SKS Microfinance

Group-3Roll No Name

A037 Akshiv Pathania

A045 Apoorv Sarwahi

A047 Sameer Sehgal

A050 Karan Shah

A051 Kush Sharma

Agenda

NBFC: Introduction

Regulations

Micro Finance Industry : Overview

SKS MicroFinance: Overview & Business

Malegam Committee Recommendations

SKS: Valuation

Auction

IPO Launch

Turnaround

Financial Statements : 2008-14

Performance analysis: Post- IPO Period

New Initiatives

Latest Developments

NBFC : Introduction

A Non-Banking Financial Company (NBFC) is a company Registered under the Companies Act, 1956 Its principal business is lending, investments in various types of

shares/stocks/bonds/debentures/securities, leasing, hire-purchase, insurance business, chit business

Its principal business is receiving deposits under any scheme or arrangement in one lump sum or in instalments

Entry Point Norms (in effect since April 1999):i. All new NBFCs were required to have a minimum NOF of Rs. 2 crore in order to register with

the RBIii. Minimum asset size of Rs. 25 crore

iii. Fulfils the Principal Business Criteria (PBC): a) A company not accepting deposits, will qualify for registration as NBFC if and when its

financial assets aggregate Rs 25 crore and constitute 75 per cent and above of its total assets and financial income constitutes 75 per cent or above of its gross income

b) Financial entities having asset size of Rs.1000 crore or above, holding financial assets which constitute 50% of the total assets OR generate financial income which as a proportion of the gross income is at least 50%, will need to be registered and regulated by the Bank

Categories of NBFCs 1. Asset Finance Company (AFC)

2. Investment Company (IC) 3. Loan Company (LC)

4. Infrastructure Finance Company (IFC) 5. Core Investment Company (CIC) 6. Infrastructure Debt Fund- Non-Banking Financial Company (IDF-NBFC) 7. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI)

Categories of NBFC

An NBFC-MFI is a non deposit taking NBFC that fulfils the following conditions:

1. Minimum Net Owned Funds of Rs.5 cr ore. (For NBFC-MFIs registered in the North East Rs. 2

crore )

2. Not less than 85% of its net assets are in the nature of qualifying assets

3. Further the income an NBFC-MFI derives from the remaining 15 percent of assets shall be in

accordance with the regulations specified in that behalf

4. An NBFC which does not qualify as an NBFC-MFI shall not extend loans to micro finance

sector, which in aggregate exceed 10% of its total assets

Regulations for NBFC-MFI

Capital Adequacy ratio: Maintain a capital adequacy ratio of atleast 15%. The total of Tier II Capital at any point of time, shall not exceed 10 0 percent of Tier I Capital

Asset Classification Norms Standard asset: No default in repayment of principal or payment of interest Nonperforming asset: Interest/principal payment has remained overdue for a period of 90

days or more Standard assets - Overdue for less than 8 weeks Sub-standard assets - Overdue for more than 8 weeks upto 25 weeks Loss assets - Overdue for more than 25 weeks

The aggregate loan provision to be maintained by NBFC-MFIs at any point of time shall not be less than the higher of:

1% of the outstanding loan portfolio 50% of the aggregate loan instalments which are overdue for more than 90 days and less than 180 days and

100% of the aggregate loan instalments which are overdue for 180 days or more

All NBFC-MFIs shall maintain an aggregate margin cap of not more than 12%

With effect from 1st April, 2014 margin caps as defined by Malegam Committee may not exceed 10 per cent for large MFIs (loans portfolios exceeding Rs.100 crore) and 12 per cent for the others.

Formation of Self-Regulatory Organization (SRO) The Malegam Committee recommends greater responsibility on industry associations All NBFC-MFIs will have to become member of at least one SRO recognized by the RBI and

comply with the Code of Conduct prescribed by the SRO To be recognised as an SRO, it should have independent directors comprising at least a third

of its board, representation of both small and large micro-lenders on the governing council, a compliance officer employed and paid by the SRO but directly responsible to the RBI

Regulations for NBFC-MFI

Growth Phases of Indian Microfinance Sector

Phase I -

Growth

• Characterised by High Growth• Large availability of funds including debt and equity• Low entry barriers• Ended with AP ordinance in October 2010

Phase II -

Volatility

• Highly volatile period from October 2010 till 2011• MFIs experienced funding constraints• Deterioration in asset quality

Phase III -

Consolidati

on

• Consolidation phase in operations by MFIs with regulatory intervention in 2011• Curtailed expansion plans and changed business model• Resumption of funding from banks and equity infusion from PE/social sector funds

