Phillip SKS Format

INSTITUTIONALEQUITYRESEARCH
SKSMicrofinance(SKSMIN)
Favourableoperatingenvironment
13November2014
INDIA|NBFCs|InitiatingCoverage
Marketsharetoriseinthefastgrowingmicrofinanceindustry
ThemicrofinanceindustrywillgrowataCAGRof20%overthenext45yearstotouch
Rs1.83tnfromitscurrentsizeofRs763bn.NBFCMFIsmarketshareshouldriseto60%
from the current 40% over the same period. Since SKS Micro Finance is the largest
NBFCMFI,ittendstogrowatanacceleratedpacewesee35%compoundedannual
growthrateoverthenext45years,translatingintoahighermarketshareof4%from
itscurrent2.25%.
Severalfactorsallayregulatoryandpoliticalrisk
RBI acts as the sole regulator for this segment and issues directives on operational
parameters. Around 90% of the industry players, including SKS, are under RBIs
supervisionthisallaysconcernsaboutanodalregulatoryauthoritybeingpresentand
providesconfidencetostakeholders.Establishmentofcreditbureausaddressconcerns
ofcreditdisciplineandwillensurebetterassetqualitymanagement.Microfinanceisa
sensitivesubjectandwillalwaysbesubjectedtopoliticalriskSKSismanagingthisin
themosteffectivewaybywideningthegeographicalspreadofitsportfolio.
Fastrevenuegrowthandcrosssellingtodriveearnings
Its loan portfolio will see a robust 41% CAGR over FY1417 given the favourable
operatingenvironmentanditstoplinegrowthwillmirrorthisgrowthbecausemargins
are regulated. However, crossselling of various products and services will aid return
ratios.
Scalablemodel+technologytoprovideoperatingleverage
SKSintendstoimplementitsgrowthobjectiveswithoutaddingtoomanynewbranches
orincurringadditionalcapitalexpenditure.Freshadditionswillbemostlyintheformof
loan officer (will add 1,500 such loan officers annually). It continues to focus on
optimisingitscoststructurebyenhancingtheproductivityofitsemployees,introducing
technologyforexpedientreporting,andreengineeringitsinternalprocesses.Thecost
toAUMratioshoulddeclinefurtherto7%byFY17fromthecurrent9%.
Riskmanagementtools:businessmodel,geography,monitoring
UnderitsJLGmodel,peerpressureactsasabiggestdeterrentagainstgroupmembers
defaulting.Additionally,theestablishmentofcreditbureaushasenabledSKStocheck
the credit history of microcredit borrowers. The wider geographical spread of its
portfolioswillalsokeeppoliticalrisklow.
Politicalriskandnaturaldisasterposeabiggestrisktothesector
WehavenotfactoredanAndhraPradeshlikecrisis(Annexure:3AndhraPradeshCrisis)
intoourestimates,consideringvariousdevelopmentssuchasastrongregulator,self
imposed credit discipline, efficient credit monitoring, and geographically diversified
loanportfolio.EmpoweringstatelegislationtooverridetheRBIdirectivetoNBFCMFIs
mayimpactbusinessprospects.
ValuationandRecommendation
SKSMicrofinanceisexpectedtodeliverstrongearningsataCAGRof42%overFY14
17e with superior return on asset of ~5% and return on equity of +20%. At current
market price of Rs360 the stock trades at 3.4x FY16 ABVPS of Rs107.5 & 2.8x FY17
ABVPSofRs132.WeinitiatecoveragewithaBUYratingwithapricetargetofRs503
pershare.
Page|1|PHILLIPCAPITALINDIARESEARCH
BUY
CMPRS360
TARGETRS503(+40%)
COMPANYDATA
O/SSHARES(MN):
MARKETCAP(RSBN):
MARKETCAP(USDBN):
52WKHI/LO(RS):
LIQUIDITY3M(USDMN):
PARVALUE(RS):
126
46
0.8
373/141
11.9
10
SHAREHOLDINGPATTERN,%
PROMOTERS:
FII/NRI:
FI/MF:
NONPROMOTERCORP.HOLDINGS:
PUBLIC&OTHERS:
9.3
57.5
15.3
4.2
13.8
PRICEPERFORMANCE,%
ABS
RELTOBSE
1MTH
25.1
18.7
3MTH
34.8
26.6
1YR
157.5
119.6
PRICEVS.SENSEX
160
140
120
100
80
60
40
20
0
Apr11 Apr12 Apr13 Apr14
SKSFinance
BSESensex
Source:PhillipCapitalIndiaResearch
KEYFINANCIALS
PreprovROE(%)
PreprovROA(%)
NetProfit(Rsmn)
%growth
EPS(Rs)
AdjBVPS(Rs)
ROE(%)
P/E(x)
Adj.P/BV(x)
FY14 FY15E
19.9
22.1
3.4
5.5
701 1587
123.6 126.3
6.5
12.6
42.3
78.9
16.5
21.5
56.3
29.0
8.6
4.6
FY16E
24.4
6.8
1923
21.2
17.8
107.5
17.4
20.5
3.4
Source:PhillipCapitalIndiaResearchEst.
ManishAgarwalla(+912266679962)
magarwalla@phillipcapital.in
SKSMICROFINANCE INITIATINGCOVERAGE
InvestmentThesis
Our investment thesis for SKS Microfinance is based on stable regulatory scenario;
favorable industry outlook and improvement in credit underwriting and monitoring
standards.ToplinegrowthofSKStomirrorloanportfoliogrowth,whichweexpectto
grow at a CAGR of 41% CAGR over FY1417. Because of regulated margin in micro
finance business, net interest income growth will reflect the growth in asset under
management (AUM). However, initiatives like cross sell, cost optimization and
contained credit cost will translate into a robust 55% compounded annual growth
rate in profit before tax. Profit after tax is expected to witness 42% compounded
annualgrowthrate(asthecompanywillhavetopayMATfromFY16onwards).We
expect SKS to maintain return on asset of +5% and return on equity of +20% on a
sustainable basis. At current market price of Rs365 the stock trades at 3.4x FY16
ABVPSofRs107.5&2.8xFY17ABVPSofRs132.
A favourable operating environment, strong business and earnings, and a superior

