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SKS Microfinance: Finance vs Ethics OR Finance with Ethics

28 July, 2010

SKS has announced the final pricing range for its IPO at Rs850 to Rs 985 per share. We think these are punchy valuations even at the lower end implying a 5.8x FY10 P/B (pre money) and 3.8x FY10 P/B (post money). Whilst global microfinance peers tend to trade at a higher multiple, those have significantly higher return ratios (30-40%) compared to SKS’ FY10 RoE of 21%.

Clearly, the valuation factors in expectations of significant RoE expansion in the future to which we see challenges from : a) Competitive, political and regulatory risks to yields b) Credit costs already at a low of 0.5% to 1.5% in the past three years could rise c) Limited operational and financial leverage. Whilst we acknowledge SKS as a strong business exposed to a huge market opportunity, valuations do not factor in these risks.

SKS Microfinance is the biggest micro-finance institutions in India with 20% market share amongst organised players. Given that micro-finance institutions are currently catering to a mere ~8% of the potential market, there is a huge market waiting to be tapped.

However, increased competition, the possibility of regulatory and political interventions and lack of operating and financial leverage in the business model leaves little scope for return ratios to expand from here:

Pressure on yields going forward: The yield on advances for SKS has been in the range of 25-28% over the last three years. However, the yields can come under pressure going forward as competition is rising with more players are entering the market (two prominent MFIs recently decreased their interest rates). Moreover, the authorities are not happy with high interest rates

charged by MFIs (25%-35%) and the possibility of the RBI or state governments capping the interest rates charged by MFIs cannot be ruled out.

Credit quality can worsen: Whilst credit costs for SKS has been in the range of 0.5%-1.5% over last three years, it can deteriorate going forward to more than 2% due to: a) increased competition in the sector (multiple borrowings by clients beyond their repayment capacity); and b) expansion into new geographies. Globally, the average credit costs for the sector have been in 2%- 5% range. Moreover, the bigger risk for credit quality comes from instances of mass defaults (e.g. Kolar incident in India) which have plagued the microfinance industry the world over.

Limited operational leverage in the model: Whilst cost to income ratio of SKs has come down from 79% in FY07 to 52% it is primarily driven by increased loan ticket size rather than operating leverage in the business model. Unless SKS increase its average ticket size per customer (which might have an adverse impact on credit quality), we do not see leverage economics working in SKS model because of large administrative and employee costs associated in reaching out to the customer base. A look at global microfinance companies show that cost to income ratio of these companies has been in the range of 45% to 55% (SKS is currently at 52%).

Financial Leverage to remain low: Whilst the company management claims that it can leverage up to ~7.0x (currently at 3.8x) and hence enhance ROE to 40% going forward (currently at 21.5%). We are sceptical that company would be able to leverage more than 5x as regulators and bankers might not be comfortable with high leverage given the inherent risk in the business model.

Even globally micro finance companies have been leveraged less than 3x because of the higher capital adequacy required by regulators and bankers. Hence on a best case basis we do not see ROA for SKS going beyond 6% (from 5.4% in FY10) and ROE beyond 30%.

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k a prasanna . 6 years ago


The company has fixed the price band at Rs 850-985 for the IPO, which is slated to open on 28-07-10. SKS Micro is proposing to issue 1,67,91,579 Equity Shares of Rs. 10 FV, including the offer for sale of 93,46,256 shares.

SKS Micro earned a net profit of Rs 173.95cr for FY10. On the post issue capital of Rs 71.97cr, the EPS comes to around Rs20/- At the upper price band, the company is demanding a valuation of almost 50 times its FY 10 earnings. For an NBFC, which has limited period of history and no dividend track record, the valuation is very very much stressed.


1. Unethical business: The Company is charging interest around 40% p.a. on money lent to the poor and down trodden.

2. Unsustainable business model: The business model will not sustain in the long -run.

3. No commitment from the promoters: SKS’s founder and chairman sold his shares to Tree Line Asia Master Fund (Singapore) Pte for $12.9 million in Feb. this year.

4. Look at the salary of top executives :

Suresh Gurumani – Managing Director of the Company. The total monthly salary is Rs. 12, 50,000. In addition to the above, Mr. Suresh Gurumani was paid onetime bonus of Rs. 10,000,000, in April 2009.

Dr. Vikram Akula – chairman Rs 70.00 lacs p.a. In addition, ESOP amounting to Rs10.97lacs, totaling Rs 1.79cr p.a.

The irony is they are trying to eradicate poverty.

5. Mohd. Yunus says – “I get very worried when investment funds come to microfinance,” said the founder of Bangladesh’s Grameen Bank, which pioneered the industry by giving small loans to rural women to start their own businesses. “I don’t want to excite businessmen that there is profit to be made here,”

6. The IPO will make the promoters, and other venture capitalists including some P/E funds that have stakes in these companies’ millionaires. The hapless borrowers continue to live in abject poverty.

