SKS Microfinance: Gearing up for competitive days

Company's move to pass on interest cost benefit should lead to higher business growth

Thanks to yet another interest rate cut by the company and a go-ahead from the Reserve Bank of India (RBI) to enhance lending threshold, the stock of SKS Microfinance (SKS) surged seven per cent on Friday. From the earlier rate of 20.75 per cent, SKS has for the second time in FY16 slashed its lending rate to 19.75 per cent, the lowest among microfinance institutions (MFIs). This would make SKS, an MFI which lends to India’s rural population, more competitive.

The rate cut is an outcome of easing borrowing costs for the company. SKS recently refinanced its loans from MUDRA (Micro Units Development & Refinance Agency Limited) at 10 per cent and issued Commercial Papers at 9.5 per cent. Trimming its interest rates by an addition 100 basis points appears to be a step in the right direction to further augment its position amongst competitive players in the MFI space. With further securitisation of loans expected in the second half of FY16, SKS’ cost of borrowing might fall by another 100 basis points (average now at 11.3 per cent).

  However, what holds potential for SKS is the Reserve Bank of India (RBI)’s approval to increase the loan threshold limit for MFIs. RBI has increased the limit from Rs 15,000 to Rs 30,000 for loans with less than 24 months maturity. Currently, MFIs are allowed to lend upwards of Rs 15,000 for loans carrying a tenure above 24 months. However, Manish Agarwalla of PhillipCapital says the positive impact from RBI’s move may be short-lived. “Once weekly instalments for the borrower increases, this will over burden the borrowing.”

While the jury is out on this, with 75 per cent of SKS’ loan book hovering around the Rs 15,000 limit, this regulatory relaxation might be a long-term growth enabler for driving its loan book. While any kind of flexibility is always welcome, the company, too, is expected to be judicious while lending.

Most analysts say with demand for loans typically peaking in the second half of any financial year, higher disbursements with shorter maturity term could significantly boost the company’s loan book in the second half of FY16. Further, loans with bigger-ticket size usually carry lower operating costs. Nevertheless, the cost-to-income ratio for SKS has been steadily declining and touched 47 per cent in the second quarter of FY16 (versus 52.3 per cent in the first quarter of FY16). Any significant increase in off-take of loans with higher ticket sizes could further reduce its operating costs. All these should help SKS become more cost-efficient and emerge competitive as and when new players begin operations.

Meanwhile, sentiment around the stock of SKS appears quite positive. The stock has gained nearly 20 per cent and recovered the losses seen after SKS was denied of small bank license. Currently, 11 out of 17 analysts polled on Bloomberg have a ‘buy’ recommendation on the stock with a target price of Rs 527.86, an upside potential of 16 per cent.