returnratiowarrantsapremiumvaluation.Webelievethathighoperatingcostand
regulated margin will restrict new entrants. Due to the unsecured nature of the
business, only a diversified portfolio only can sustain any credit risk.As SKS is an
establishedplayerwithawelldiversifiedpresence,sizeableloanportfolio,andisthe
largestNBFCMFI(Bandhan,thelargestMFI,receivedabankinglicense),itstandsina
sweetspottoridethemicrofinancegrowthcycle.WeinitiatecoveragewithaBUY
ratingwithapricetargetofRs503pershare.
ValuationMethodology
DCFExcessReturnValuation
ReturnonEquity=
RetentionRatio=
Expectedgrowthrate=
Costofequity=
sss
Year
NetIncome(Rsbn)
EquityCost(Rsbn)
ExcessEquityReturn(Rsbn)
TerminalValueofExcessReturn(Rsbn)
CumulatedCostofEquity
PresentValue(Rsbn)
Sss
BeginningBVofEquity(Rsbn)
CostofEquity(%)
EquityCost(Rsbn)
sss
ReturnonEquity(%)
NetIncome(Rsbn)
DividendPayoutRatio(%)
RetainedEarnings(Rsbn)
sss
EquityInvested(Rsbn)=
PVofEquityExcessReturn(Rsbn)=
ValueofEquity(Rsbn)=
Numberofshares(Inbn)=
ValuePerShare=
Highgrowth Stablegrowth
stage
Phase
22.00%
20.00%
100.00%
50.00%
22.00%
10.00%
13.40%
13.00%
1
1.9
1.1
0.7
1.1
0.7
2
2.3
1.4
0.9
3
2.8
1.7
1.1
4
3.4
2.1
1.3
5
4.1
2.5
1.6
6
5.0
3.1
2.0
2.0
1.0
7
6.2
3.8
2.4
2.3
1.1
8
7.5
4.6
2.9
2.6
1.1
1.2
0.7
1.4
0.8
1.6
0.8
1.8
0.9
9
10 TerminalYear
9.2 11.2
12.2
5.6
6.8
7.9
3.6
4.3
4.3
149.4
2.9
3.3
1.2 46.8
8.5
10.4
12.6
15.4
18.8
23.0
28.0
34.2
41.7
50.8
55.9
13.4
13.4
13.4
13.4
13.4
13.4
13.4
13.4
13.4
13.4
1.1
1.4
1.7
2.1
2.5
3.1
3.8
4.6
5.6
6.8
13.0
7.1
22.0
1.9
0.0
1.9
22.0
2.3
0.0
22.0
2.8
0.0
22.0
3.4
0.0
22.0
4.1
0.0
22.0
5.0
0.0
3.4
4.1
5.0
22.0
9.2
0.0
9.2
20.0
11.2
0.1
2.8
22.0
7.5
0.0
7.5
22.0
11.2
0.0
2.3
22.0
6.2
0.0
6.2
11.2
8.5
54.9
63.4
0.1
503
Source:Company,PhillipCapitalIndiaResearch
PHILLIPCAPITALINDIARESEARCH|2|P a g e
Marketsharetoriseinthefastgrowingmicrofinanceindustry
ThemicrofinanceindustrywillgrowataCAGRof20%overthenext45yearsto
touchRs1,828bnfromthecurrentRs763bn.
NBFCMFIswillgainmarketsharetotouch60%fromcurrent40%.
SKSMicroFinance,beingthelargestNBFCMFI,tendstogrowatanaccelerated
pace we see 35% compounded annual growth rate over next 45 years,
translatingintoanenhancedmarketshareof4%fromthecurrent2.25%.
Microfinance in India started evolving in the early 1980s when informal selfhelp
groups (SHG) were formed for providing access to financial services to people who
weredeprivedofcreditfacilities.Currently,NationalBankforAgricultureandRural
Development(NABARD)andSmallIndustriesDevelopmentBankofIndia(SIDBI)are
devoting their financial resources and time towards the development of
microfinance.TheIndianmicrofinancesectorshouldgrowataCAGRof20%over45
yearstotouchasizeofaboutRs1.8trnfromthecurrentmarketsizeofRs0.8trn.It
hasenormousgrowthpotentialas41%ofIndianhouseholdsstilldonothaveaccess
toformalbankingservices.
These institutions are organised under three models: Self Help Group (SHG),
Grameen model/jointliability groups, and individual banking groups as in
cooperatives. As of March 2014, both SHGbank linkages (bank provided micro
financecreditthroughselfhelpgroup)andMFIscollectivelyhaveoutstandingloans
ofRs763billion.
Marketshare:Basedongrossloanportfolio
Basedondisbursement
Bandhan
SKS
22%
24%
23%
Spandana
26%
Janalakshmi
Share
Ujjivan
3%
11%
4%
4%
Equitas
Satin
8%
5%
6%
7%
7%
3%
Asmitha
4%
4%
14%
4%
4%
Muthoot(Panchratna)
Others
5%
6%
7%
Source:Company,PhillipCapitalIndiaResearch,Sadhan
As per the 2011 census, the total number of households under formal banking
services in India is 145mn (59%) of which rural are 91mn (54% of total rural
households) and 53mn are urban (68% of total urban households). The untapped
78mnruralhouseholdsprovideabigopportunityformicrofinancelenders.Assuming
allruralhouseholdsarepotentialcustomers(onecustomerperhousehold),theclient
baseforthemicrofinancesegmentcanincreasefromthecurrent110mnhouseholds
to190mnhouseholds.
Considering a credit outstanding of only Rs 9,700 per customer (current loan per
customeratRs6,900+factoringanannualinflationof7%),themicrofinancemarket
canreachasizeofRs1.8trnfromthecurrentlevelofRs0.8trninnext45years.
Microfinanceindustry
Clientoutreach,mn
SHG
NBFCMFIs
Total
188
200
110
80
40
86
77
96
92
103
85
77
69
66
63
60
54
94
CAGR6%
CAGR21%
120
CAGR11%
160
23
27
32
27
28
33
FY09
FY10
FY11
FY12
FY13
FY14
0
FY19e
Source:Company,PhillipCapitalIndiaResearchEstimates,Sadhan
Microfinanceindustry
Grossloanportfolio,Rsbn
NBFCMFIs
Total
1828
SHG
2000
763
462
302
608
385
223
556
FY10
347
209
FY09
312
216
280
183
464
400
227
173
400
800
528
1200
731
CAGR10%
CAGR29%
1097
CAGR19%
1600
0
FY11
FY12
FY13
FY14
FY19e
Source:Company,PhillipCapitalIndiaResearchEstimates,Sadhan
The NBFCMFI sector in India has gone through two phases in its lifecycle so far.
Phase 1 was high growth (20062010) and phase2 was the Andhra Pradesh crisis
(Annexure: 3 Andhra Pradesh Crisis) and consolidation (201013). The sector has
gained momentum in its 3rd phase (current) and is expected to see accelerated
growth.Thisphaseischaracterisedbyamorestableregulatoryenvironment,steady
availability of funds, improving profitability with comfortable asset quality, and
capitaladequacyandrelativelylesserimpactofconcentrationrisk.
Hence, we expect that NBFCMFIs will gain 60% market share in thenext 45years
(from the current 40%) to due to favourable operating environment and superior
model(Annexure:2SHGModelvs.jointliabilitymodel).SinceSKSisthelargestNBFC
MFI, it should see accelerated growth, thus gaining market share in a fastgrowing
industry. We expect SKS market share to increase from 2.25% (% of overall
microfinanceloanoutstandingincludingthatofSHG)to4%inthenext45years.
SKSMicrofinanceclientoutreachandloanportfolio
Clientoutreach,mn
SKSMicrofinancemarketshare
Loanoutstanding,Rsbn
7%
78
80
70
6%
CAGR15%
CAGR35%
5%
60
50
40
35
29
30
17
15
14
20
10
7%
6%
90
5 8
FY10
FY11
FY12
FY13
FY14
4%
4%
4%
3%
2.5%
2%
12
2.3%
1.4%
1%
0%
FY09
FY19e
FY09
FY10
FY11
FY12
FY13
FY14
FY19e
Source:Company,PhillipCapitalIndiaResearchEstimates
Severalfactorsallayregulatoryandpoliticalrisk
RBInowactsasasoleregulatorandissuesdirectivesonoperationalparameters.
Around90%ofindustryplayers,includingSKS,areunderRBIssupervisionthis
allaysconcernsabouttheexistenceofanodalregulatoryauthorityandprovides
confidencetovariousstakeholders.
Establishment of credit bureaus addresses the concern surrounding credit
disciplineandensuresbetterassetqualitymanagement.
Microfinance(beingasensitivesubject)willalwaysbesubjectedtopoliticalrisk.
A wider geographical spread of portfolio is the most effective way to manage
this.
RBIactsasasoleregulatorformicrofinancelendersanditissuedaseparatesetof
directives for MFIs categorising the segment as nonbanking finance company
microfinanceinstitute(NBFCMFIs).NBFCMFIsaretightlyregulatedbytheRBIwith
Micro Finance Institutions Network (MFIN) acting as the SRO (selfregulatory
organisation). SKS satisfies the conditions mentioned under the RBIs directive
including qualifying asset criteria, asset classification and provisioning, pricing of
credit,andcapitalrequirementetc.therefore,itwasalsoreclassifiedasaNBFC
MFI.
The advent of the central regulator has allayed various stakeholders (banks, equity
investors,borrowers)concerns,whichhasresultedinrestorationofbankfundingto
the segment and flow of capital from various equity investors. The Government of
IndiahadpresentedtheMicrofinanceInstitutions(DevelopmentandRegulation)Bill,
2012 (MFIBill 2012) before the Parliamentof India in May2012. TheMFI Bill 2012
provided for the development and regulation of microfinance institutions and
envisaged empowering the RBI to issue directions to MFIs in connection with
prudential norms, corporate governance norms, and operations. The bill was
introduced in theLok Sabhain May, 2012 and was later referred to the standing
committee (headed by former finance minister Mr. Yashwant Sinha) for perusal.
However,thestandingcommitteedidnotapprovethedraftlegislationandreturned
theMFIBill2012statingthatthecurrentBillwasunacceptableinthepresentform;
the Standing Committee suggested that Centre must have wider consultations with
theStateGovernmentsandstakeholdersandarriveataconsensusonvitalissues.
The standing committee also recommended the setting up of a unified and
independent regulator Micro Finance Development and Regulatory Council
(MFDRC)fortheentiremicrofinancesector.Undernewgovernment,revisedMicro
FinanceBillwillbeintroducedintheparliament.
KeyhighlightsofRBIsdirectiveforNBFCMFIs
Parameters
Capital
requirement
Qualifying asset
criteria
PSL Norms for

