The document provides an overview of SKS Microfinance, including its business model, valuation process, and regulatory environment. SKS pioneered the joint liability group lending model and grew rapidly before facing difficulties in 2010. It valued itself using a branch-level valuation model that projected earnings and growth rates. Key recommendations from the Malegam Committee established regulations for the microfinance sector, including categorizing qualified NBFCs as NBFC-MFIs and capping interest rates.

1. Group-3
Roll No Name
A037 Akshiv Pathania
A045 Apoorv Sarwahi
A047 Sameer Sehgal
A050 Karan Shah
A051 Kush Sharma

2. 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

3. 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 RBI
ii. 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

4. Categories of NBFC
 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)
 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

5. 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.

6. Regulations for NBFC-MFI
 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

7. 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 -
Consolidation
• 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

8. Status of Microfinance in India

9. 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

10. 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
Sangam
Size
Increases
Repaymen
t of Loans
 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

11. 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.

12. 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”

13. Recommendations
 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/annum
The 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 others
The loan is without collateral
The 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.

14. 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.

15. 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.

16. 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

17. 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.

18. 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 Conditions
No mentorship and contacts
Did not meet the funding requirements
Desired one of the highest stake as compared to the bidders
The funding met the SKS requirement
Terms of coming with an IPO in 36 months
Desired the highest stake as compared to the bidders
The funding met the SKS requirement
Terms of having a preferred stock arrangement
Desired the lowest stake
Tri Partners had a condition to come up with an IPO in 60 months
Did not meet the funding requirements
Funding would increase the leverage of SKS

19. Qualitative Comparison
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

20. 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

21. 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.

22. 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

23. 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

24. 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 1,629
No. 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

25. Financial Performance
Particulars (Rs. Cr.) FY14 FY13 FY12 FY11 FY10 FY09 FY08
Income from Operations
Interest 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

26. Ratio Analysis
Particulars 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%

27. Performance: post-IPO period
1200
1000
800
600
400
200
0
Members per Loan Officer
2011 2012 2013 2014
25
20
15
10
5
0
Employees (‘000s)
2011 2012 2013 2014
200%
150%
100%
50%
0%
Cost to Income
2011 2012 2013 2014
10
0
-10
-20
-30
-40
-50
RoA (%)
2011 2012 2013 2014
0
-40
-80
-120
RoE (%)
2011 2012 2013 2014
1500
1000
500
0
Total Revenue (INR Cr.)
2011 2012 2013 2014

28. Performance: post-IPO period
24%
16%
6% 11%
38%
5%
Market Share
SKS MicroFin
Spandana
Share Microfin
Asmitha
Microfin
Kshetra
Dharmasthala
Other
Source: Moneycontrol
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.
2012-Debacle
(Source: MFIN Micrometer, as on March 31, 2013)

29. 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

30. 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

31. Thank You