Deal Radar 2008: SKS Microfinance

Microfinance is slowly becoming a mainstream financial service category, and with the recent IPO of Mexican MFI, Compartamos, interest in the segment has been growing.

SKS Microfinance was launched in 1998 by Vikram Akula, who is now recognized by TIME Magazine as one of the 100 most influential people in the world. In the last ten years, the company has grown to include 700 branches in 15 states in India. The company has provided over $550 million in microcredit and has maintained outstanding loans of $223 million.

SKS offers several microfinance options to the poor in India for a variety of businesses from agriculture and livestock purchase to basket weaving and photography. SKS uses a three step model to deliver microfinance to the depths of India. Firstly, employees carry out an in-depth study of a particular village to understand the local situation and determine the potential in that village. Once it has been determined, meetings are carried out with the locals to explain how SKS can help them.

Next, a Sangam (Center) Formation begins. Women, who are not related to one another, make up a five member group and agree to stand guarantor for each other. (This is the same methodology that Mohammad Yunus experimented with in Grameen Bank, and has now become standard procedure for Microfinance institutions all over the world.)

Then a Compulsory Group Training begins, where each member learns about SKS’ practices, credit discipline, collective responsibility and SKS’ financial products. After a Sangam is formed, a leader and deputy leader are selected and meetings are held weekly with SKS field assistants and all financial transactions are carried out during the meeting.

In May 2007, SKS partnered with Citibank and launched a $44 million financing program which will deliver loans worth Rs 5,000 to Rs 20,000 to over 200,000 unbanked customers in 7000 villages thus providing economic opportunities to poor families across India. In December 2007, SKS raised their most current round of financing of $37.3 million (Rs 147 crore) from US based Silicon Valley Bank and Columbia Pacific and from existing investors Sequoia Capital, Vinod Khosla, and Odyssey Capital.

Earlier, in March 2007, SKS raised $11.5 million from Sequoia Capital, and prior to that in March 2006, they received a $2.5 million investment from Vinod Khosla, SIDBI and others. In October 2005, the company closed its first round of private investment for over $3 million lead by Vinod Khosla, Ravi Reddy, Chairman and CEO, Quest Industries, Sandeep Tungare, Chairman and CEO, Vistaar Technologies, Unitus and SIDBI.

By the end of 2008, SKS plans to add 770 new branches to its existing 696 branches to increase its members from the present 1.8 million to 4.2 million and the gross disbursement from Rs 1,200 crore to Rs 5,000 crore says an article in Business Line. Their aim is to reach 5 million families by 2010. In a recent interview with VC Circle, S Dilliraj, CFO SKS Microfinance, said that the company is growing at over 200 per cent annually and states that their strong model and systems ensure repayment rates of over 99 per cent. SKS charges 26% interest on their loans, but aims to bring this down to 21% with economies of scale.

To service the needs of India’s enormous population that is so far unbanked or underbanked, many other MFI’s are needed. Entrepreneurs looking for inspiration and role models can look to Vikram Akula, who, by the looks of it, will be following the example of Compartamos, and taking SKS public.

Further reading:

* Series of articles under Fortune at the Base of the Pyramid.

This segment is a part in the series : Deal Radar 2008