This action might not be possible to undo. Are you sure you want to continue?
net Investors with a high risk appetite can consider subscribing to the Initial Public Offer (IPO) of SKS Microfinance, one of the largest microfinance NBFCs in India. Presence in the under-penetrated micro-financing segment offers immense growth potential. The company has over 2,000 branches across 19 States, a more diversified presence than any other microfinance institution (MFI) in India and is better equipped to leverage future growth opportunities. Investors may consider this IPO at Rs 724 per share or below. At this price the company may realise Rs 1,260 crore from this IPO. At a price-book value of 3.5 times post-offer, the stock would trade at Rs 724. The PE ratio at this price would be 26 times. Over the last 15 months, the company has raised funds from private equity investors at Rs 300/share. SKS Microfinance has a high capital adequacy ratio (of 28.3 per cent which may further improve to excess of 40 per cent post-offer) and strong risk-management systems which address two concerns MFI are facing today ² access to capital and maintenance of asset quality. The net non-performing asset ratio as of March 31, 2010, was 0.16 per cent. SKS¶ conservative provisioning on standard assets and high NPA provisioning reduces the inherently high credit risks in this business, to some extent. Innovative Business Model SKS¶ loans are disbursed only to women, primarily for income-generating activities due to which the credit risk is low. SKS adopts a Joint Liability Group (JLG) approach to lending, with each group consisting of five members giving mutual guarantee to each other. Each centre has around 5-7 JLGs, which again guarantees the combined loans mutually. SKS has a diversified sector and geographic profile. The sector-wise disbursements as of March 31 2010, saw trade (includes small retailers) dominate with 29 per cent of the total outstandings, followed by livestock (26 per cent) and services (20 per cent). Most of the portfolio comes under µpriority lending¶ norms of the RBI, enabling the sale of this portfolio to other mainstream lending institutions; this also reduces funding costs for SKS to that extent. SKS has geographically diversified its lending portfolio, with Andhra Pradesh contributing only 29 per cent, compared to 100 per cent in 2005. Demand-supply gap A CRISIL report on MFIs in September 2009 estimated an addressable market of Rs 1,20,000 crore for microfinance. A report put out by Sa-Dhan, an association of MFIs, suggests that total credit disbursed by way of microfinance was Rs 35,000 crore in 2009. These data show the potential this sector holds and why strong growth may continue over the next 3-4 years.
according to the management. However. so are operating costs. SKS¶ average loan size is small. However. The borrowing profile of SKS. SKS lends at a fixed rate. Another concern is the seasonality of the earnings. Return on assets too is high at 4. which may expand the already high operating costs.3 per cent commission from the wholesaler. To discourage members approaching several MFIs simultaneously. Revenues may get a further boost from its intent to extend housing loans to loyal customers.000 per borrower. the µMicro Finance Institution Network¶. SKS receives a 2. The Risks In spite of trying to match the asset-liability profile. the secured nature and higher equity for such loans may reduce credit risk while maintaining high returns. thanks to its high yields. Given that the MFI loans are to low income groups. However. SKS¶ cost-income ratio fell to 52 per cent for 2009-10 from 62 per cent the preceding year and may show moderation with the company scaling up. which are back-ended to the second half of the year. The interest spread stood at an exceptional 12 per cent for 2009-10. Further. which SKS¶ own network distributes. given substantial costs involved in training employees. . While the effective rate is attractive at 21 per cent.Financials SKS¶ gross loan portfolio and net profits has grown nearly eleven-fold with profits expanding by 23 times over a five-year period ending March 2010. recovery does tend to pick up once a moratorium period is extended. For this. is planning to set up a database of borrowers to ensure that the borrowing limit doesn¶t cross Rs 50.3 per cent and may further improve as the operating costs moderate. in addition to securitisation of its loans. Over-leveraging by the borrowers is a key risk. A flat rate of 12. is skewed towards banks. but is trending up as it expands repeat customers. a group of MFI-NBFCs. This project is yet to be implemented outside Andhra Pradesh. with increases in cost of funds not passed on. there is scope for margin expansion as SKS leverages its branch network to cross-sell products such as insurance and mobile phones which contribute directly to the bottom-line.5-15 per cent a year plus a 1 per cent processing fee (translating into a compounded rate of 25-28 per cent) is charged on these loans. during natural calamities. like other institutions. While the yields are high. Retaining a skilled workforce is a challenge (SKS has attrition rates upwards of 25 per cent). as there have been instances where borrowers accessed funds from multiple lenders. SKS has also set up Sangam stores which enable small retailers to access interest-free working capital loans and products from wholesalers. the loan portfolios may result in NPAs due to the inability of the borrower to pay. it has supplemented bank funds with market issuances. It can further tap this mode given its investment-grade ratings. Operating costs are higher than interest costs and are likely to remain so.
