 "Bullish on micro-lending options, SKS opted out of race")
The once-in-a-decade chance to open a bank does not appear to entice India’s only listed microfinance company, SKS. While rivals Bandhan and Janalakshmi have applied for banking licence, SKS chose to opt out, as it sees the business opportunities for microfinance companies to grow with an increase in the number of banks.
“It is heartening to see financial inclusion is the focus of new bank licensing programme. But we believe that to benefit from this opportunity, it is not necessary to get converted into a bank. If we felt that we would not be able to take the upsides of financial inclusion without being a bank we would have applied for a licence. We see multiple platforms through which we can participate and benefit from this opportunity,” S Dilli Raj, chief financial officer, SKS, told Business Standard.
He feels new banks will have to depend on micro-lenders to meet their priority sector lending targets. This will lead to an increase in the number of securitised transactions. The new banks will also offer term loans to microfinance companies for on-lending to weaker sections of society to achieve their priority sector lending targets till the time they expand their presence in deeper geographies.
In 2012-13, SKS participated in securitisation deals worth Rs 1,200 crore and raised Rs 1,680 crore term loans from banks for on-lending to weaker sections. In the previous financial year, the company did securitisation transactions worth Rs 866 crore and raised term loans of Rs 618 crore. “The priority sector lending target for new banks is kept at 40 per cent from the very beginning. So, suddenly there will be a huge demand for priority sector loans. We believe this is the real opportunity and we can exploit it without being a bank. This is why we did not apply for a banking licence,” Dilli Raj said.
The Reserve Bank of India (RBI) received applications for new banking licence from 26 companies, including two micro-lenders. However, a few companies, including Mahindra & Mahindra Financial Services, decided not to apply for a banking licence after reviewing the implications of the guidelines released by the central bank. The deadline for submitting applications expired on July 1.
Sources say bigger business opportunity alone did not convince SKS to opt out of the banking business. While there is no certainty on who will be allowed to open a bank, applicants need to make fresh investments to create infrastructure for banking operations even before getting the licence.
“One cannot wait till the time RBI grants licences. Companies will have to start making investments to build capacity and expertise. Applicants need to start the process of expanding branch network, upgrading technology infrastructure and strengthening the leadership team. So, your costs increase even though you are not sure of getting a licence. Why will you focus on and invest in something that is highly uncertain,” a person familiar with the developments asked, requesting anonymity.
By not converting itself into a bank, SKS will also be able to avoid SLR (statutory liquidity ratio) and cash reserve ratio requirements. This will leave the company with surplus liquidity to grow its business.
According to analysts, the requirements to maintain SLR and CRR from inception are likely to pose a challenge for new players, as building a base of low-cost deposits will take some time for a newly converted bank.
“SKS has managed to come out of the crisis in Andhra Pradesh’s microfinance sector. It is time to consolidate their core micro-lending business. The company will continue to do what it does best,” said the source.
The micro-lender made profits in the third quarter of last financial year after incurring losses in the preceding seven quarters. In January-March period of 2012-13, SKS made a profit of Rs 2.7 crore compared to loss of Rs 330 crore in the corresponding quarter of the previous financial year.
“It is heartening to see financial inclusion is the focus of new bank licensing programme. But we believe that to benefit from this opportunity, it is not necessary to get converted into a bank. If we felt that we would not be able to take the upsides of financial inclusion without being a bank we would have applied for a licence. We see multiple platforms through which we can participate and benefit from this opportunity,” S Dilli Raj, chief financial officer, SKS, told Business Standard.
He feels new banks will have to depend on micro-lenders to meet their priority sector lending targets. This will lead to an increase in the number of securitised transactions. The new banks will also offer term loans to microfinance companies for on-lending to weaker sections of society to achieve their priority sector lending targets till the time they expand their presence in deeper geographies.
In 2012-13, SKS participated in securitisation deals worth Rs 1,200 crore and raised Rs 1,680 crore term loans from banks for on-lending to weaker sections. In the previous financial year, the company did securitisation transactions worth Rs 866 crore and raised term loans of Rs 618 crore. “The priority sector lending target for new banks is kept at 40 per cent from the very beginning. So, suddenly there will be a huge demand for priority sector loans. We believe this is the real opportunity and we can exploit it without being a bank. This is why we did not apply for a banking licence,” Dilli Raj said.
The Reserve Bank of India (RBI) received applications for new banking licence from 26 companies, including two micro-lenders. However, a few companies, including Mahindra & Mahindra Financial Services, decided not to apply for a banking licence after reviewing the implications of the guidelines released by the central bank. The deadline for submitting applications expired on July 1.
Sources say bigger business opportunity alone did not convince SKS to opt out of the banking business. While there is no certainty on who will be allowed to open a bank, applicants need to make fresh investments to create infrastructure for banking operations even before getting the licence.
“One cannot wait till the time RBI grants licences. Companies will have to start making investments to build capacity and expertise. Applicants need to start the process of expanding branch network, upgrading technology infrastructure and strengthening the leadership team. So, your costs increase even though you are not sure of getting a licence. Why will you focus on and invest in something that is highly uncertain,” a person familiar with the developments asked, requesting anonymity.
By not converting itself into a bank, SKS will also be able to avoid SLR (statutory liquidity ratio) and cash reserve ratio requirements. This will leave the company with surplus liquidity to grow its business.
According to analysts, the requirements to maintain SLR and CRR from inception are likely to pose a challenge for new players, as building a base of low-cost deposits will take some time for a newly converted bank.
“SKS has managed to come out of the crisis in Andhra Pradesh’s microfinance sector. It is time to consolidate their core micro-lending business. The company will continue to do what it does best,” said the source.
The micro-lender made profits in the third quarter of last financial year after incurring losses in the preceding seven quarters. In January-March period of 2012-13, SKS made a profit of Rs 2.7 crore compared to loss of Rs 330 crore in the corresponding quarter of the previous financial year.