SKS Microfinance pitches ‘social factor’ to woo investors

“Investing here means placing money in the hands of poor women,” says Vikram Akula, founder and chairman of SKS Microfinance.

He says social targets can be achieved with an intention of profit.
Microfinance companies charge 26-31% interest rates on loans to poor, which range from Rs2,000 to Rs30,000.

Most of the time, the repayment is done in 50 weeks, through weekly portions.

Microfinanciers say these high rates come down as more and more poor women come into the micro-lending model of a company.
SKS Microfinance has used the path to growth of burger major McDonald’s — at a compounded annual growth rate (CAGR) of 147.7%, in terms of outstanding loans over four years as on March 31, 2010.
In the last fiscal, the company’s financial expenses were at 8.51% of outstanding loans, while personnel expenses were at 6.39% and operating and other expenses at 3.97%.

SKS  charges interest on loans based on these costs.
Repayment rates are around 99%.

The moot question is, why charge such usurious interest rates, that, too, from the wretchedly poor?

Also consider this: The borrower also needs to buy a loan cover insurance to mitigate the microfinancier’s risk of loss.

Housing loan between Rs 50,000 and Rs 150,000 will have to be repaid in 3-5 years with an annual interest of 21%.

A one-time loan processing fee of 2% of the sanctioned amount is also charged,” as stated in the draft-red herring prospectus of the company, whose shares are up for sale starting July 28, 2010.

A credit bureau specifically for the micro-borrowers is on its way and then microfinance entities can decide to ignore borrowers who do not pay up.

All the more reason for rates to come down, says a banker who did not wish to be named.

Microfinance entities have their argument against this. “Typically, our borrowing costs for funds from banks are 11-14%, and we don’t get any subsidy. We have very low overdues or non-performing assets (NPAs) that account for 1%. About 8-10% is the transaction costs, which includes staff salaries and transportation and other operational expenses. We must then make at least 2% to maintain the RBI capital adequacy, which has increased from 10% to 12% to 15% now,” Vijay Mahajan, another key figure of the industry and the chairman of microfinancier Basix, had said at microfinance gathering a couple of months ago.

To provide investors a share of the so-called “social-sector investing” the interest charged to the borrowers will have a mark-up to offer profits, experts said.

With this IPO, SKS  aims to widen its capital base to meet growth plans Kotak Mahindra Capital, Citigroup Global Markets, Credit Suisse are the book-running lead managers for the IPO, which will close on July 30, 2010 for QIB bidders and on August 2 for others.

Rating agency CARE has given a grade of 4 to the company indicating above-average fundamentals.

The price per share will be disclosed on July 26, 2010. It is learnt that the company intends to raise Rs 1,000-1,500 crore via the IPO.

Investors need  to bear risks such as microfinance office/officers getting robbed deep in hinterland, which causes losses.

Also, microfinanciers are dominant in  southern  India. There are 581 districts where there are multiple microlenders. In cases where there have been multiple lenders, borrowers have a tendency to take a  loan from those offering  lower rates to pay-off higher-interest rate loan, or the classical refinancing.

Repayment rates may be higher and overlending could be a another risk.

“Microfinanciers’ risk-management practices have weakened over the past couple of years, on account of a shift in focus towards business growth and network expansion. Some credit sanction and monitoring practices have been diluted. These include multiple loans fdrom different MFIs, reduction in average waiting period for loans and doing away with staggered disbursements,” Crisil Ratings said in a recent report on India’s top 50 microfinance institutions.

SKS Microfinance has been doubling its borrowers list each year, which currently stands at 6.8 million. Sources indicate the company’s plan to touch a billion borrowers in a short time.