including the imposition of an interest-rate ceiling. RBI should put a cap on the interest to be charged on the end users.a. The IPOS will make the promoters. for as many poor and near poor as possible. Since the advances to MFIs are classifieds as priority sector advances. Micro finance is the provision of financial services to low income clients. are bound to happen. and petty traders and rural artisans belonging to socially and economically backward classes and tribes whose propensity to save is limited or too small to be mopped up by the banks. Such dependence in the case of marginal farmers. the sector. The committees were constituted after the government received many complaints against the loan shark practices adopted by some leading MFI¶s of the state. Most of their income goes for servicing the debt with no savings. the RBI took a series of measures in April 1996 to give a thrust to micro-finance based lending. as most of their income goes for servicing the debt with no . The borrowers pay exorbitant rate of interest. This will adversely affect the operating results. Those who promote microfinance generally believe that such access will help poor people out of poverty. As a follow up of these commendations. And the hapless borrowers continue to live in abject poverty. including savings. This kind of situation is no better than the one the poor borrowers had experienced with the traditional moneylenders. Micro finance should not be viewed as a business venture where one can expect very high return on investments. especially for meeting emergent requirements. On the recommendations of the Group. insurance and fund transfers. Prasanna Andhra Pradesh government cracks down on predatory practices of Microfinance Institutions The Andhra Pradesh government has constituted district level µTask Force Committees¶ (TFCs) to investigate the unethical practices of micro finance institutions in the state. The Micro Finance Institutions. that banks have to fulfill as part of their social obligation and regulatory requirement. from the hapless borrowers. It is a movement whose object is to create a platform.a. The Micro Finance Institutions. instead of providing credit at affordable interest rate. the MFIs are collecting interest between 24% to 36% p. More importantly. to have permanent access to an appropriate range of high quality financial services. Micro finance should not be viewed as a business venture where one can expect very high return on investments. and other venture capitalists including some P/E funds that have stakes in these companies¶ millionaires. Governmental and statutory regulations. However. Usurious rate The interest rate applicable to loans given by banks to micro-credit organizations or by the micro-credit organizations to Self Help Groups/member beneficiaries is left to their discretion.By K. In 1994. the RBI constituted a Working Group on NGOs and Self Help Groups (SHG). the dependence of the rural poor on moneylenders continues in many areas. It is time that the regulators look into this ugly side of micro financing. The microfinance industry has grown at a rapid pace across the world and has created a positive impact in the lives of millions of poor people. the applicable interest rate is around 15%p. the Reserve Bank advised that the banks¶ financing of SHG should be reckoned as part of their lending to weaker sections and such lending should be reviewed by banks at regular intervals. IPO ANALYSIS: The ultimate goal of microfinance is to enable the poor to build assets. Despite the vast expansion of the formal credit system in the country. reduce vulnerability to shocks and economic stress and improve quality of life by enabling better access to education and healthcare. Currently. increase incomes. at an affordable cost. exploiting the situation and looking for a return on investments in excess of 30% p. Microfinance is one of the tools that can reduce the suffering of people by financial services that enable the poor to use the existing knowledge and experiences.A. (very high interest rates) does not deserve any support. all loans by banks to MFIs are categorized as priority sector lending.a. They also defeat the very purpose of establishing the Micro Finance Institutions. landless laborers.a. exploiting the situation and looking for a return on investments in excess of 30% p. instead of providing credit at affordable interest rate. including consumers and the self employed that traditionally lack access to banking and related services. which sucks the blood of the poorest of the poor.
RECOMMENDATIONS The promoters/share holders are being profited at the cost of the hapless poor. 2009 records statements that there were delays in the deposit of undisputed statutory dues to appropriate authorities and there were instances of fraud on the Company by employees.savings. Governmental and statutory regulations. which will make these kind MFIs redundant. They also defeat the very purpose of establishing the Micro Finance Institutions. RISKS / MATTERS OF CONCERN: SKS has limited operating history and the fast growing and rapidly evolving business make it difficult to evaluate the business and future operating results. bring more transparency in their operations and derecognize the MFIs. The company has no dividend history. which are known for bad corporate governance. Government is bound to regulate the interest rate in favor of the beneficiaries. The initiatives taken by the Public Sector Banks ± for financial inclusion will make the presence of MFIs in rural areas irrelevant in the next couple of years. Even otherwise government will not be a mute spectator to the exploitation. This kind of situation is no better than the one the poor borrowers had experienced with the traditional moneylenders. Unethical and unsustainable business model. down trodden and other weaker sections of the society. may adversely affect the operating results. The RBI should also exercise greater control over MFIs. AVOID . including the imposition of an interest-rate ceiling. The report of the audited financial statements for the year ended March 31.