Phase IV –

Stable

Growth

• Stable growth expected with regulatory framework in place • Other State governments not following the AP ordinance route• Margins are expected to stabilize and profitability improve

Status of Microfinance in India

SKS Microfinance: Overview

Constraints: (3 C’s) Lack of Capital Capacity constraints High Cost of delivering micro-loans

1997

• Swayam Krishi Sangam – SKS NGO

1998

• 1st Loan

2002

• ~5000 borrowers

2005

• NGO to for profit- NBFC

2007

• Half a Million customers

2010

• IPO Launch

Innovative Principles: Profit- Oriented Model Leveraging Industry Best Practices Technology for Automation

Performance : 3rd largest MFI Operations in ~300 districts 5,021,000 members in FY13 Portfolio outstanding ~ INR 2350 Cr

in FY13

SKS Microfinance: Business Model

Joint Liability Groups: Pioneered by Grameen Bank Lending to individual women,

utilizing five member groups where groups serve as the ultimate guarantor for each member

High Repayment Ratio of 98% Because of Social Pressure

Group Formation

Sangam Formation

& Borrowing

Member invests in enterprise

s

Repayment of Loans

Sangam Size

Increases

Product Portfolio: Income Generation Loan Mid Term Loan Mobile Loan Gold Loan Housing Loan

Characteristics: Small Ticket loans Short duration loans Higher rate of interest High Frequency of Repayment

Malegam Committee

RBI formed a sub-committee on October 15, 2010. Consisted of 6 members including Shri Y. H. Malegam and Shri

Kumar Mangalam Birla. Microfinance is an economic development tool whose

objective is to assist the poor to work their way out of poverty. It covers a range of services which include, in addition to the

provision of credit, many other services such as savings, insurance, money transfers, counseling, etc

The committee focused on provision of credit.

Recommendations

Recommendation #1: New Category of NBFC called NBFC MFIs “A company (other than a company licensed under Section 25

of the Companies Act, 1956) which provides financial services pre-dominantly to low-income borrowers with loans of small amounts, for short-terms, on unsecured basis, mainly for income-generating activities, with repayment schedules which are more frequent than those

normally stipulated by commercial banks and which further conforms to the regulations specified in that behalf”

Recommendation #2: NBFC to satisfy certain conditions to be classified as NBFC MFI Not less than 90% of its assets are in the qualifying assets

Loan given to individual whose income does not exceed Rs 50,000/annumThe amount of loan doesn’t exceed Rs 25,000 and total outstanding

indebtedness doesn’t increase by Rs 25,000 The tenure of the loan is greater than 12 months for loan till Rs 15,000 and 24

months for othersThe loan is without collateralThe loan is repayable by weekly, fortnightly or monthly

The income it derives from remaining assets should be in accordance with the norms

NBFC which is not a NBFC-MSI should not be permitted to give loans to the microfinance sector, which in aggregate exceed 10% of its total assets.

Recommendations

NABARD

It was established on recommendation of Shivaraman Committee on July 12, 1982 to implement NBARD Act 1981.

It replaced the following Agricultural Credit Department (ACD) and Rural Planning and

Credit Cell (RPCC) of RBI Agricultural Refinance and Development Corporation (ARDC)

RBI sold its 71.5% stake in NABARD to the GOI which holds 99% stake in 2010.

NABARD is the apex institution in the country which looks after the development of the cottage industry, small industry and village industry, and other rural industries.

Valuation

Requirement of Additional Capital: Fast growth of customers Equity financing requirement jumped to $12 mn in 2009 Regulations to maintain CAR of 9% 25% of equity should be held by Indian investors

SKS decided to conduct an auction & made a list of potential investors.

How to set a Valuation for SKS ? Use comparable firms

Non-availability Hire an Investment Banker

Lack of experience in MFI sector

Senior management built their own model to set a value.

Valuation

Branch Valuation model: Approach:

Build simple model of branch earnings Consider how this value will change as branch matures Estimate growth rate of no. of new branch and HQ expenses to

calculate future earnings

Inputs : Average size of Loan, Growth parameters – New clients and Branches, Loan Size

Output: Projected Balance sheet and Income Statement

Challenges: Difficult to predict forecasting growth rate

Branch Valuation Model

Expense: Financing Cost:

Cost of borrowings: 15% p.a. Provisions for loan loss: 2% p.a.

SG&A Expenses per branch : Branch Operations:

• Salaries: Rs. 2,28,000 p.a.• Bonus : up to 60% of salaries• Other : Rs. 2,49,600 p.a.• CapEx : Rs. 1,22,000 p.a.

