institution's net profit has been observed stable in fluctuating in between Rs. 10 crores to Rs. 15 crores for last 5 years.

3. Expenses

Interest expense remains RSDC's largest expense and is considered the primary direct cost in the banking industry. This expense has shown a declining trend in line with falling market interest rates and declining business volume.  The next major expense is income tax, followed by staff costs. Staff cost increased sharply from 2077/78 to 2078/79 by 1.73 times. Relatively that’s time business growth justify staff expenses but declining business and increasing staff cost need to notice. Other operating expenses remained relatively low throughout the review period.

Trends in Key Performance Indicators

Earnings Metrics

Earnings Per Share (EPS)

RSDC's Earnings Per Share (EPS) has experienced considerable relatively stable in lower zone. Over the past twelve fiscal years, EPS reach peak of Rs. 25.04 on Q4 2072/73 than declined with higher rate for two fiscal year and then stayed in between Rs. 10 – 15 range for remaining years. This trend reflecting changes in profitability and the overall operating environment.

EPS remained relatively stable within the range of Rs. 10 - 15 up from Q4 2074/75. As of Q4 2082/83, EPS stood at Rs. 14.18.

Efficiency Measures

Return on Equity (RoE)

RoE broadly mirrors the movement in EPS. The ratio declined to 7.68% in Q4 2074/75 and 7.92% on Q4 2081//82 due to weak profitability. In remaining fiscal years, it stayed around to 10.00%. As of Q4 2082/83 it achieved 10.20%.

Return on Assets (RoA)

RoA followed a similar trajectory to RoE. During the review period, it was lowest at 1.25% in Q4 2081/82 latter rebounded and reached its highest level of 2.44% again in Q4 2082/83. The FY 2082/83 figure of 2.44% represents the highest RoA during the entire review period, indicating improved efficiency in utilizing total assets to generate profits.

Valuation Multiples

Price-to-Earnings (P/E) Ratio and Price-to-Book (P/B) Ratio

RSDC's P/E ratio has been observed relatively stable. The ratio reached a peak of 172.32 times in Q4 2073/74 because of higher market price. From Q4 2074/75 onward, the P/E ratio again followed an stable trend fluctuating with low margin. As of Q4 2082/83, it stood at 48.61 times.

Similarly, the P/B ratio peaked in Q4 2073/74 because of the exceptionally high market price. Thereafter, it consistently remained below 10 times, with a median of 4.70 times over the past 12 years. This indicates that the market price has generally grown faster than the institution's net worth per share. During the review period, RSDC maintained an median Net Worth Per Share (NWPS) of Rs. 125.22.

Health Indicators

RSDC has consistently maintained its Capital Fund to Risk-Weighted Assets Ratio (CAR) at a healthy level, demonstrating a strong capital position.

The institution has also maintained an efficient lending position. As of Q4 2082/83, the Credit-to-Deposit (CD) ratio stood at 100.96%. Except 2081/82, then since Q4 2078/79, the CD ratio has remained above 100%. This is because RSDC is a wholesale microfinance institution that primarily deals with institutional borrowing and lending rather than retail deposit collection.

Despite being a wholesale microfinance institution, RSDC's Non-Performing Loan (NPL) ratio has shown an increasing trend. Before Q4 2073/74, the institution reported virtually no NPLs. However, from Q4 2079/80, NPLs have gradually increased. As of Q4 2082/83, the NPL ratio stood at 3.92% of total loans, mainly reflecting the inability of some retail microfinance institutions to repay wholesale borrowings on time.

Dividend History

RSDC has maintained a moderately dividend distribution history. The institution declared its highest total dividend of 16.00% in FY 2075/76. Over the review period, RSDC maintained a median annual total dividend of 10.76%. Although the dividend payout has been moderately, one positive aspect is that the institution has consistently distributed dividends to its shareholders every year.

Note: This article provides an analysis of RSDC's financial statements only and does not attempt to draw any conclusions or make any judgments.

Data: The data for this article has been taken from SS Pro by ShareSansar.