Microfinance lender SKS Microfinance’s share is in hot demand right now. The scrip hit the upper circuit with price rising almost 10 per cent for the second day in a row after bottoming out and touching a low during intra-day trade on Tuesday, as the company announced that it would ramp up its non-core business by getting into secured lending business such as gold loans.
The Sequoia-backed firm that reported a net loss of Rs 69.77 crore in the fourth quarter ended March 31, will be able to diversify its revenue stream by increasing the portion of lending beyond its bread-and-butter microfinance segment. The microfinance business has come under severe regulatory battering over the past few months, especially in the southern state of Andhra Pradesh, the largest micro-lending market in the country.
“We are reinventing our company and microfinance. Reinvention of microfinance will focus on consolidations of existing customer base, diversifying product offerings and continuing to build consensus to resolve issues in Andhra Pradesh,” Vikram Akula, executive chairman of the company, said on Tuesday.
Although regulatory norms restrict SKS Microfinance from going too aggressively in businesses such as gold loan, it can still stabilise its business. Current regulations restrict microfinance firms to cap the non-core businesses to 15 per cent of the total.
By this parameter, SKS can generate a maximum amount Rs 616 crore ($138 million) from such non-core lending.
According to the company’s CFO Dilli Raj, SKS Microfinance may hit the limit in two years and thereafter, may look at a business structure of a step-down subsidiary to keep growing such non-core businesses.
SKS Microfinance has five branches involved with gold-secured lending and the firm will significantly ramp it up with a target of as many as 500 branches by March, 2012. This will be outside Andhra Pradesh where the company has been facing regulatory hurdles for day-to-day operations.
The microfinance firm is eyeing to build a gold loan book of Rs 150 crore by next March. It will be competing with the likes of Muthoot Finance and Manappuram General Finance & Leasing, besides several commercial banks who lend against gold, especially in southern India.
However, SKS Microfinance can take out some of the business going to these existing players if it is able to get a large chunk of its present clientele in the bottom-of-the-pyramid space, who might be flocking to small towns to secure money against the family jewels.