HQ operations:• Executive Salaries, MIS, HR &Audit : Rs. 2,16,00,000 p.a.

Income: LPF : 1-2% Rate of Interest: Average 23.6% Interest Margin: ~ 8%

Assumptions: No. of Clients: 4000 Avg. Size of loan : Rs. 7000 Loan size growth rate: 0 % Tax rate : 35% Terminal Growth rate: 5% after 2

years Rate of Discount: 16%

Final Value using WACC approach: ~Rs. 400 mn ($ 8 mn) Based on this primary value, SKS asked potential investors to bid to get equity stake.

Bidder has to submit term sheet which consists of his/her valuation of company and desired share of the post-money firm.

Auction: Offers and Terms

Name Pre- Money Valuation(USD Millions)

Amount of investment (USD Millions)

Desired Stake Terms

Bombay Brokers

18.3 3 11.41% None

Global Bank 15.5 8 34% IPO in 36 months

Sequoia 15.3 8 34.78% Preferred Stock

India Ventures 10 3.5 NA None

Tri Partners 14 2.25 10.25% IPO in 60 months

Highest Valuation offered with a minimum stake of 11.41%No terms and ConditionsNo mentorship and contactsDid not meet the funding requirements

Desired one of the highest stake as compared to the biddersThe funding met the SKS requirementTerms of coming with an IPO in 36 monthsDesired the highest stake as compared to the biddersThe funding met the SKS requirementTerms of having a preferred stock arrangement

Desired the lowest stakeTri Partners had a condition to come up with an IPO in 60 monthsDid not meet the funding requirementsFunding would increase the leverage of SKS

Criteria Bombay Brokers Global Bank Sequoia India Ventures Tri Partners

SKS scaling 1 4 4 3 3

Domestic Equity 5 1 4 2 2

Comfort 1 2 5 5 5

Low interference 5 2 2 2 2

Investments in other MFIs

1 4 1 1 1

Control 1 3 4 2 2

Commitment to Social Mission

1 3 2 2 2

Brand Recognition

1 4 5 3 3

Presence in India 4 1 4 3 3

Desired Stake 1 4 5 1 2

Total 21 28 36 24 25

Rating Scale used 1 to 5 where 1 is the lowest score and 5 being the highest score

Qualitative Comparison

SKS IPO Date of the IPO: 28 July to 2 August 2010 First day of Trading: 16 August 2010 Issue Size: US$350 million, of which US$155 million were fresh equity shares and

US$195 million, were stock sales from existing shareholders representing a combined total of 23.3 percent of post-IPO shares.

Market Capitalization of SKS: US$1,525 million (as of IPO close on 2 August 2010) Structure: 60 percent of shares sold to institutional investors (qualified institutional

buyers [QIBs]), 30 percent to retail investors, and 10 percent to non institutional investors, primarily high net worth individuals.

Promoters: MBTs, Kismet, Sequoia Capital and Unitus Anchor Investors: SKS secured an initial US$64 million from a group of 18 anchor

investors who agreed to buy 18 percent of the offering at the top of the offering window of INR 985 per share. The anchors included JP Morgan, Morgan Stanley, India ICICI Prudential, Reliance Mutual Fund, and George Soros’ Quantum Fund. They are required to hold the shares for at least 30 days.

Stock Exchanges: Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) Trading Symbol: SKSMICRO

2010 Crisis & Turnaround Strategy

Factors that led to 2010 Crises : A hyper-competitive environment devoid of regulation, High interest rates generating abnormal returns, Debt accumulation compounded by multiple borrowing – (Average borrower’s debt

balance more than doubled), MFI’s focus for-profit mainstream operations did not gel with the claim of eradicating

poverty Intense Competition and no price war led to process dilution – (400-600 companies and

everyone was charging 31-32%) End Result - The entire MFI sector was engulfed in widespread allegations of harassment

of clients by recovery agents and borrower suicides in AP

Andhra Pradesh Micro Finance Institutions (Regulation of Money lending) Act, 2010 The key features of the Bill were :

• All MFIs should be registered with the district authority.• No person should be a member of more than one SHG.• All MFIs shall make public the rate of interest charged by them on the loans extended.• There would be a penalty on the use of coercive action by the MFIs.• Any person who contravenes any provision of the Ordinance shall be punishable with imprisonment for a period of 6 months or a fine up to the amount of Rs 10,000, or both.