NBFCMFI
Regulation
Capital adequacy ratio consisting of tier1 and tier2. Capital which shall not be less
than15%ofitsaggregateriskweightedassets.
Thetotaloftier2capitalatanypointoftimeshallnotexceed100%oftier1capital.
Income of borrowers P.A. Rural <= Rs 60,000; Urban <= Rs 120,000. Ticket size Rs
35,000(1stcycle)&Rs50,000(subsequent).
TotalindebtednessofborrowertobelessthanRs50,000.Tenure>=24monthsifloan
sizeinmorethanRs15,000.
Collateralfreeloanwithrepaymentmodelofweekly,fortnightly,ormonthlycollection.
Nopenaltyfordelayedpayment.
Qualifyingassetstoconstitutenotlessthan85%ofitstotalassets(excludingcashand
bankbalances).
Atleast70%ofloansforincomegenerationactivities.
ThecaponmarginsasdefinedbyMalegamCommitteemaynotexceed10%forlarge
MFIs(loansportfoliosexceedingRs1bn)and12%fortheothers.
The funding for loans fulfilling the above mentioned criteria qualifies for indirect
agricultureexposureunderPSL.
Loanprocessingfee<=1%
Standardasset(090days);substandardasset(91180days);lossasset(>180days)
Asset
classification
Provision
norms
Standard asset (1% of overall portfolio); substandard asset (50% of instalment

overdue);lossasset(100%ofinstalmentoverdue).Note:Theaggregateloanprovision
willbemaintainedathigherof1%ofoverallportfolioorsumofprovisioningforsub
standardandlossassets
Source:Company,RBI,PhillipCapitalIndiaResearch
Theneedtoavoidmultiplelendingtopreventoverindebtednesshasbeenkeenlyfelt
by MFIs after the Andhra Pradesh microfinance situation and especially after RBIs
subsequentlegislationprohibitingmultiplelending.MFIsarealsorequiredtobecome
a member of at least one credit bureau through which they will share client data
periodically and generate client reports before making decisions on loan
disbursements.
ThenumberofMFIsthathavejoinedcreditbureaushasbeenincreasing,andthereis
a significant initiative to check the credit history of microcredit borrowers and
understand their credit behaviour, repayment patterns, existence of multiple
borrowings,andriskofoverindebtedness.Currently,almostallMFIsarereportingto
creditbureaus,whichhaveover100mnclientrecords,andgeneratemorethan1mn
reportseverymonthforMFIsbeforetheyapproveloanstoborrowers.SKS,beingone
of the pioneer members, adopted the practice of credit check with credit bureaus
suchasEquifaxorHighmarkforeachdisbursement.
Microfinanceisasensitivesubjectandwillalwaysbesubjectedtopoliticalrisk.Wider
geographicalspreadofportfolioisthemosteffectivewaytomanagethis.SKShasa
welldiversified portfolio, spread over 16 states. Learning from the Andhra Pradesh
crisis, SKS has diversified its portfolio it has no more than 15% exposure to any
particular state. At the time of the Andhra Pradesh crisis, its exposure to the
erstwhilestatewas30%.
Geographicaldistributionofloanportfolio
1.8
1.2
1.1
3.9
15.8
4.3
5.5
5.7
15.7
8.4
13.7
10
11.7
Orissa
karnataka
westBengal
Bihar
Maharashtra
Uttarpradesh
Madhyapradesh
kerela
Rajashthan
Jharkhand
Punjab
Haryana
Chattisgarh
Uttranchal
SKSloandisbursementpolicy
Metric
state
District
Branch
NPA
Collectionefficiency
Capondisbursement
<15%
<3%
<1
NodisbursementtoabranchwithNPA>1%
Nodisbursementtoabranchwithontimecollectionefficiencyof<95%
Fastrevenuegrowthandcrosssellingtodriveearnings
SKS loan portfolio will see robust 41% CAGR, given the favourable operating
environment.
Toplinegrowthwillmirrorloanportfoliogrowthduetoregulatedmargin.
Improved financial parameters and well capitalised balance sheet enabled a
ratingupgrade,resultingineasyavailabilityoffundsatcompetitivecosts.
Crosssellingofvariousproductsandserviceswillaidthereturnratio.
Robustgrowthintheloanportfolio:SKSprovidessmallvalueloansandcertainother
basic financial services to its members (Annexure: 1 SKS operating model). Its
members are predominantly located in rural areas in India, and loans extended to
themaremainlyforuseinsmallbusinessesorforotherincomegeneratingactivities
andnotforpersonalconsumption.
SKS:Portfoliodistributionbasedonactivities
livestock
Tailoring&clothweaving
Grocerystoreandotherretailoutlet
16%
25%
Masonry,painting,plumbing,electrician,ca
rpenterandrelated
Tradingofvegitable&fruits
3%
4%
Tradingofagricommodity
5%
vehiclerepair
11%
6%
Eateries
Agriculture
6%
9%
8%
Garment&Footwearretailing
8%
Otherincomegeneratingactivities
SKS revenue growth is directly linked to its loan portfolio growth, given a cap on
margin (cost plus 10%). Being one of the largest microfinance institutions, the
company should benefit from the favourable operating environment. Its
disbursementsshouldseerobustCAGRof35%andloanportfolioshouldseeaCAGR
of41%overFY1417,drivenbynewclientadditions.
Trendinloanportfolioandnetinterestincome
GrossloanPortfolio,Rsbn
Grwth%(rhs)
Grwth%(rhs)
150%
50
100%
40%
20%
40
0%
20
50%
10
0
0%
4.0
20%
40%
2.0
60%
1.0
80%
0.0
100%
FY17e
FY16e
FY14
FY15e
FY13
FY12
FY11
100%
FY10
FY17e
FY16e
FY15e
FY14
FY13
FY12
80%
FY11
0
FY10
60%
20%
5.0
3.0
40%
20
40%
6.0
FY17e
60
30
60%
FY16e
0%
50%
7.0
FY14
80
40
80%
FY15e
20%
100%
8.0
FY13
100
Grwth%(rhs)
9.0
FY12
60%
120
60
FY11
80%
NetInterestIncome,Rsbn
FY10
140
Disbursement,Rsbn
SKSnewclientadditionsareexpectedtobearound4mn,takingthetotalclientbase
to 9.8mn in the next three years, driven by factors such as new branch/centre and
increased client base in existing centres. The branch and centre network should
increase to 1,435 (1,255 at the end of FY14) and 289,913 (228,188 at the end of
FY14),respectively,byFY17.
SKSclientbasetouched7.3mninFY11,i.e.,beforetheAndhraPradeshcrisis.Non
availabilityoffunds(bankslimitedcreditlinesaftertheAPcrisis)reducedSKSability
toserviceitsclientsanditsclientbasedeclinedto5mnbyFY13.Availabilityoffunds
fromthebankingsystemandstrongdemandforitssecuritisedpaperwillprovidethe
necessary resources to reach out to more clients, which were not serviced so far.
EfficientuseoftechnologywillenableSKStoaddmoreclientstoexistingcentresthus
improvingtheoperationalefficiencies.
Clientoutreach
(nos)
FY10
FY11
Branches
2,029
2,379
Centres
226,017 274,782
No.ofMembers(mn)
6.8
7.3
FY12
FY13
1,461
1,261
229,600 216,234
5.4
5.0
FY14
1,255
228,188
5.78
FY15e
1,285
239,597
6.0
FY16e
1,335
263,557
7.8
FY17e
1,435
289,913
9.8
Exploring multiple funding avenues: Primary sources of funding for NBFCMFIs are
bank loans and securitisation. After the crisis, scheduled commercial banks limited
their funding to the MFI sector due to the latters high delinquency. Even
securitisationdealsdeclined,giventhefragilestateoftheindustry.
Gradually,themarketstabilised,therewasclarityontheregulatoryfront,fairpricing
practiceswereadopted,andcreditbureauswereestablished.AllthisallowedNBFC
MFIs to recapitalise their balance sheets, which helped their performance, in turn
resulting in better availability of funds and a rating upgrade. The cost of bank
borrowingsdeclinedwithdiminishingcreditrisk.Borrowingcosts,whichwereatbase
rate +400bps immediately after the Andhra Pradesh crisis, declined to base rate
+250bps. Securitisation regained its ground with improved business fundamentals
(because securitisation deals are usually done in Q4, its share in overall funding
appears very high at the end of fiscal we expect yearend securitised funding
sourcetoremainhigh,upwardsof45%).
FundingSource
Bank
Financialinstitution
NBFC
Securitisation
FY09
48%
17%
0%
35%
FY10
44%
16%
2%
38%
FY11
64%
12%
2%
23%
FY12
44%
8%
1%
47%
FY13
58%
7%
0%
35%
FY14
45%
6%
2%
48%
SKSisexploringvariousfundingoptionssuchascommercialpapermarket,external
commercialborrowing,andnonconvertibledebenturestoreduceitsfundingcosts.It
recentlyissuedRs300mnworthofcommercialpaper.Thedeclineinfundingcostwill
be passed on to the borrower due to regulated margins. However, we believe that
thedeclineinthelendingratewillbeseenasamanifestationoffairpricingpractice
andenablesSKStowardoffanynegativepublicperceptionagainstMFIs.
Crossselling of various products and services to enhance RoA: SKS leverages its
networktodistributefinancialandnonfinancialproductsofotherinstitutionstoits
members (customers) at a cost that is lower than competition. Its network also
allows such distributors to access a segment of the market to which many do not
otherwise have access. While the focus continues on its core business of providing
microcredit services, it continues to diversify into other businesses involving fee
basedservicesandsecuredlending(suchasgoldloans).Itsobjectiveintheseother
businesses is to focus on lending that will allow it to maintain repayment rates,

