CONFIDENTI AL

SKS Microfinance
“The SKS Acceleration Model”

empowering the poor to become

economically self -reliant

March 2008

This presentation is solely for viewing. No part of i t may be circulated,

quoted, or reproduced for distribution without prior written approval from
SKS Microfinance.
SKS HAS PROVIDED 1.72 MILLION (17.21 L AKHS) BORROWER S OVER
US $550 MILLION (Rs. 2200 CROR ES) WITH A 99% REPAYMENT RATE

Upper Poor
70 million
households
in India with some
assets Borrowers earn
($1-$2/day PPP) returns (ROI) of
100% and
borrowers
Very Poor
increase annual
80 million income 11%
households more than non -
in India with no
assets borrowers
(up to $1/day PPP)
BUT MOST MFIs ARE NOT ABLE TO SCALE

2% of MFIs serve
>100,000 Clients
(49 Institutions) 73% of MFIs Serve
<2,500 Clients
9% of MFIs serve (2321 Institutions)
10,000 – 100,000 Clients
(276 Institutions)

Close to 90 %
16% of MFIs serve of MFIs serve
2,500 – 10,000 Clients less than
(515 Institutions) 10,000 clients

Source: Microcredit Summit

3
RESULTING IN A HUGE UNMET DEMAND FOR M ICROFIN ANCE IN INDIA

Projected micro-credit demand, in crores Assumptions

• Existing market: Rs. 20,000 cr ores
•Basis: NABARD; EDA Rural
Rs. 240,000 Report, “Maturing of Indian
($55 Billion) Microfinance”
• Poor households: 150 mi llion
•Basis: World Bank poverty
statistics, India
• Avg. credit demand / HH: Rs. 20,000
•Basis: EDA Rural Systems
• Adjustment for service difficulties: 20%
Rs. 20,000 •Basis: adjustment made to reflect
($5 Billion) inaccessible poor in rural areas
(~7%) and half of underserved
urban poor (0.5 x 26% = 13%)
Current micro- Total micro-credit
• covered in part by moneylender s and
credit by MFIs demand, India
informal sources, but largely untapped

Source: EDA rural report “Maturing of Indian Microfinance”, World Bank.

THERE ARE 3 CONST RAINTS TO SCALING MF... AND THE SKS SOLUT ION

A profit-oriented model to access commercial

capital
Capital

Scalable processes from the business world

Capacity

Deploying technology to automate and lower

Costs transaction costs

5
THE PROFIT -ORIENTED APPROACH HAS ATTRACTED $ 55 million (Rs.
217 CRORES) IN EQUITY…. LEVER AGED TO DISBURSE MORE THAN
$550 MILLION (Rs. 2200 C RORES) IN LOANS

ROE Equity Investors Lenders

Above
Market Vinod Khosla
ROE SKS CAPITAL

First MFI
loan in
India

Yatish Trading
First MFI
loan in
world
SKS DRAWS FROM SCALE ABLE BUSINESS MODELS

SKS factor y-style recruitment & training draw s

SKS trains
over 450 new
loan officers
per month
200%
Annual
Growth

SKS decentralized operational model draw s on

Field office

SKS adds 50
Field office
Field office
branches and
over 100,000
members a
month
Shared
back office
SKS DEPLOYS CUTTING -EDGE TECHNOLOGY TO LOWERS COSTS

Industry Leading MIS:

USER FRIENDLY SCALEABLE ACCOUNTING REPORTING

Real-time Data Transfer:

Head Office
Server

Internet All SKS branches transfer

Database portfolio data through the
internet within hours of
meetings, enabling
D
B
D
B management to quickly
3 4 respond to potential
3 D 4
B
2
2
problems
D B D5
1 B5
1
AS A RESULT, SKS H AS SCALED TO 15 STATES WITH 1.72 MILLION MEMBE RS

