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SKS MicroFinance Case Analysis_Final

SKS MicroFinance Case Analysis_Final

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Published by: Ravish Sharan on Sep 07, 2012
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By, Anand Tajpuriya (C058) Ajinkya Zingade (C062

Shrey Agarwal Saurabh Agrawal Karan Ahuja Abhey Bansal (D002) (D004) (D005) (D010)

SKS Microfinance


Grameen Bank
• Grameen Bank (GB) was initiated as a challenge to the conventional banking which had no place for the poor
• Began as the Grameen Bank Project in 1976; which was established as a Bank in 1983 • Promotes Credit as a Human Right • Grameen Bank gives collateral-free loans. Provides loans and financial services without any legally enforceable contact • Preference for giving loans to women • Provides services at the door-step of the poor • Owned by the poor borrowers

SKS Microfinance


Grameen Bank – Contd.
Some Key Points related to GB: • Loans can be received in a continuous sequence • All loans are to be paid back in regular installments • More than one loan can be received simultaneously • Has both compulsory and voluntary savings • Replicated in more than 100 countries around the world Why does SKS require Capital? Facts & Figures (as on Oct ‘11): • GB has 8.349 million borrowers. Of which, 97% are women • Branches -2,565 ; Villages covered - 81,379 villages covering more than 97% of total villages in Bangladesh
SKS Microfinance 3

Professor Yunus and Ms. Taslima Begum with Nobel Peace Prize. 2006 (efforts in Economic & Social Development) SKS Microfinance 4 .

12.Case Overview • Microfinance is an effective tool that can help reduce poverty and spread economic opportunity by giving poor people access to financial services. SKS Microfinance 5 . such as credit and insurance. • SKS uses the group lending model • Borrowers undergo financial literacy training and must pass a test before they are allowed to take out loans.000 to Rs. SKS distributes small loans that begin at Rs. • Weekly meetings with borrowers follow a highly disciplined approach. 2.000 (about $44-$260) to poor women so they can start and expand simple businesses and increase their incomes. • Re-payment rates on our collateral-free loans are more than 99% because of this systematic process.

BA from Tufts University Management Consultant with Mckinsey prior to SKS Vikram Akula COO of SKS Microfinance Head. a subsidiary of ANZ Grindlays Bank plc Prior to this he worked with American Express and Standard Chartered Bank M R Rao Jennifer Leonard CFO of SKS Microfinance 1 year with NGO.Organization Founder and CEO of SKS Microfinance PhD from University of Chicago. 4 years in equity research with Merril Lynch SKS Microfinance 6 .Alternate Channel ING Vysya Life Insurance2004 – 2006 (2 years) AVP 1992 – 1995 (3 years) Esanda FinANZ.

• SKS became 3rd largest MFI • 380000 members • Portfolio of Rs 175cr • Expanded to 11 states SKS Microfinance Loan Portfolio Fragmented structure 7 .Snapshot of SKS Microfinance Use of Technology Leveraging best practices for scaling Profit Oriented Model 3 C’s Lack of capital Capacity constraints High cost of delivering micrloans Lack of trust in SKS and on Vikram Akula Resulted in volunteer-run foundation “the Indian Development Service” Managed to raise start-up capital $52000 to found SKS as NGO Need of Highly efficient service delivery model SHARE Spandana SKS SKDRDP MMFL SKS grew at an impressive rate Borrower base expanded by 200%-300% By 2007.

SKS Approach • SKS Microfinance follows the Joint Liability group Model. • SKS follows a clear process in its operations – – – – – Village selection Projection meeting Group Formation Compulsory Group Training Centre Meetings SKS Microfinance 8 . utilizing five member groups where groups serve as the ultimate guarantor for each member. The methodology involves lending to individual women.