increase member loyalty, and also provide economic benefits to its members and
their families. Such other products and services offering fee income will allow it to
increaseitsoverallRoA.
Financialproductsandservicesotherthanmicrocreditinclude:providingloanstoits
members for the purchase of mobile handsets in association withNokia IndiaSales
PrivateLimited,securedloanstoitsmembersagainstgoldascollateral,andloansto
its members to facilitate the purchase of solar lamps in association with D.Light
Energy Private Limited. Another product in the pilot phase is loans for sewing
machines.SKSearnsacommissionfromthemanufacturersforfacilitatingthesaleof
theseproducts.Apartfromgoldloans,alltheseloansareunsecuredandforproducts
thatenhancesmemberproductivityinitseconomicactivities.
Creditbreakup
Solarlamp
1%
Nonmicro
credit
5%
Microcredit
95%
Mobile
0%
Gold
4%
Tax liability to remain low in medium term: SKS had carried forward deferred tax
assets (DTA) worth Rs 5.58bn by the end of FY14. As the DTA gets utilised against
future profit, the tax rate in normal circumstances will be NIL (until the entire DTA
provisionisutilised).Whilethecompanywillbesubjectedtominimumalternatetax,
for FY15, theeffective tax shouldbenil as SKS will continue to writeoff its Andhra
Pradesh loan portfolio (completely provided) in order to avoid MAT. As per our
estimate,SKStaxincidencewillbenilforFY15andat20%inFY1621.
Rsmn
Deferredtaxasset(DTA)
MATcredit
OutstandingProvisiononAPportfolio
PBT
Taxliability(innormalcase)
DTAutilised
Writeoff
Effectivetax(MAT)
Effectivetaxrate
FY15e
5038
0
202
1588
540
540
1588
0
0%
FY16e
4227
416
0
2386
811
811
202
416
17%
FY17e
3108
1043
0
3291
1119
1119
0
658
20%
DuPontAnalysis
Interestonloan
Incomeonsecuritisation
Loanprocessingfee
Incomefromoperations
financialexpenses
Netinterestincome
Otherincome
Totalincome
Operatingexpenses
Operatingprofit
provisionandcontingencies
Profitbeforetax
Tax
Profitaftertax
leverage
Returnonequity
FY10
21.5
2.7
0.4
24.6
8.1
16.5
2.4
18.9
9.9
9.0
1.4
7.6
2.6
4.9
4.4
21.5
FY11
24.7
2.9
0.2
27.8
8.3
19.5
2.6
22.1
12.3
9.8
5.7
4.1
1.5
2.7
3.1
8.2
FY12
11.9
1.2
0.3
13.4
6.7
6.7
2.3
9.0
14.0
5.0
39.0
44.0
1.2
45.2
2.7
122.8
FY13
10.4
2.8
1.1
14.3
6.8
7.5
2.4
9.9
12.4
2.5
11.6
14.1
0.0
14.1
5.1
72.0
FY14
15.7
2.2
1.3
19.3
8.6
10.7
2.5
13.2
9.8
3.4
0.6
2.8
0.0
2.8
5.9
16.5
FY15e
17.4
2.1
1.5
21.0
8.0
13.0
3.1
16.1
10.7
5.5
0.1
5.3
0.0
5.3
4.0
21.5
FY16e
17.9
1.9
1.4
21.2
8.0
13.2
3.1
16.3
9.8
6.5
0.7
5.8
1.1
4.7
3.7
17.4
FY17e
18.3
1.7
1.4
21.5
8.1
13.4
2.3
15.7
9.1
6.6
0.7
5.9
1.1
4.8
4.2
20.2
Scalablemodel+technologytoprovideoperatingleverage
SKS intends to implement its growth objectives without adding a significant

numberofnewbranchesorincurringadditionalcapitalexpenditure.
FreshadditionofheadcountwillbeinSangammanagers(loanofficers),withan
annualrunrateof1,500loanofficer.
SKS will continue to focus on optimising its cost structure, which includes
enhancing employee productivity, introducing technology for expedient
reporting,andreengineeringtheinternalprocesses.
ThecosttoAUMratioshoulddeclinefurtherfrom9%to7%byFY17.
SKS provides collateralfree credit to most of its members in their own