SINCE 1998 Branch

• 1.72 million Members office

• 3.44 Million life insurance policies

• US $223 Million (Rs. 891 Crores)
outstanding
• US $550 Million (Rs. 2200 Crores)
Disbursed
• 3,50,000 health insurance lives
• 99% On-time Repayment Rate
• 6200 employee base
• 700 branches
• Over 20000 villages

SKS is one of the

fastest grow ing MFIs in
the world, with a Annual
Growth of 200%
SKS’s GOAL IS TO SC ALE TO 4 MILLION BY 2009

6,000
5,000
4,000
3,000
2,000
1,000
0
5

9
-0

-0

-0

-0

-0
ar

ar

ar

ar

ar
M

M
SKS HAS ALSO CREATED A DISTRIBUTION CHANNEL TO THE BOP
Enterprise

Consumer
Fund Based
Housing
Financial
Education
Services
Remittances
Fee Based Insurance

Products Investment

Savings

Food (Perishables and

Non-Perishables)
Commercial

Non- Electronics
Financial
Consumer Packaged
Goods (FMCG)

Non- Health (e.g. immunizations)

commercial
Disaster Management
11
TRADITIONAL MICROFINAN CE TARGETS POOR AND UPPER POOR
POPULATIONS, BUT HAS NOT BEEN ABLE TO REACH ULTRA POOR
Upper Poor
(70 million
households)
Have some
assets

Very Poor
(70 million
households)
Have no assets
but can work

Ultra Poor
(10 million households)
extreme poverty
ULTRA POOR PROGR AM PROVIDES ECONOMIC, SOCI AL AND HEALTH INPUTS

An asset, A sustainable
An ultra poor to
gets training + health entrepreneurial
member begin
& social inputs activity

with initial support from

Ravi & Prathiba
Reddy Foundation
 EMPOWERING T HE POOR T O BECOM E ECONOM ICALLY
SELF-RELIANT

SKS Microfinance Pvt Ltd.

www.sksindia.com
info@sksindia.c om

CONFIDENTIAL - This presentation is solely for viewing. No part of it may be circulated, quoted, or reproduced for distribution
without prior written approval from SKS Microfinance.
 SKS CHARGES INTEREST SUFFICIENT TO COVER COSTS…
Cost of Funds for SKS Loan Loss Profit is Used for
•Dividend for the borrowers Cost to the Borrowers
from different provisioning for
•Future expansion in other 15% Flat=28%
commercial Banks like hardship cases
ICICI, HDFC, UTI, SIDBI areas diminishing
and others

Overheads and other Admin.

Related costs 2.0 28.0
2.0
12.5

Salary and Incentives for

the staff. Average field
staff salary is Rs. 5,000
Total staff strength about
500
3

8.5

Personnel Admin. Cost of Loan loss Cost to

Cost Cost Funds Provision Profit Borrower
15
…YET SKS IS AMONG THE LOWEST COST TO THE BORROWER

45

40

35

30

25
Cost of Borrow ing (%)
20

15

10

0
Bank RRB Coops Schemes SKS

Transportation Cost (Estimate)

Source: World Bank Study “Access To Finance” Transaction Costs (Bribes, Broker Fees, etc.)
Interest Rate
THESE SYSTEMS ENABLE SKS TO OFFER M ICRO-CREDIT AND MICRO-
INSURANCE PRODUCTS
Purpose Terms Interest Rate (Effective)
Working
Capital Loans
Range
Small Rs 2000 – ($50)
Income Generating 25-30%
enterprise Rs. 12,000 ($300)
Loans (IGL)
50 weekly repayments
Range
Small Rs. 4,000 ($100) – 25-30%
Mid-Term Loans (MTL)
enterprise Rs 12,000 ($300)
50 weekly repayments
Small Starting at
Individual Loans (ILP)
23%
enterprise Rs 20,000 ($600)
12-18 monthly repayment

