SKS Pursues Microfranchise To Cure Headaches

The political interference in the microfinance sector within the state of Andhra Pradesh in India has left the sector reeling in recent quarters. Despite Reserve Bank of India’s (RBI) Malegam Committee Report which offered a much needed breather for the MFI sector, SKS Microfinance, the largest player in India had to significantly increase their provision for bad debts. During the recently reported results, provision for bad loans increased to more than Rs 106 crores (~$23.37 million) from Rs 14.82 crores (~$3.27 million) set aside a year ago driven by a mere 10% repayment rate in Andhra Pradesh compared with 98% repayment rates in the rest of the country.

SKS Microfinance’s Financials
SKS Microfinance’s Q4 revenues fell 36% over the year to Rs 194 crore (~$42.7 million) and reported losses of Rs 70 crores (~$15.4 million) falling 211% over the year. For the year, revenues grew 32% to Rs 1,270 crores (~$280 million) with earnings falling to 36% over the year to Rs 112 crores (~$24.69 million).

They ended the quarter with a total member base of 7.3 million spread across 19 states through 2,379 branches. During the quarter, incremental loans disbursed amounted fell 66% over the year to Rs. 786 crores (~$173 million) and they ended the year with a gross loan portfolio falling 5% over the year to Rs. 4,111 crores (~$0.91 billion).

SKS’s Expanding Product Offerings
SKS continued their focus on diversifying product offerings during the quarter. As part of the retail store project, Sangam Store, they tied up with Metro where they pay Metro for supplying goods to kirana stores. In return, SKS does not charge interest to the Kirana storeowner, and instead, earns a 2% commission for every order placed with Metro. They are running successful pilots of this project in 3,800 stores in Hyderabad with plans to scale up to 20,000 stores in Hyderabad, Bangalore, and Kolkata where the Metro stores are located.

They also tied up with Nokia which has enabled their borrowers to purchase Nokia handsets in installments. SKS earns Rs 127 (~$2.80) per handset financed and also earns interest at 24% to 25% per year for a 25-week loan. Since launch, through the offering, they have sold 3.7 lakh handsets to their borrowers and plan to take the volumes to 10 lakh mobile phones during the year.

This indicates a strategic shift toward microfranchise from pure play microfinance, a move that I like. Overall, as a development economics tool, I am of the opinion that microfranchise is a substantially ore powerful model than microfinance.

They are also diversifying on the secured loan segment and are evaluating options of securing their loans against gold. Their studies have revealed, that even within rural India, 30% to 40% of borrowers are willing to mortgage their gold against interest rates as high as 5% to 6% a month. Over the past six months, SKS has been running a successful pilot operation in five branches and plan to expand the project in 400 branches to build a secured portfolio. SKS charges 24% interest per year from the borrower in return for the loan.

The stock is trading at Rs 371.40 (~$8.19). It touched a high of Rs 1491.50 (~$32.88) in September of last year.

Through the recent changes in the MFI sector in the country announced by RBI, SKS is hopeful that RBI will be able to weed out interference of other state governments and thus improve SKS’s position in Andhra Pradesh to help regain their financial strength. Till then, they are successfully diversifying their portfolio to maintain steady growth and alternate sources of income.

Over time, I would not be surprised if they find a substantially healthier business in pursuing microfranchise deals.