neighbourhoods,anditsSangamManagers(loanofficers)assistwiththeprocessesof
credit verification. While this helps its borrowers save on travel costs, it results in
high operating expenses, particularly personnel and administrative costs. Personnel
costs were 67% of its operating expenses in FY14. It has embarked on cost
optimisation initiatives by improving its ratio of borrowersperSangamManager,
while realising the benefits of economies of scale. The borrowersperSangam
Managerratiowas411asof31stMarch2012,andhasimprovedto944by2014.
SKS merged its branches, both in undivided Andhra Pradesh and other states. It
intends to implement its growth objectives without adding a significant number of
newbranchesorincurringadditionalcapitalexpenditure.Therewasanetreduction
ofapproximately200branchesinFY13andsixbranchesinFY14.Itstotalheadcount
was reduced from 16,194 as of 31st March 2012 to 8,932 as of 31st March 2014.
Though thecapital expenditure may notbe at a rapidpacecompared withbalance
sheetgrowth,SKSdoesnotwanttoholdbackinanenvironmentwhichisfavourable
for growth. Considering the huge potential for client addition and expansion of
centresunderway,thefreshadditionofheadcountwouldbeSangammanagers(loan
officers)withanannualrunrateof1,500loanofficers.
Otherfactorsthatthecompanycontinuestofocusonisoptimisingcoststructure
including enhancing employee productivity, introducing technology for expedient
reporting, and reengineering internal processes. SKS has completed all branch
connectivitywithdailyMISflowtotheheadoffice.Thishasenabledbettertreasury
and cash management, reduced the need of maintaining high cash balances at
branches,andreducedoperatingcost(costofmanagingcashishigh).Theresultsof
cost optimisation are seen in a 42% fall in operating expenses between FY12 and
FY14. The costtoassetundermanagement ratio declined over the last few years
andshouldkeepfalling.
SKS other technology initiatives are refactoring of its inhouse lending system for
effective monitoring and control, enabling loan officers with handheld devices to
improveproductivity,andmobilebankinginordertomakedisbursementscashless.
These initiatives will lead to an improvement in the clientperloanofficer ratio as
wellasafallinthecashbalanceinitsbalancesheet.
Improvingoperatingefficiency
Clientperloanofficer
Cashaspercenttototalasset(rhs)
CosttoAUMratio
16%
1200
14%
12%
1000
10%
800
8%
600
6%
400
4%
2%
200
0%
FY09 FY10 FY11 FY12 FY13 FY14 FY15e FY16e FY17e
0
FY11
FY12
FY13
FY14
FY15e FY16e FY17e
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Riskmanagementtools:businessmodel,geography,monitoring
Underthejointliabilitygroupmodel,peerpressureactsasabiggestdeterrentto
groupmembersdefaulting.
Theestablishmentofcreditbureausenablesthelendertocheckcredithistoryof
microcreditborrowers.
Wider geographical spread of portfolio is the most effective way to manage
politicalrisk.
SKS has an advantage over banks because of its strong Joint Liability Group (JLG)
model. It has been rigorous in its approach towards customer education and
monitoringofitscustomerbehaviour,whichmakesitstandoutfrombanks.
Under its jointliability grouplending model, SKS lends solely to women borrowers
(similartotheGrameenBankmodel)inthismodel,womenguaranteeeachothers
loans.TherearethreereasonswhySKSlendsonlytowomen:1)womentendtouse
resourcesmoreproductivelythanmen;2)theyaremorelikelytoinvestmostoftheir
incomebackintothehousehold;3)theyaremorelikelytoavoidriskyventuresand
insteaduseloanstoundertakesmall,manageableactivities.
SinceallthemembersinthegroupareliabletorepayanyloansundertheJLGmodel,
peer pressure acts as a biggest deterrent for the group members to default. The
collection efficiency has been very encouraging under the JLG model. The
establishment of credit bureaus enables the lender to check the credit history of
microcredit borrowers andunderstandtheir credit behaviour, repayment patterns,
existenceofmultipleborrowings,andriskofoverindebtedness.
Microfinanceisasensitivesubjectandwillalwaysbesubjectedtopoliticalrisk.Awider
(geographic)portfoliospreadisthemosteffectivewaytomanagethis.SKShasawell
diversifiedportfoliospreadover16states.LearningfromtheAndhraPradeshcrisis,SKS
doesnothavemorethan15%exposuretoanyparticularstate.Similarly,ithasputina
disbursement cap per district and per branch. It also follows a stringent NPA
recognitionpolicy>60daysoverduevs.the>90daysprescribedbytheregulator.
Having completely provided for its Andhra Pradesh exposure, any improvement in the
operating environment could be value accretive for SKS. It has obtained interim relief
fromtheSupremeCourttorestartlendingandcollectionactivitiesinthestate.Theapex
courthasrelaxedsomeofthecriterialaiddownintheAndhraPradeshMicrofinanceAct,
2010.Whilethisispositive,andSKShasrestartedoperations,ithasdonesoinalimited
way. The company has preferred to wait for the parliaments sanction of the MFI Bill,
2012,soastoavoidanypossibleconfrontationwiththestategovernment.
Trendinassetquality
NNPA,%
101
98
FY13
FY14
95.1
95
1.6%
0.8%
1.0%
1.2%
0.7%
1.0%
94
4.8%
0.9%
0.2%
FY11
10.9%
2.4%
1.3%
7.2%
FY10
97.3
96
0.1%
0.9%
0.3%
0.2%
2.3%
FY09
0.4%
0.3%
0.2%
1.0%
20%
99.9
97
17.7%
30%
99.9
99
20.1%
40%
Collectionefficiency(%)
100
37.2%
33.7%
50%
10%
Creditcost,%loanportfolio
52.1%
GNPA,%
60%
FY15e
FY16e
FY17e
93
0%
92
FY12
FY13
FY14
FY11
FY12
KeyRisk
Politicalriskandnaturaldisasterposeabiggestrisktothesector
WehavenotfactoredAndhraPradeshlikecrisisinourestimatesconsideringvarious
developments like strong regulator; selfimposed credit disciple; efficient credit
monitoringandgeographicallydiversifiedloanportfolio.Empoweringstatelegislation
tooverridetheRBIdirectivetoNBFCMFImayimpactthebusinessprospects.
Nonavailabilityoffundmayimpactbusinessgrowth
Banks are primary funding source for SKS Microfinance. Around 86% of on book
fundingrequirementissourcedfrombanks.Anydisruptioninflowoffundstoimpact
thebusinessgrowthandourassumptionofrobust41%CAGRinloanbookoverFY14
17e.MostofthebankshaverestoredfundingtoSKSgivenitsimprovedfinancialsand
strongcapitalbase.
Highattritionrate
Employee strength of the SKS Microfinance was 8,932 as on March 31, 2014. The
manpower distribution shows that the field staff in branch offices is 7,731 (86.6%)
and Head Office & Regional Office staff is 1,201 (13.4%). Voluntary attrition rate
duringFY14was26.1%.StudydonebyMFII(MicrofinanceInstituteofIndia)suggest
high attrition for the industry ranges between 6% 53%. The high attrition is in the
fieldofficersegment,whichmayimpactbusinessgrowthandreduceproductivity.
COMPANYNAME INITIATINGCOVERAGE
Annexure:1
SKSBusinessmodel
The company is primarily engaged in providing microfinance to lowincome
individuals in India. SKS Microfinances core business is providing small value loans
and certain other basic financial services to its members (customers), who are
predominantlylocatedinruralareasinIndia.ThesemembersuseSKSloansmainly
for small businesses or for other incomegenerating activities; they are not usually
used for personal consumption. These individuals often have no access (or very
limitedaccess)toloansfrominstitutionalsourcesoffinancing.
In its core business, SKS uses a villagecantered, grouplending model to provide