7. Government /RBI will not be mute spectators to the exploitation.

They are bound to regulate the segment. This will make the business un- attractive.

8. Financial inclusion initiatives taken by the public sector banks/government will marginalize the micro finance business. Do not buy the theories put forth by the BRLMs to sell the issue.

9. The average cost of acquisition of shares by promoters is less than Rs50/-

10. The Andhra Pradesh government has constituted district level ‘Task Force Committees’ (TFCs) to investigate the unethical practices of micro finance institutions in the state. The committees were constituted after the government received many complaints against the loan shark practices adopted by some leading MFI’s of the state.


Mangesh Mulpuri . 6 years ago

Who said MFIs as Not-for profit organizations??

As per my view, micro financing as like any other financing activity. The motive of MFis looks like wealth maximization (Portfolio expansion) and not for profit. Which business now a days gives a 36%PA in revenue addition and a 24% PAT with almost 100% recovery rate and 80% recurring .no businsess except MFIs. So the IPO price band of SKS is very reasonable. And from now onwards we would expect the SKS to work for Share maximization also…

I would suggest Banks to offer this Micro finance products in branch banking.(though they are serving via MFIs and SHG federations; they are not the active lenders to poor ).

As the MFI business is lureing, many number of MFIs are growing. I actually want to see the MFIs to offer ISLAMIC BANKING products. So as the loans or advances taken by the poor people to go on a productive proposes instead of present custom ceremonies.

Hoping to see a Hybrid Insttution which is an MFI offering products in Islamic banking principles


Mangesh Mulpuri


Manoj Gautam . 6 years ago

Well, for a change I would bask in what SKS has achieved. Despite all the brouhaha about so called “Not for Profit Vs For Profit,” micro-finance companies are in effect result of decades of Government apathy towards rural financial inclusion. Nationalised banks with their overall growth development objectives were best equipped to provide micro-credit facilities to rural groups engaged in productive activities. Micro finance companies have proliferated because our Banks failed to achieve this. Rural credit over the last few decades have evolved and institutions such as RRBs have failed to understand it properly. Most of the government rural financial institutions are plagued by corruption, inefficiencies etcetera etcetera. Any one who is aware of ground realities of Indian rural social fabric would give a hands on to these micro finance institutions. Generations in villages die as debtors of rural money lords who charge anywhere between 36% to 50% on the principal. There are stories of people committing suicides in villages due to the miseries caused by money lenders.

Manoj Gautam . 6 years ago

Companies such as SKS have brought the whole rural financial inclusion under organised gambit. If India has to become self dependent, villages have to be developed. Urbanization is not the solution for our problems. We would need to make villages self reliant. It is where these companies will make the difference with their understanding of local environment and already established distribution networks. I am sure going forward Vikram would not mind to dabble in real rural economy. Microfinance is just one part. Wait and Watch

Mangesh Mulpuri . 6 years ago

Micro financing doesn’t guarantee Developing rural economy and thoese money lenders in villages mostly used to serve only the farmers or people with lower middle class sect. the credit facilities to these people still don’t have any access to organized credit except credit cooperatives for few. And most of the times these lower middleclass people spend barrowed money on social customs and on health. Contrary to that micro financing helps to create women SHGs on some other form and with joint liability they are eating the poor mans cake. In the name of Sustainability to the MFI, they are charging. That’s true that high interest for high risky loans. This practice followed everywhere.

I don’t intended to offend what MFIs are doing, I am saying that MFIs are doing business with poverty. That’s their business. Please don’t say they are developing or reducing poverty kind of words. Yes they are giving access to Poor people who were denied credit facilities earlier by institutions

k a prasanna . 6 years ago

The regulator has stepped in. RBI, in its recent review meeting with the Chiefs of Banks has raised concern over lending to for-profit MFIs. The analysis of SKS Micro IPO by FIRSTCHOICE has again proved correct. In the first week of July 2010 itself FIRSTCHOICE had indicated that the regulators would step in and take actions against profiteering MFIs.

k a prasanna . 6 years ago


While analyzing the IPO of SKS micro finance, FIRST CHOICE had envisaged that the regulator/government will initiate actions to make the presence of these land sharks (MFIs)irrelevant in financial inclusion. It has come true. Now, the new banks has to open 50% of their branches in un banked rural area. Apart from this, PSU banks have drawn elaborate plans for financial inclusion in the un banked rural areas. RBI has already raised its concern over lending to MFIs by PSU banks, which are into profiteering. All these steps taken by the regulator will make the presence of modern day Shylocks, in the rural area, irrelevant and unsustainable. The analysis of First choice has hit the bull’s eye again.

SKS Microfinance: Finance vs Ethics OR Finance with Ethics

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