2010 Crisis & Turnaround Strategy

Dark times for SKS Microfinance SKS Microfinance Ltd saw a 91% erosion of its share value from its peak on 28 September 2010 till 2013. It experienced Drop off in loan collections and a drying up of funding Its loan portfolio in A.P shrunk to zero in 2nd quarter of 2013 from a high of Rs. 1,491 crore at the start of crisis in October 2010. Collection levels in AP dropped to 5%, forcing SKS to shrink its loan book in other states and use the money to provide for the AP bad loans. SKS reported a loss of Rs 1,360 crore in FY12. Exit of Vikram Akula after Andhra Pradesh Micro Finance Institutions Act, 2010

Turnaround of SKS Microfinance On account of the turnaround strategy, SKS Microfinance had four consecutive quarters of profit -- a profit after tax (PAT) of Rs 1.2 crore in Q3-FY13, Rs 2.7 crore in Q4-FY13, Rs 5 crore in Q1-FY14 and Rs 16.3 crore in Q2-FY14 The lending portfolio grew sequentially by 11 per cent to Rs 1,320 crore from the non-AP

regions in the fourth quarter of 2011-12, with 95 per cent collections on an average. The collection efficiency in 16 non-AP states has further improved to 99.9% and cost of

borrowing has come down

2010 Crisis & Turnaround Strategy

Turnaround Strategy Building blocks of SKS’s turnaround strategy were -

• Fully providing for the Andhra Pradesh exposure, • Managing the supply side shock, • Optimizing the cost structure, • Insulating the non-Andhra Pradesh portfolio from contagion, • Recapitalization and return to profitability.

Key focus areas were - Consolidation of its customer base, cross-selling initiatives and diversification and increased collection efficiency

Limiting Exposure to any single state to 15% of the total portfolio outstanding and to 50% of the reported net worth - The exposure to AP reduced to Rs 236 crore or 15 per cent of the loan portfolio as of March 2012.

Structural Readjustment—branch and headcount rationalization—Reducing number of branches and employee headcount

De-risking strategy along with the geographical de-risking - SKS diversified its lending to include financing of small kiranas, loans for purchase of mobile handsets and gold loans and came with insurance products as de-risk products

SKS opted not to go in for the corporate debt restructuring package, and repaid its Rs 3,800 crore debt without delay and raised Rs 230 crore from institutional investors in QIP

Operational Performance

Particulars FY14 FY13 FY12 FY11 FY10 FY09 FY08

Branches 1,255 1,261 1,461 2,379 2,029 1,353 770

States 15 15 18 19 19 18 16

Districts 294 298 329 378 341 307 219

Centers (Sangam) 2,28,188 2,16,234 2,29,600 2,74,782 2,26,017 1,29,461 63,142

Employees 8,932 10,809 16,194 22,733 21,154 12,814 6,818

Members (in '000) 5,783 5,021 5,351 7,307 6,780 3,953 1,879

Active borrowers (in '000) 4,963 4,308 4,257 6,242 5,795 3,521 1,629No. of loans disbursed (in '000) 4,133 1,160 2,730 7,090 7,397 4,700 2,052

Disbursements for the period (INR crores) 4,788 3,320 2,737 7,831 7,618 4,485 1,680

Gross loan portfolio (INR crores) (A+B) 3,113 2,359 1,669 4,111 4,321 2,456 1,051

Avg. size of loan = Disbursements / No. of Loans Disbursed

11,584 11,159 10,024 11,045 10,299 9,543 8,187

Gross loan portfolio / No. of loan officers (INR '000) 5,919 3,497 1,612 2,681 3,638 3,093 2,809

Members / Branches 4,608 3,982 3,662 3,071 3,342 2,922 2,441

Members / Loan officers 1,100 744 517 477 571 498 502

Financial PerformanceParticulars (Rs. Cr.) FY14 FY13 FY12 FY11 FY10 FY09 FY08

Income from OperationsInterest income on portfolio loans 393 220 359 1,031 761 450 142

Income from assigned loans 56 58 35 119 96 48 17

Membership fee 0 0 0 10 16 8 4

Other Income

Insurance commission 0 0 2 11 19 12 0

Group insurance administration charges 0 0 17 71 32 18 4

Income on investments 25 24 22 16 27 17 2

Miscellaneous income 37 27 29 12 7 1 1

Total revenue 545 353 472 1,270 959 554 170

Financial expenses 214 143 200 350 288 194 57

Personnel expenses 166 173 261 326 216 136 48

Operating and other expenses 77 83 151 170 122 75 28

Depreciation and ammort 4 6 10 16 13 11 5

Total operating cost 246 263 422 513 351 222 80

Provision and write-offs 15 244 1,173 236 51 13 4

Total expenditure 475 650 1,796 1,099 691 429 141

Profit before tax 70 -297 -1,324 171 268 125 29

Tax expense 0 0 37 59 94 44 12

Profit after tax 70 -297 -1,361 112 174 80 17

Ratio AnalysisParticulars FY14 FY13 FY12 FY11 FY10 FY09 FY08

Spread analysis ( as of Average Gross Loan Portfolio)