unsecuredloanstoitsmembers.Thismodelreliesonaformofsocialcollateraland
ensures credit discipline through peer support within the group. SKS believes this
model makes members prudent in conducting their financial affairs and prompt in
repayingtheirloans.Ifanindividualborrowerfailstomaketimelyrepayments,other
members in the group will not be able to borrow from SKS in the future. In such a
situation, the group usually uses peer pressure to encourage the delinquent
borrowertomaketimelyrepaymentsorwilloftenmakearepaymentonbehalfofa
defaulting borrower, effectively providing an informal joint guarantee on the
borrowersloan.
Under its jointliability grouplending model, SKS lends solely to women borrowers
(similartotheGrameenBankmodel)inthismodel,womenguaranteeeachothers
loans.TherearethreereasonswhySKSlendsonlytowomen:1)Womentendtouse
resourcesmoreproductivelythanmen;2)Theyaremorelikelytoinvestmostoftheir
incomebackintothehousehold;3)Theyaremorelikelytoavoidriskyventuresand
insteaduseloanstoundertakesmall,manageableactivities.
SKSsapproachistoprovidefinancialservicesatthedoorstepofmembersinvillages
and urban colonies. This allows its customers convenience and savings in terms of
cost and time associated with travelling to mainstream banks. It also enables SKS
staff to promptly and fully collect repayments. SKS loans are designed for
convenience with small weekly repayments corresponding to cash flows. Small first
loansinculcatecreditdisciplineandcollectiveresponsibility.
SKSusesafivememberJointLiabilityGroup(JLG)lendingmethodologybasedonthe
Grameen Bank model, where each member of the group serves as the ultimate
guarantorforeachofitsmembers.Further,multiplegroups(4to10)ofmembersina
singlevillagearecombinedtogetherasaSangam(centre).TheSangamisresponsible
for the repayment of all groups, creating a dual jointliability system, where the
Sangampaysincaseanyofthegroupdefaultsonpayment.Thecentremeetsevery
week, where the Sangam Manager (Loan Officer) collects loan application forms,
disbursesloans,andcollectsloaninstalments.
ThewayMFIsoperateinIndia
Selectionofvillages
Beforestartingoperations,staffconductsvillagesurveystoevaluatelocalconditions
like population, poverty level, road accessibility, political stability, and means of
livelihood.
GroupFormation
Womenformselfselectedfivemembergroupstoserveasguarantorsforeachother.
Experience has shown that a fivemember group is small enough to effectively
enforcegrouppeerpressureand,ifnecessary,largeenoughtocoverrepaymentsin
caseamemberneedsassistance.
CompulsoryGroupTraining
CGTisafourdayprocessconsistingofhourlongsessionsdesignedtoeducateclients
onSKSprocessesandproceduresandtoalsobuildacultureofcreditdiscipline.Using
innovativevisualandparticipatoryteachingmethods,SKSstaffintroducesclientsto
itsfinancialproductsanddeliverymethods.CGTalsoteachesclientstheimportance
ofcollectiveresponsibility,howtoelectgroupleaders,howtoaffixsignatures,anda
pledge that serves as a verbal contract between SKS and its members. During this
training period, SKS staff collects quantitative data on each client to ensure
qualification requirements are met, as well as to record baseline information for
futureanalysis.Onthefourthday,clientstakeaGroupRecognitionTestconducted
by a different staff member than the one who trained them. If they pass, they are
officiallyacceptedasSKSmembers.
CentreMeetings
DuringCentreFormation,groupsarecombinedtoformacentreof3to10groupsor
15 to 50 members. Weekly Centre meetings serve as a time to conduct financial
transactions. Meetings are held early in the morning, so as to not interfere with
clientsdailyactivities.Aleaderanddeputyleaderareselectedtofacilitatemeetings
and ensure compliance with SKS procedures. In addition to financial transactions,
membersusetheweeklymeetingstodiscussnewloanapplicationsandcommunity
issues. Centre meetings are conducted with rigid discipline in order to sustain the
environmentofcreditdisciplinecreatedinCGT.
KeyfeaturesofJLGModel
Fivemembersgroupsarethebasicunits
58suchgroupsconstituteabranch(Centre)
Centresmeetonceaweek
Disbursementsandcollectionsaremadeincentremeetings
GroupsandCentresappraisetheloansandundertakejointliability
AllCentremeetingsareattendedbythestaffofMFI
Flatrateofinterestcalculation
StartedbyGrameenBankofBangladesh
Highlystandardisedprocesses
Manyadoptersallovertheworld
Annexure:2
SKSsJLGmodelversusthebanksSHGlinkagemodel
SelfHelpGroupModel
InitiatedinIndiainthe1980s
Clientsmaybemenorwomen
Agroupof1020individuals
Isanindependententity
IsusuallypromotedbySelfHelpPromotingInstitutions(SHPIs)orMFIs
Havetheirownbankaccountsandbooksofaccounts
SHGscollectsavingsandgiveloanstotheirmembers
Canborrowontheirownaccount
SHGscanexecutedocuments
Arerecognisedbygovernment
Alsotakeupsocialissues
SHGhasitsrootinsocialdevelopment
Banksprovideloansonlyafter6monthsofgroupformation
JLGModel
Agroupcomprising5members
410suchgroupsconstituting2050membersformingacentre
UsuallypromotedbyanMFI
Mainlypromotedforloans,notinternaltransactions
Nobankaccounts
NobooksofaccountsaremaintainedbyJLGs
HavetodependonMFIforalltheirloanrequirement
Arenotrecognisedbythegovernment
Cannotexecutedocuments
JLGhasitsrootsinmicrofinance
LoansprovidedimmediatelybytheMFIsafterthegroupisformed
WhyistheJLGmodelmoresuccessfulthanbanksSHGmodel?
EventhoughSHG(selfhelpgroup)linkageprogrammemadeimpressiveprogressin
thelasttwodecades,thelastfewyearshaveseenstagnationintheircreditgrowth.
Themainreasonswere:1)inSHG,groupformationisperceivedasameanstoavailof
governmentsubsidiesandentitlements,whichalsoledtoanincreaseinthenumber
of multiple memberships, and 2) the financing banks were also ill prepared for the
sudden spurt in SHG loans and their monitoring and supervision of such loans
becamelessregular(andeventotallyabsentattimes!).
FreshloanstoSHGshavebeennearstagnantforlastfewyears,thoughitshoweda
marginalrisein201213.However,aregionwiseanalysisshowsadisturbingfeature
Southern and Central regions show an increase of nearly 20% and 10% in the
numberofSHGsthatextendedfreshloans;theNorthernregion,too,sawamarginal
increase of 1.74%. All other regions points to negative growth in the numbers.
BackwardstatessuchasBihar,ChhattisgarhandJharkhandreportedadeclineofover
20%whileNorthEasternStatesrecordedahigh50%decline.
SHGlendingbybanksishighlyconcentratedinSouthernIndia
MountingNPAsinSHGlending
From an envious record of almost 100% recovery, the NPAs of SHG loans by banks
havereachedanalarminghighofover7%ofloansoutstandingagainstthem.More
painfulisthefactthatloanstoSHGsinthemostresourcepoorregionsinthecountry
reportedNPAsofover10%.GNPAsinSHGstoodat7.08%in201213thisfigure
wasjust2.9%in200910.Thisexplainswhybankshavebeenwaryoflendinginthe
SHG segment. Southern region with an NPA of 5.11% was the lowest while Central
regionwithanalarming17.3%wasthehighest.OfgraveconcernarethehighNPAsin
major states like Madhya Pradesh (21.16%), Uttar Pradesh (18.22%), Odisha
(18.27%),TamilNadu(10.81%)andKerala(12.38%)
Alarmed by the steady increase in the NPAs of loans to SHGs, NABARD undertook
