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Business News/ Market / Mark-to-market/  SKS Microfinance: Is the glass half full or half empty?
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SKS Microfinance: Is the glass half full or half empty?

SKS Microfinance has the chance to build upon its strength during the transition phase when the new licencees convert to banks

After the central bank left it out of the list of small bank licencees, shares of SKS Microfinance shed almost one-seventh of its value in a single trading session. Photo: BloombergPremium
After the central bank left it out of the list of small bank licencees, shares of SKS Microfinance shed almost one-seventh of its value in a single trading session. Photo: Bloomberg

SKS Microfinance Ltd is feeling the lack of love from the Reserve Bank of India (RBI) and investors.

After the central bank left it out of the list of small bank licencees, the stock shed almost one-seventh of its value in a single trading session.

That was perhaps not surprising since part of the price build-up was in anticipation of getting the licence and a future equity dilution happening at a high premium to book value.

Now that the licence has been denied, what is the way forward for SKS and what are its prospects?

One thing is clear: the competitive landscape will change.

The nine microfinanciers (including Bandhan, which will become a fully fledged bank) that have got licences make up about 50-60% of advances and a similar proportion of the client base.

Banks are perceived to have an advantage over non-banking financial companies, or NBFCs, because of a couple of factors.

One, political risk—as seen from the Andhra Pradesh government’s action against SKS five years earlier—will reduce. Moreover, as banks, there will be no uncertainty about regulations.

Second, banks have access to scalable and lower cost sources of funding—mainly current account and savings account deposits. This allows them to be more competitive in pricing their loans and squeezing out smaller firms.

Thirdly, there would be more lending flexibility in terms of higher ticket size loans and no interest rate caps.

All these factors could make existing microfinanciers adopt riskier lending practices (such as exploring client segments they have avoided so far) or diversify into other areas where they might not have an expertise.

On the other hand, there are some costs to being a bank as well. Regulatory reserve and liquidity requirements would add to expenses and negate some of the benefits of the low-cost deposit base, at least in the short term. In any case, building such a deposit franchise can take a long time as the experiences of lenders such as Yes Bank Ltd and Kotak Mahindra Bank Ltd show.

Also, SKS has the chance to build upon its strength during the transition phase when the new licencees convert to banks.

In the end, it boils down to how well and how soon these new licencees are able to take advantage of their conversion to banks and how SKS reacts to these changes and maintains earnings growth. The views on these will essentially determine stock valuations.

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Published: 21 Sep 2015, 07:38 AM IST
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