With some of its peers embarking on a journey to transform themselves into small finance banks over the next 18 months, Hyderabad-headquartered SKS Microfinance has decided to do more of what it is already doing. India’s only listed microfinance company will go about strengthening its market share in the rural markets, expand loan portfolio, reduce cost of borrowing, reduce operating costs, and bring down lending rates to below 20 per cent, President S Dilli Raj told BusinessLine in an interview. Though the MFI did not bag the coveted small finance bank licence, that has not dampened Raj’s spirit to grow his company’s business and prepare it for a bank licence, as and when the RBI puts the licensing process on tap. Edited excerpts:


Since SKS did not get the banking licence, what will be your growth strategy, going forward?

 Actually, there is no change in the strategic direction or the action course. But what we would do over the next 18 months (when new entities will be focussing on starting their banking operations) is to expand our portfolio, strengthen our market share in the rural markets, reduce our cost of borrowings and reduce the operating costs.

There would be a renewed focus on strategic initiatives to get results over the next 18 months. I would just simply look at the data points to see whether we have succeeded in the action we chartered out for ourselves. First and foremost is the interest rate you charge to customers. In March 2014, we were charging borrowers 24.55 per cent. Today, we charge 20.75 per cent. We have reduced the interest rates by 380 basis points in the last one year. At 20.75 per cent, currently we offer the cheapest loans in the microfinance segment in India.

When it comes to operating efficiency, there are only two good matrices to measure them — cost-to-income ratio and operating expenditure (opex) to gross loan portfolio (GLP). Our cost-to-income was 75 per cent in FY14. That was brought down to 61 per cent in FY15 and today it is 47 per cent. The opex to GLP was 10 per cent in FY14. This was brought down to 9.5 per cent in FY15 and in Q2 of FY16 it was 7.6 per cent. So, if you really get laser sharp focus on your efficiencies, you could become much more efficient.


How will you tackle competition from small finance banks?

I don’t think we are going to change anything. We are going to do more of what we are doing right now. As I said, we have already given a guidance of 50 per cent growth in AUM. So, in 18 months we would become much larger. Probably, our loan portfolio would be over ₹9,000 crore. We will become much more efficient than what we are. So, the interest rate that we charge our customers will definitely be below 20 per cent, with or without anchor rate reduction. Cost-to-income ratio would be much lower than 50 per cent. We are right now at 47 per cent. We are already the most efficient MFI player in the country and with these ratios we will be the most efficient player in the world.

Is it a conscious strategy to grow at below-the-industry average growth rate?

 We will grow at 50 per cent, annualised. That is the lowest rate of growth for the MFI sector. The sector is growing at 66 per cent. The top five players are actually growing at 70 per cent. We are among the top five but we are pulling down the (sector) growth rate. This 50 per cent growth comes not from demand or supply constraints. Demand generation isn’t an issue. In October 2010, we had 5.2 million borrowers (before the Andhra Pradesh crisis broke out). Today, we have got only 3.8 million borrowers (these are all non-AP numbers). Our average loan ticket size is ₹13,000, which is the lowest in the sector. The sector average is around ₹20,000. On the supply side too there is no constraint. Today, we can raise any amount of debt and equity that is warranted and supported by our business plan.

 This 50 per cent growth is coming from a self-imposed financial discipline that we would like to grow at a rate lower than the whole sector and be a responsible player.


Are you looking at getting into new lines of business?

No, not really. The reason is the potential of this (MFI) segment itself is so huge that it is still a largely underpenetrated if not un-penetrated market. We have not diversified out of the Grameen model. For instance, some of the existing players have ventured into individual loans, which could be about 10-15 per cent of their portfolio. Ours is a 100 per cent Joint Liability Group-led model. We stick to the essentials of the Grameen model — women not men (borrowers); equated weekly instalments; rural not urban (locations); (loans for) income generation but not consumption; group not individual (loans); non-farm sector but not the farm sector. We have never diluted that and we are not going to dilute it.

But as part of risk mitigation strategy and diversifying the revenue streams, we do look at other products. Apart from the focus on credit, we also look at whether there is anything else we can facilitate (such as purchase of productivity enhancement tools) at a price-value equation less than what the borrower is getting (from the market). In the last one-and-a-half years, we started doing cross-sale of mobile phones, solar lamps, bio-mass stoves and water-purifiers.

How are you going about doing cross-sale?

We have tied up with manufacturers and suppliers. We do demand aggregation. We have a large base of 3.8 million customers. We have a very strong and formidable distribution network (1,268 branches serving 216,723 sangams or village centres with the help of about 6,000 loan officers), which is close to the consumer. We meet our customers 50 times a year at their doorsteps. In no business do you meet customers so many times a year. It is a live relationship. We have leveraged this by looking at the products they need.

We are now doing cross-sale of mobile phones, solar lamps, bio-mass stoves, and water-purifiers. Even a 30 per cent conversion will translate into a sale of about a million pieces. We get a good price discount for our customers. Then we extend loans for the purchase of the products. It may be a small ticket size loan of about ₹2,500 but a loan does make a difference. This way we get non-loan revenue (fee) from the supplier. In a way this enhances customer stickiness also. But obviously we need to be cautious as to which products we expose this segment of customers to. It cannot be a conspicuous consumption item. It has to be either productivity enhancement tool or enterprise equipment. Mobile phones and solar lights are productivity enhancement tools. We have absolutely no hesitation in financing these products for customers on whom we are ready to take an exposure of ₹15,000-28,000.

Cross-sale of mobile phones and solar lights has reached a scale. Now we are doing a pilot with sewing machines and cycles. These products will form a very small percentage of our assets. It shouldn’t exceed 5 per cent of our credit assets. At the end of the day these are non-MFI assets. But 5 per cent of those assets can contribute 15 per cent of our revenues and actually 20 per cent of our profit. Over a period of time, this will also be used to cross-subsidise the interest rate.

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