studies in two important states Uttar Pradesh and Odisha to understand the
underlyingreasonsforthespurt.
Thestudieshighlightedthefollowingreasons:
Focus on group formation for availing subsidy from the government, not self
helporgroupdynamics.
Some groups were not functioning at all no regular meetings, no records of
transactions, not trained / exposed to SHG functioning, no regular internal
savingsorlendingandmembersnotevenawareofthedefaultofloans.
Self Help Promoting Institutions (SHPIs) do not provide the escort services
necessary to nurture the SHGs, rather more target oriented and confined to
linkingthegroupswithbanksfordisbursementofloanandsubsidy.
Banks have largely left the issue of monitoring / supervising the group
functioning to the SHPIs, and there were no regular postdisbursement follow
ups.
Widespread prevalence of middlemen / agents for SHGbank linkage, even for
depositingthesavingsamountthisledtopilferages.
NopropercreditappraisalorratingofSHGswasdonebeforeextendingtheloans
No proper training to the bank staff or to SHPIs/SHG members before groups
werelinkedtobanks.
Wilful default and external environment was not conducive to regular loan
repayment.
Annexure3:
AndhraPradeshMicrofinanceCrisis
AndhraPradeshhasthehighestconcentrationofmicrofinanceoperationswith17.31
million SHG members and 6.24 million MFI clients. The total microfinance loans in
AndhraPradeshincludingbothSHGsandMFIsstoodatRs157,692mnwithaverage
loanoutstandingperpoorhouseholdatRs62,527,whichisthehighestamongallthe
statesinIndia.
Thisdataimpliesthatthestateishighlypenetratedbymicrofinance(bothMFIsand
SHGs) giving rise to multiple borrowing. The average household debt in Andhra
PradeshwasRs65,000vs.nationalaverageofRs7,700.Thishighpenetrationofboth
SHGsandMFIsalsoledtostiffercompetitionforclientoutreachbetweenthestate
and private financial providers resulting in wider conflict of interest. To arrest the
growthofMFIsandtostemtheallegedabusivepracticesadoptedbytheMFIs,the
state government promulgated an ordinance on October 16, 2010. In December
2010,theOrdinancewasenactedintoTheAndhraPradeshMicrofinanceInstitutions
(RegulationofMoneylending)Act,2010.
The ordinance was a result of a series of suicides attributed to the alleged abusive
practices of MFIs such as charging high interest rates, adopting coercive collection
practices,andlendingaggressivelybeyondtherepaymentcapacityoftheborrowers
ratherthanhelpingthepoorgetoutofpoverty.Accordingtoonereportmorethan
77ruralpeoplehavebeendriventosuicidesunabletobearthecoercionunleashed
bytheirrecoveryagents.Oneofthekeystepstheordinancehasproposedissetting
upoffasttrackcourtsineverydistrictforMFIrelatedissues.
AsofJanuary,2011,theMFIrepaymentratesfellfrom99%rightbeforetheissuance
of the ordinance to less than 20%. The stringent regulations set by the state
government(suchasmonthlyrepayments,allMFIbranchestoberegisteredwiththe
government, no door to door collection of repayments etc.) coupled with active
encouragementbythelocalpoliticians,ledtothefallinrepaymentlevels.SomeMFIs
suchasStarMicroFinSociety,asmallNGOMFI,faced0%repaymentrateinurban
operationareasand2%inruralareasvs.100%beforetheMFIOrdinance.
This, along with other reasons, led to what is commonly termed as the AP crisis.
Thecrisisunderminedthegrowthandindeedtheveryexistenceofcommercialised
microfinanceinstitutions.ThecrisishadanimpactnotonlyinthestateofAPbutalso
throughout India with many MFIs facing issues raising funds, expanding operations,
etc.
MultipleBorrowing
A key findingof the CMF study onAccess to Finance in Andhra Pradesh was that
multipleborrowingisextremelycommonamongruralpoor,withanestimated84%
ofhouseholdshavingtwoormoreloansfromanysource.Thefindingsalsoimplied
thatmanycasesofmultipleborrowingappeartobedrivenbyaninabilitytoobtain
sufficient credit from a single source as suggested by data collected on timing and
purposesofloans.
Thestudyfurtherbroughtoutthathouseholdshadtakenmorethanoneloanwithin
twosuccessivemonthsinthepastyear36%of428households(153households)
reported taking more than one loan within two successive months mostly from
informalsourcesinthepastyear.
Distributionoftotalloans
60%
DistributionofTotalLoans
50%
40%
30%
20%
10%
0%
2Loans
3Loans
4Loans
5Loans
6Loans
SourcesofCredit
CMFs study highlighted that respondentsdid not borrow from banks because they
did not have enough savings to open bank accounts; they perceived opening bank
accountswasexpensiveandamajorityofthemhadnoideaabouttheprocess.
MajorSource
AnyBank
SHGs
MFIs
Informal
PercentageofHouseholdswithLoanOutstanding
2009
2012
34%
33%
55%
57%
9%
6%
67%
64%
Accordingtomicrosave,inmorethan80%ofthefocusgroupsessions,respondents
listed SHGs, moneylenders, andMFIsas the most popular options in order to meet
theircreditrequirements.Mostrespondentsdidnotpreferbankingservicesdespite
the presence of banking network in the study areas. Respondents cited inordinate
delays,cumbersomeprocedures,andcomplexdocumentationrequirementsofbanks
asthemajorreasonsfornotpreferringbanksasasourceofcredit.
AftertheAPMFIcrisis
After the Andhra Pradesh Microfinance crisis, certain large MFIs with their
headquarters and substantial portion of their businesses located within the state
weremoresignificantlyandadverselyaffected.IntheyearfromAugust2012,several
of the big commercially oriented NBFCMFIs had recovered their confidence as the
banksbegantosupplyfundsagaintoMFIs.InvestorsregainedtheirinterestinMFIs,
primarilythoselocatedoutsideAndhraPradesh,resultinginariseinthenumberof
investments in MFIs. The guidelines issued by the RBI also brought about a more
orderly manner of operation for MFIs, which improved the credibility of the MFI
sectorasanindustrywithgreatertransparencyandlessrisk.
The situation for the NGOMFI sector also referred to as the nonprofit or
communitybasedmicrofinancesectorappearstobedifferent.Manysectorleaders
believethatinthecurrentscenario,theseMFIs,majorityofwhicharesmallandlocal
in terms of their operational focus, will not fare as well. As the focus is almost
completely concentrated on the regulated NBFC sector, NGOMFIs are generally
strugglingtorecover.
Several prominent Andhra Pradeshbased MFIs other than SKS Microfinance have
continuedtoexperiencenegativeornegligiblebusinessgrowth,despiteexpirationin
June2013ofthemoratoriumforloanrepaymentgrantedbythebanksaspartofan
earlierloanrestructuringdeal.InJuly2013,fivetroubledMFIsBhartiyaSamruddhi
Finance Limited (BASIX), Spandana, Share, Asmitha Microfin Limited and Trident
Microfin Private Limited, sought RBIs permission for a second round of loan
restructuring,whichwassubsequentlyturneddown.
BackgroundoftheAPMFIAct
Andhra Pradesh had a unique position of leadership within the Indian microfinance
industry up until 2010, evidenced by the presence of the four largest MFIs in India
withinthestate.InMarch2010,AndhraPradeshaccountedformorethan30%ofall
borroweraccountsandoutstandingloanportfoliosofMFIs.
Even though the Andhra Pradesh Government made significant investments in