1% But this customer segment would not get loans from bank and even if they got it the cost of commute to & fro was high How did SKS reduce cost? Reduced manual processing errors and confusion from variance in process by installing Portfolio Tracker The system captured all the data and tracked delivery of loans 9 SKS was nicknamed “Starbucks of India SKS Microfinance .6% to 28.Other Costs .Provisions Interest rates higher as compared to the banks • Labor intensive business • Weekly loan officer visits • Extensive traveling • Low ticket size • Poor Infrastructure Higher interest rates of around 23.MFI Operating Income Operating Income = Income generated through interests from loan products .Salaries .Benefits .

blanket weaving. flour grinding etc Market Sizing – Estimated market size Rs 4.5 Trillion – Even if probabilities are taken into account market size is Rs 200 Billion – Current penetration is less than 6% The SKS way What all does the customer do to get a loan? • • • • Bears the transaction cost Uses up saving to make initial payments Attend 5 one-hour training Attend weekly centre meetings SKS Microfinance Why loans only to Women? • Lesser risk • More cooperative • Likely to re-invest • Positive impact 10 . earning less than $1-$2 a day Potential market size for this profile – 150 M households Estimated Credit Demand – Rs 30K Occupations they were typically involved in – Production. candle making. poor woman.Client • • • • Typical customer – Rural.

and an annual revenue of approximately $10 Million SKS Microfinance 11 .The Structure Loan Officer Branch Unit Each unit had 6 or so branches under it • Conducted meetings in the day time • Recruited new clients in the night • Served 330 clients each Each Branch had a cashier. 5-7 loan officers and a branch manager Area 5 or so units formed an area At maturity an area was projected to have 30 branches. 135 thousand customers. a portfolio of $20 Million.

high transaction costs.Competition The Competitors – Large Commercial banks ruled out – RRBs and Cooperatives – Had Government subsidies But Were bureaucratic. corrupt employees and required cleints to travel – SHG model which was adopted but had poor repayment rate – Money lenders Other MFIs were the strongest Competitors • There were 10 large MFIs and there were 1000 small MFIs but the small MFIs had only 20% of the market as compared to the large MFIs SKS’s Competitive advantage • Customer focus (door step delivery and emergency loans) • Rapid expansion 12 SKS Microfinance .

379 378 22.733 7.154 6.953 FY08 770 219 6.618 4.029 341 21.818 1.321 4.353 307 12. of Staff Total No.814 3.039 665 FY08 170 17 1.831 4. of Members (in '000) FY11 2. of Branches Total no.Performance of SKS Operational Information Total no.879 FY07 276 103 2.680 1.111 7.300 1.780 FY09 1.781 958 174 4.307 FY10 2.270 112 4. of Districts Total no.485 2.055 950 FY09 554 80 3.089 212 FY07 46 2 335 71 13 SKS Microfinance .381 603 Amount Disbursed for the period (INR crores) Portfolio outstanding (INR crores)* * includes assigned loan portfolio Financial Information Revenue (INR crores) PAT (INR crores) Assets (INR crores) Networth (INR crores) FY11 7.456 1.051 452 276 FY10 1.

which does not qualify as an NBFC-MFI shall not extend loans to the microfinance sector. 5 crore. which in aggregate exceed 10% of its total assets. • The income an NBFC-MFI derives from the remaining 15% of assets shall be in accordance with the regulations specified in this regard. RBI introduced a new category for MFIs.MFI is: • Minimum net owned funds of Rs.Malegam Recommendation . SKS Microfinance 14 . • An NBFC.RBI Guidelines • Based on the recommendations of the Malegam Committee. • Not less than 85% of its net assets are ‘qualifying assets’. known as Non Banking Financial Company-Micro Finance Institutions (NBFC-MFIs) The criteria for classifying an NBFC as an NBFC.

• Loan to be extended without collateral. • Loan is repayable on weekly.000 in subsequent cycles. 50. is not less than 75 % of the total loans given by the MFIs. 50. • Tenure of the loan not to be less than 24 months for loan amount in excess of Rs. given for income generation. which satisfies the following criteria: • Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding Rs. 1. 15.000 with prepayment without penalty.Malegam Recommendation Qualifying asset’ shall mean a loan.000 in the first cycle and Rs. • Aggregate amount of loans. fortnightly or monthly instalments at the choice of the borrower. 35.000.000 or urban and semi-urban household income not exceeding Rs. 60.20. • Loan amount does not exceed Rs. SKS Microfinance 15 . • Total indebtedness of the borrower does not exceed Rs.000.

