India's largest microfinance lender SKS Microfinance Ltd has capped its return on assets for the microfinance business at 3 per cent and has plans to launch a wholly owned subsidiary for its non-microfinance business.

The firm that had a roller-coaster ride both in terms of stock market valuations since listing over a year ago and the regulatory and board room tussle, has been facing a tough market with ballooning losses and shaky investor confidence.

Capping the RoA at 3 per cent would restrict the firm’s ability to generate margin from the microfinance business. In the year before it got listed, the firm’s RoA was estimated at around 5 per cent which shrunk significantly last fiscal.

SKS Microfinance scrip last traded at Rs 112.95, up 4.97 per cent and hitting the upper circuit for the day on the BSE.

One possible explanation for the investor reaction could be expectations that the firm might look at raising funds separately to grow its more lucrative non-microfinance business.

SKS reported a net loss of Rs 384 crore for the July-Sept quarter, compared to a net profit of Rs 81 crore during the same quarter a year ago. Its revenues slipped 66.5 per cent to Rs 123 crore, down from Rs 366.6 crore a year ago.

Non-microfinance Biz

The company has recently forayed into some more profitable businesses such as gold loans, as part of its non-MFI business. It is also looking to separate those segments from its core area of microfinance. The firm has announced on Wednesday that it will house its non-MFI businesses into a separate, wholly owned subsidiary.

Besides gold loans, this includes areas like lending to kirana store owners and providing loans for mobile handset purchase.

“The kirana, mobile and gold-secured lending initiatives are expected to yield superior margins,” said MR Rao, managing director and chief executive officer of SKS Microfinance.

The company offers consumers loans to purchase mobile phones, with the option of paying in small, easy instalments. SKS has partnered with Nokia to help finance handset purchase by its borrowers. The company has disbursed loans for purchase of 3.5 lakh mobile handsets across six states.

Its other business is housed under Sangam Stores, a lending product targeted at local mom-and-pop stores run by SKS borrowers. The aim is to enable the store-owners to buy fast-moving consumer goods and groceries from wholesalers. They would then resell the goods through their retail kirana stores.

“We plan to service 15,000 Sangam Stores (present number is 4,000) and extend loans for purchase of 5.5 lakh mobile handsets this year. In the gold loan space, SKS Microfinance will continue with 50 branches this fiscal,” said Rao.

Other Initiatives & Funding

SKS has recently said that it will raise up to Rs 900 crore for funding growth plans outside the state of Andhra Pradesh, the country’s largest microfinance market and a key region that sparked regulatory troubles for SKS.

The company was hoping that its existing investors would back the fundraising plan as proposed, under an institutional placement of shares. Investors in SKS include Catamaran Management Services, WestBridge, Sequoia Capital India, Sandstone Investment Partners, Kismet Microfinance, George Soros, Tree Line Asia and veteran venture capitalist Vinod Khosla.

Top company executives have told various sections of the media on Wednesday that the firm is looking to raise a part, roughly half of the total amount, in the first phase.

Meanwhile, the company also plans to invest Rs 15 crore over the next three years in order to align its customer grievance redressal and client protection practices. The investment will be used to ensure privacy of client data, fair-pricing, grievance redressal, curbing over-indebtedness and proper collection practices, the company has said.

“The old paradigms of MFI business are changing,” said S Dilli Raj, chief financial officer of SKS Microfinance. “Value is migrating from competition-centricity to customer-centricity, scale to efficiency and growth to profitable growth,” he added.

The company also announced that it would appoint a social sector veteran as its ombudsman by the end of December 2011 to provide its borrowers with an opportunity to escalate their complaints to an independent office.


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