subsidising financial inclusion through SBL programs, MFIs continued to increase
financingtotheircustomers.AnaddedfeatureofthishighlevelofMFIlendinginthe
statewaslowdefaultrateswithportfolioatriskbeinglessthan1.0%formostofthe
MFIs.Incontrast,theSBLprogramsreportedmuchhigherdefaultrates.
ImpactoftheAPMFIAct
The APMFI Ordinance and the APMFI Act had an immediate impact on the
recoveriesbyMFIs.ThestringentregulationssetbytheAPMFIAct,particularlythe
inability to hold centre meetings for repayment of loans, led to a significant fall in
repaymentlevels.Recoveryratesthatwereashighas99.0%plummetedtoaslowas
10.0% in Andhra Pradesh. There was no effective way by which the MFIs could
enforcerepaymentsandthisbecameamajorconcernfortheMFIsectorinAndhra
Pradesh.
AccordingtotheStateoftheSectorReport2011,theamountoftotalunpaidloans
extendedbyMFIstoaroundfivemillionborrowerswasapproximatelyRs70bn.Inthe
short run, this dampened credit supply and encouraged a lack of credit discipline.
Given the consequences of restrictive regulatory changes and surge in non
repayments by clients, MFIs in Andhra Pradesh greatly reduced or stopped lending
operationsafterNovember2010.
Financials
ValuationRatios
IncomeStatement
Y/EMar,Rsmn
Interestincomeonportfolioloans
Incomefromassignedloans
loanprocessingfee
IncomefromOperations
OtherIncome
Totalrevenue
Financialexpenses
NetInterestIncome
Personnelexpenses
Operatingandotherexpenses
Depreciationandammort
Totaloperatingcost
Preprovisionprofit
Provisionandwriteoffs
Profitbeforetax
Taxexpense
Profitaftertax
FY14
3930
557
338
4828
623
5451
2142
2686
1656
766
41
2462
847
146
701
0
701
FY15e
5188
632
452
6275
937
7212
2399
3876
2241
903
42
3185
1627
40
1587
0
1587
FY16e
7367
823
570
8763
1251
10014
3287
5476
2926
1066
42
4034
2693
300
2393
470
1923
FY17e
10314
1057
769
12142
1222
13365
4536
7606
3766
1279
43
5089
3740
420
3320
620
2700
BalanceSheet
Y/EMar,Rsmn
LIABILITIES
Equitysharecapital
Reservesandsurplus
Networth
Borrowingfrombanks
Borrowingfromfinancialinstitution
BorrowingfromNBFCs
TotalBorrowings
CurrentLiabilities&Provisions
TotalLiabilities
FY14
FY15e
FY16e
FY17e
1082
3313
4592
13212
1646
455
15313
5068
24973
1260
8699
10156
17175
2370
667
20213
3652
34020
1082
10623
11902
24217
3318
965
28500
4799
45200
1082
13323
14612
33904
4645
780
39330
6270
60212
ASSETS
TotalFixedassets
Portfolioloans
Advances
Otherassets
Cashandbankbalances
TotalAssets
112
17207
321
563
6710
24966
124
24486
325
682
8360
34020
138
34371
330
843
9484
45200
153
47843
334
1023
10830
60212
PreprovisionOperatingRoAE(%)
RoAE(%)
PreprovisionOperatingROA(%)
RoAA(%)
EPS(Rs.)
Dividendpershare(Rs.)
BookValue(Rs.)
AdjBV(Rs.)
FY14 FY15e
19.9
22.1
16.5
21.5
3.4
5.5
2.8
5.4
6.5
12.6
0.0
0.0
42.4
80.6
42.3
78.9
RevenueAnalysis:
InterestincomeonIBA(%)
InterestcostonIBL(%)
NIMonIBA/AWF(%)
NetinterestincometoAUM(%)
Otherincome/AWF(%)
Op.Exp/TI(%)
Op.Exp/AWF(%)
Op.Exp/AUM(%)
Employeeexps/Opexps(%)
Tax/Pretaxearnings(%)
29.7
13.6
11.0
7.5
2.6
74.4
15.1
9.0
67.3
0.0
AssetQuality:
GNPAs/GrAdv(%)
NNPAs/NetAdv(%)
Provision&contingencies/GrAdv(%)
GrowthRatio:
Advances(%)
Borrowings(%)
Networth(%)
NetIntIncome(%)
Otherincome(%)
NonIntExp(%)
ProfitBeforeTax(%)
Netprofit(%)
Asset/LiabilityProfile
AvgAdv/AvgBorrowing(%)
Avgcash/Avgasset(%)
Incrnetworth/asset(%)
Leverage(x)
CapitalAdequacyRatio:
CRAR(%)
TierI(%)
NNPAstoEquity(%)
FY16e
24.4
17.4
6.8
4.9
17.8
0.0
110.0
107.5
FY17e
28.2
20.4
7.1
5.1
25.0
0.0
135.0
132.0
30.1
13.5
13.5
8.6
3.3
66.2
15.3
8.6
70.3
0.0
29.8
13.5
14.2
9.0
3.2
60.0
13.7
7.9
72.5
19.6
29.5
13.4
14.7
9.4
2.4
57.6
12.4
7.2
74.0
18.7
17.7
0.1
0.9
10.9
0.9
0.2
1.8
0.8
1.0
2.3
0.7
1.0
12.4
5.4
17.6
69.2
21.4
6.2
123.6
123.6
42.3
32.0
121.2
44.3
50.4
29.4
126.3
126.3
40.4
41.0
17.2
41.3
33.5
26.6
50.8
21.2
39.2
38.0
22.8
38.9
2.3
26.1
38.7
40.4
103.2
31.3
2.7
4.4
117.4
25.5
18.9
2.3
120.8
22.5
4.4
2.8
121.2
19.3
5.1
3.1
27.2
27.2
0.3
35.8
35.8
2.2
28.2
28.2
2.2
24.2
24.2
2.2
Management
VineetBhatnagar(ManagingDirector)
JigneshShah(HeadEquityDerivatives)
(9122)23002999
(9122)66679735
Research
Automobiles
DhawalDoshi
PriyaRanjan
Banking,NBFCs
ManishAgarwalla
PradeepAgrawal
PareshJain
(9122)66679769
(9122)66679965
(9122)66679962
(9122)66679953
(9122)66679948
Consumer,Media,Telecom
NaveenKulkarni,CFA,FRM (9122)66679947
VivekanandSubbaraman
(9122)66679766
ManishPushkar,CFA
(9122)66679764
Cement
VaibhavAgarwal
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AnjaliVerma
(9122)66679967
Engineering,CapitalGoods
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(9122)66679759
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(9122)66679986
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(9122)66679949
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(9122)66679992
Midcap
VikramSuryavanshi
Metals
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GauriAnand
DeepakPareek
(9122)66679768
Retail,RealEstate
AbhishekRanganathan,CFA (9122)66679952
NehaGarg
(9122)66679996
Technicals
SubodhGupta,CMT
(9122)66679762
ProductionManager
GaneshDeorukhkar
(9122)66679966
DatabaseManager
VishalRandive
(9122)66679944
(9122)66679951
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(9122)66679950
Sr.ManagerEquitiesSupport
RosieFerns
(9122)66679971
(9122)66679969
Sales&Distribution
KinshukBhartiTiwari
AshvinPatil
ShubhangiAgrawal
KishorBinwal
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BhavinShah
Pharma
SuryaPatra
CorporateCommunications
(9122)66679946
(9122)66679991
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DipeshSohani
SalesTrader
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SuniilPandit
Execution
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(9122)66679756
ZarineDamania
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(9122)66679747
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(9122)66679945
ContactInformation(RegionalMemberCompanies)
SINGAPORE
PhillipSecuritiesPteLtd
250NorthBridgeRoad,#0600RafflesCityTower,
Singapore179101
Tel:(65)65336001Fax:(65)65353834
www.phillip.com.sg
MALAYSIA
PhillipCapitalManagementSdnBhd
B36BlockBLevel3,MeganAvenueII,
No.12,JalanYapKwanSeng,50450KualaLumpur
Tel(60)321628841Fax(60)321665099
www.poems.com.my
HONGKONG
PhillipSecurities(HK)Ltd
11/FUnitedCentre95QueenswayHongKong
Tel(852)22776600Fax:(852)28685307
www.phillip.com.hk
JAPAN
PhillipSecuritiesJapan,Ltd
42NihonbashiKabutocho,Chuoku
Tokyo1030026
Tel:(81)336662101Fax:(81)336640141
www.phillip.co.jp
INDONESIA
PTPhillipSecuritiesIndonesia
ANZTowerLevel23B,JlJendSudirmanKav33A,
Jakarta10220,Indonesia
Tel(62)2157900800Fax:(62)2157900809
www.phillip.co.id
CHINA
PhillipFinancialAdvisory(Shanghai)Co.Ltd.
No550YanAnEastRoad,OceanTowerUnit2318
Shanghai200001
Tel(86)2151699200Fax:(86)2163512940
www.phillip.com.cn
THAILAND
PhillipSecurities(Thailand)PublicCo.Ltd.
15thFloor,VorawatBuilding,849SilomRoad,
Silom,Bangrak,Bangkok10500Thailand
Tel(66)222680999Fax:(66)222680921
www.phillip.co.th
FRANCE
King&ShaxsonCapitalLtd.
3rdFloor,35RuedelaBienfaisance
75008ParisFrance
Tel(33)145633100Fax:(33)145636017
www.kingandshaxson.com
UNITEDKINGDOM
King&ShaxsonLtd.
6thFloor,CandlewickHouse,120CannonStreet
London,EC4N6AS
Tel(44)2079295300Fax:(44)2072836835
www.kingandshaxson.com
UNITEDSTATES
PhillipFuturesInc.
141WJacksonBlvdSte3050
TheChicagoBoardofTradeBuilding
Chicago,IL60604USA
Tel(1)3123569000Fax:(1)3123569005
AUSTRALIA
PhillipCapitalAustralia
Level37,530CollinsStreet
Melbourne,Victoria3000,Australia
Tel:(61)396298380Fax:(61)396148309
www.phillipcapital.com.au
SRILANKA
AshaPhillipSecuritiesLimited
Level4,MillenniumHouse,46/58NavamMawatha,
Colombo2,SriLanka
Tel:(94)112429100Fax:(94)112429199
www.ashaphillip.net/home.htm
INDIA
PhillipCapital(India)PrivateLimited
No.1,18thFloor,UrmiEstate,95GanpatraoKadamMarg,LowerParelWest,Mumbai400013
Tel:(9122)23002999Fax:(9122)66679955www.phillipcapital.in
DisclosuresandDisclaimers
PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives and Private Client Group. This report has been
preparedbyInstitutionalEquitiesGroup.Theviewsandopinionsexpressedinthisdocumentmayormaynotmatchormaybecontraryattimeswiththeviews,estimates,rating,
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ThisreportisissuedbyPhillipCapital(India)Pvt.Ltd.whichisregulatedbySEBI.PhillipCapital(India)Pvt.Ltd.isasubsidiaryofPhillip(Mauritius)Pvt.Ltd.Referencesto"PCIPL"inthis
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PhillipCapital(India)Pvt.Ltd.
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INSTITUTIONALEQUITYRESEARCH

A favourable operating environment, strong business and earnings, and a superior

PSL Norms for

Standard asset (1% of overall portfolio); substandard asset (50% of instalment

businesses is to focus on lending that will allow it to maintain repayment rates,

SKS intends to implement its growth objectives without adding a significant

SKS provides collateralfree credit to most of its members in their own

FY15e FY16e FY17e

In its core business, SKS uses a villagecantered, grouplending model to provide

Even though the Andhra Pradesh Government made significant investments in

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