• The CRAR for NBFC-MFIs. 100 crore will be required to comply w. 100 crore and above are already required to maintain minimum CRAR of 15%. they have to maintain CRAR at 15%. 2012. which have more than 25 % loan portfolio in the state of Andhra Pradesh will be at 12% for the year 2011-2012 only.Capital Requirement • All new NBFC-MFIs shall maintain a capital adequacy ratio of not less than 15% • Existing NBFCs to be classified as NBFC-MFIs.f April 01. Those with asset size of Rs. those with asset size less than Rs. Thereafter.e. SKS Microfinance 16 .

which are overdue for more than 90 days and less than 180 days and c) 100 % of the aggregate loan instalments. which are overdue for 180 days or more. SKS Microfinance 17 . or b) 50 % of the aggregate loan instalments.Provisioning norms With effect from April 01. 2013: The aggregate loan provision to be maintained by NBFC-MFIs shall not be less than the higher of: a) 1% of the outstanding loan portfolio.

Why does SKS require Capital? • Growing number of borrowers and branches and to finance its ambitious expansion plans • SKS depended on interest from loans given for operating income. So. So. not possible to give loans to new borrowers from this income • Not allowed to take deposits from general public • Increased demand from commercial bank. therefore wanted to achieve first mover advantage • Maintenance of capital adequacy ratio of 9% • Very high debt equity ratio would increase distress costs and was very risky. could not depend very much on debt and needed equity SKS Microfinance 18 .

Value(V) = D+E • Return on Assets(Ra) = D/V*Rd + E/V*Re SKS Microfinance 19 .Valuing the Firm • FCF = EBIAT + Depreciation – Capital Expenditure – Increases in Working Capital • The WACC(Weighted average cost of capital) approach values the tax shield by adjusting the cost of capital • The APV(Adjusted Present Value) approach values the tax shield separately from the un-levered free cash flow • The CCF(Capital Cash Flow) approach values the tax shield by incorporating it in the cash flow • Cost of Debt – Rd. Cost of Equity – Re. Equity – E. T – Tax Rate • Debt – D.

WACC WACC • Calculate Cost of equity capital using CAPM method Ke = Risk free rate + Beta (Market premium) • For calculating beta for equity: Beta of Asset = Beta of debt (D/E+D) + Beta of Equity (E/E+D) • Then calculate after tax cost of debt • Cost of debt can be estimated from the firm credit rating and default risk or from yields on publicly traded debt • Calculate WACC by the formula: Cost of debt (1-T) (D/E+D) + Cost of Equity (E/E+D) • Calculate FCFF= EBIAT + Dep .Capital expenditure .Working capital expenditure • Calculate terminal value= (Last year FCFF*Growth rate)/(WACC-Growth rate) • Discount FCFF and terminal value to its present value to calculate NPV SKS Microfinance 20 .

APV(Adjusted Present Value) • Separate the values in 2 components: – Value of firm without debt – Benefits and cost of borrowing • Value of the firm = Value of the un-levered firm + Present value of interest tax shields – Costs of financial distress • Value of Unlevered Firm = Discounting FCF at Ra SKS Microfinance 21 .

APV Calculation • APV at constant D/V – Interest tax shield is as risky as firm – Discount Interest tax shield at Ra – Results in same answer as WACC • APV at constant Debt – Interest tax shield is less risky than firm but as risky as debt – Discount Interest tax shield at Rd – If tax saving till perpetuity then • Present value of tax shield = T * D SKS Microfinance 22 .

CCF(Capital Cash Flow) • • • • • CCF = FCF + Interest Tax Shield = FCF + T*Rd*D CCF are discounted at Ra Assumes interest tax shields are as risky as firm If D/V is constant then yields same result as WACC CCF retains his simplicity since the discount rate. the return on assets. is independent of the capital structure and can be used for every forecast period SKS Microfinance 23 .

Using Multiple method • Reasons of Popularity – Less assumptions – Simpler to Understand – Reflect the current mood of the market since measures relative value and not intrinsic value SKS Microfinance 24 .

Using Multiple method • Potential Pitfalls – Inconsistent estimate of values where key variables like risk. growth and cash flow potential are ignored – Result in high valuation when markets is over valuing and less valuation when it is under valuing – Scope for bias making vulnerable to manipulation SKS Microfinance 25 .

