India: SKS Microfinance Eyes Banking Foray

Apr 2010
Mumbai, India, April, 18 2010 - Leading microfinance player SKS Microfinance is planning to enter the banking space and is awaiting Reserve Bank of India's (RBI) guidelines in this regard to seek the licence, a source close to the development said.

"SKS Microfinance is likely to approach the Reserve Bank for a banking licence once the guidelines are issued," the source told PTI here today.

SKS Microfinance's interest in banking is prompted by the fact that it would help it reduce its cost of capital by half. At present, the cost of capital for microfinance players stands 12-13 per cent but once transformed into a bank, it will substantially decline to 6-6.5 per cent. This, in turn, will enable MFIs to reduce lending rates to their customers from an average of 28 per cent to about 21-22 per cent.

Entering the banking space, therefore, makes eminent sense for SKS as it will reduce its cost of funds and spur its growth ambitions," the source said.

SKS Chief Executive Suresh Gurumani could not be reached for comments.

Banks have lower fund costs as they have recourse to current and savings deposits which NBFCs and MFIs do not. "NBFCs have to borrow from the market directly at much higher rates than commercial banks. Consequently, the rates at which they lend are also higher," the source said. Another factor understood to have influenced its decision to enter banking space is the fact that political establishment too feel that large microfinance institutions can essay a key role in expanding banking coverage, especially to unbanked areas and population.

The source said since top microfinance institutions meet all the RBI guidelines to set up a bank and hence, SKS may not meet with disappointment if it seeks a banking licence from the regulator.

After its IPO, SKS networth is likely to be over Rs 1,500 crore. The first microfinance company in the country to attempt the IPO route to raise funds, SKS Microfinance aims to garner Rs 1,000-1,100 crore through the IPO for which, it is awaiting Sebi approval. According to a market source, the IPO is likely to hit the market before June.


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