Gross yield (I) 21.20% 19.20% 17.30% 27.04% 28.30% 31.59% 25.63%

Financial cost 8.30% 7.80% 7.30% 7.41% 8.51% 11.09% 8.51%

Operating cost 9.60% 14.30% 15.40% 10.93% 10.36% 12.67% 12.12%

Provision and write-offs 0.60% 13.30% 42.90% 5.03% 1.53% 0.77% 0.63%

Taxes 0.00% 0.00% 1.30% 1.30% 2.80% 2.53% 1.86%

Total expenses (II) 18.50% 35.50% 67.00% 24.67% 23.20% 27.05% 23.13%Return on average gross loan portfolio (I) - (II) 2.70% -16.20% -49.80% 2.38% 5.10% 4.54% 2.50%

Efficiency:

Cost to income 74.50% 125.10% 155.30% 55.66% 52.36% 61.77% 70.80%

Asset quality:

Gross NPA 0.10% % 0.00% 2.35% 0.33% 0.34% 0.20%

Net NPA 0.10% % 0.00% 1.28% 0.16% 0.18% 0.16%

Leverage:

Debt : Equity 3.3 4.1 2.3 1.3 2.8 3.2 3.7

Capital adequacy ratio 27.20% 32.20% 35.40% 45.40% 28.32% 38.99% 24.73%

Profitability:

Return on Average Assets 2.90% -15.80% -46.70% 2.33% 4.93% 3.86% 2.33%

Return on average equity 16.70% -74.40% -118.90% 7.50% 21.50% 18.19% 11.69%

Performance: post-IPO period

2011 2012 2013 20140

200

400

600

800

1000

1200

Members per Loan Officer

2011 2012 2013 20140

5

10

15

20

25

Employees (‘000s)

2011 2012 2013 20140%

50%

100%

150%

200%

Cost to Income

2011 2012 2013 2014

-50

-40

-30

-20

-10

0

10

RoA (%)

2011 2012 2013 2014

-120

-80

-40

0

RoE (%)

2011 2012 2013 20140

200400600800

100012001400

Total Revenue (INR Cr.)

24%

16%

11%6%5%

38%

Market Share

SKS MicroFin

Spandana

Share Microfin

Asmitha Microfin

Kshetra Dharmas-thalaOther

In FY13, Company was among the top three MFIs in terms of client outreach, total value of loans disbursed, Gross Loan Portfolio outstanding and number of branches.

Performance: post-IPO period

2012-Debacle

(Source: MFIN Micrometer, as on March 31, 2013)

Source: Moneycontrol

SKS Microfinance: New Initiatives

SKS currently reaches over 1 lakh villages in India with a presence in 15 states through its 1256 branches, to provide more financial services to the bottom of the pyramid by leveraging its extensive branch network and financing ability

Solar Lamps Financing Program Indian homes traditionally use kerosene lamps to light up their homes Prolonged exposure to fumes and harmful particles dangerous to health SKS partnered with d.light solar to make solar lamps available to its members Pilot initiative in 10 branches across 2 states, estimated to reach 475 branches in FY15

Mobile Financing Program High potential in mobile telephony, but high costs deterrent to rural borrowers of SKS SKS partnered with Nokia India Pvt Ltd. to supply handsets to its borrowers Loan product has been designed to facilitate the process of disbursement of mobile handsets Under this program, SKS has disbursed 3.5 lakh mobile loans to its borrowers in 6 states in India

Gold Loan Gold Loan pilot launched under the name of “Swarnapushpam” Provide personal/business loans to our members for meeting their short-term liquidity requirements Loans secured by gold jewellery ranging from Rs.2000 to Rs.1,00,000 Pilot extended to 40 branches across states of Karnataka, Maharashtra and UP Gold Loan portfolio stood at Rs 55.9 crore, representing 2.4% of total outstanding loan portfolio at the end

of FY13

SKS Microfinance: Latest Developments

SKS announced a reduction of interest rate charged from borrowers by 100 basis points from 24.55% to 23.55% with effect from 1 October

Rs.400 crore capital raised in May through a qualified institutional placement (QIP) route

Thank You