41% Desired one ofConditions stake as compared to the bidders No terms and the highest Thementorship and contacts compared to the bidders No funding highest stakerequirement Desired the met the SKS as Desired meet thewith an IPO in 36 months Terms ofthe lowest stake requirement Did not coming the SKS requirements The funding met funding Tri Partners had a condition to come up with an IPO in 60 months Terms of having a preferred stock arrangement Did not meet the funding requirements Funding would increase the leverage of SKSz SKS Microfinance 26 .41% 34% 34.5 2.25% None IPO in 36 months Preferred Stock None IPO in 60 months Highest Valuation offered with a minimum stake of 11.78% NA 10.3 15.25 11.3 10 14 3 8 8 3.Money Valuation(USD Millions) Amount of investment (USD Millions) Desired Stake Terms Bombay Brokers Global Bank Sequoia India Ventures Tri Partners 18.5 15.Offers and Terms Name Pre.

Qualitative Comparison Criteria SKS scaling Domestic Equity Comfort Low interference Investments in other MFIs Control Commitment to Social Mission Brand Reognition Presence in India Desired Stake Total Bombay Brokers 1 5 1 5 1 1 1 1 4 1 21 Global Bank 4 1 2 2 4 3 3 4 1 4 28 Sequoia 4 4 5 2 1 4 2 5 4 5 36 India Ventures 3 2 5 2 1 2 2 3 3 1 24 Tri Partners 3 2 5 2 1 2 2 3 3 2 25 Rating Scale used 1 to 5 where 1 is the lowest score and 5 being the highest score SKS Microfinance 27 .

Best Alternative.Sequoia Capital • • • • • • • • Other Alternatives Portfolio Buyout A portfolio buyout occurs when a bank (or other agent) purchases the rights to the future payment stream from a set of loans granted by the MFI It includes a clause which specifies that the MFI is responsible for making up any loss in repayment up to a certain percentage of the overall portfolio (typically 10%) MFIs can only sell off as much of their portfolio as is financed by accumulated earnings or equity. from which tradable securities are issued Securitisations require a rating and the ability to re-sell securitised microloans may attract more potential buyers SKS Microfinance 28 . not term loans from banks. in a portfolio buyout Securitization Securitization of microloans refers to a transaction in which the repayments from a set of microloans from one or more MFIs are packaged into a special purpose vehicle.

4 Deutsche Sec buys 9.com/industry-andeconomy/banking/article3700191.15% stake • Will help in restarting lending Challenges Changed Customer Perception Regulatory environment not favorable Dark Times • Andhra Pradesh Microfinance (Regulation of Moneylending) Act 2010 • Suresh Gurumani – Quit after the IPO • Vikram Akula – Was shown the exit door Source: http://www.ece?homepage=true&ref=wl_home SKS Microfinance 29 .SKS Microfinance: The company that got too big Silver Lining • Completed a Rs 230 Crore QIP at share price of Rs 75.thehindubusinessline.

8 cr • Auditors of the company have reported that there was cash embezzlement by the employees to the tune of Rs 2.5 crores and loans given to non-existent borrowers was Rs 13.3 crores • Employee fraud is an inherent risk in the business Initiatives taken by SKS to prevent this Indemnity bond from every field staff Personal guarantee of a third person Every Bank transaction requires two associates Fidelity Insurance Strong box controlled by two keys SKS Microfinance soars on hopes RBI will ease bad loan norms • Provisioning Norms for badloans to be relaxed • Asset Classification guidelines have been pushed Source: The Hindu & The Economic Times In 2011 RBI mandated that MFI’s make 100% provisioning for loans overdue for a period of more than 180 days MFI based out of AP are facing tough times SKS Microfinance 30 .SKS Microfinance employees embezzle Rs 15.

Spandana Sphoorty Financial Ltd (SSFL) {HQ – Hyderabad (AP). 18227 mn} 2. Loan Outstd. 4944 mn} 5. SKS Microfinance Ltd (SKSMPL) {HQ – Secunderabad (AP). Asmitha Microfin Ltd (AML) {HQ – Hyderabad (AP). Loan Outstd. 8568 mn} 4. 18227 mn} 3. Loan Outstd. Loan Outstd. Share Microfin Limited (SML) {HQ – Hyderabad (AP).Top 5 Current Players and Leaders in MFI Industry 1. Loan Outstd. Shri Kshetra Dharmasthala Rural Development Project (SKDRDP) {HQ – Dharmasthala (Kar). 4050 mn} (as per Crisil analysis) SKS Microfinance 31 .

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