20 weeks
Emergency Emergencies Bullet repayment
0%
Loans

Loan Cover Insurance 1% of loan amount

Insurance N/A
for member and
husband

17
BORROWER S UNDERTAKE A RANGE OF ACTIVITIES, EARNING
RETURNS (IRR) FROM 14% TO 245%

Others Agriculture
6% 3%
Services 23%
25% Live Stock

10%
Production 33% Trade
THE POOR IN T HE DEVELOPING WORL D CAN EARN RETURNS
FROM 29% TO 236% FROM THEIR MICRO -ENTERPRISES

Activity Internal Rate Return on Invested Net Annual

of Return (%) Capital (%) Income ($)

Trade Vegetable Vending 50 57 143

General Store 14 29 144
Sweet Making Shop 145 147 1,010
Ice Cream Making 13 29 305

Agriculture Leasing mango tr ees 184 185 511

Leasing irrigated farm land 160 161 667

Services Operating a Flour Mill 52 59 409

Tailoring 121 123 307
Roadside Mi cro-diner 245 246 1,528

Livestock Goat rearing (1 goat) 58 65 40

Buffalo rearing 69 74 246

Production Pottery 235 236 520

Source: Examples from SKS Microfinance in India

19
FOUR MAIN F ACTORS LIE B EHIND HIGH RETURNS FROM MICRO -ENTERPRISES

Process

They primarily rely on their own and their family’s

Use of family
labor, which is low-cost, typically more productive
labor
than external labor, and usually has an expertise
in the chosen activity

Low Infrastructure costs are low or non-existent (e.g. Implications

infrastructure micro-general stores are run out of the home; • Low inputs result
costs pottery wheels are manually operated) in extremely high
returns on
investment

No taxes and They operate in the informal economy where

legal costs taxes and other legal costs are not applicable

Even at 25-30%, the interest rate on working

Capital costs capital loans are small (from 1-4%) compared to
are a small %
the income streams and total business costs of
of total costs
poor clients

20
THE ROI ON T RADE ACTIVITIES ARE AS HIGH AS 52%
Occupation Description Annual Financials, IRR, ROI

Trade
Small General St ore • Home-front stores that sell household items, Rev. +Rs.148,500 ($3,300)
from batteries and matchboxes to candles Exp. -Rs.142,000 ($3,160)
and candy Income Rs. 6,050 ($ 135)
• Units of sale are small, with high margins
• Up-front investment of Rs. 20,000 ($445) is IRR = 10% Avg. ROI = 26%
used to buy stock from wholesalers in towns

Vegetable Vending
• Women buy seasonal vegetables from Rev. +Rs. 49,500 ($1,100)
local farmers to sell in nearby towns Exp. -Rs. 43,075 ($ 960)
• Unit of sales are small, margins are high Income Rs. 6,425 ($ 143)
• Investment of Rs.10,000 ($225) is used to
IRR = 43% Avg. ROI = 52%
buy weighing scale, baskets and wooden
displays
Livestock
Buffalo Rearing • Invest in buffalos for income from milk Rev. +Rs. 22,600 ($502)
production Exp. -Rs. 11,550 ($257)
• Each buffalo yields 6 litres of milk a day Income Rs. 11,050 ($245)
which is sold at Rs. 8/litre
IRR = 69% Avg. ROI = 74%
• Up-front investment is used to buy a
single buffalo costing between Rs.
10,000 - 15,000

Source: Examples from SKS Microfinance in India 21

THE ROI ON AGRICULTURE INVESTM ENTS ARE AS HIGH AS 185%
Occupation Description Annual Financials, IRR, ROI
Livestock
Goat Rearing
• Invest in goats for income from Rev. +Rs.1,800 ($ 40)
offspring Exp. -Rs. 50 ($ 1)
• Average of 3-4 offspring per year Income Rs.1,750 ($ 39)
with a sale price of Rs. 500 - Rs.700
• Investment of Rs. 2,250 is required IRR = 56% Avg. ROI = 63%
per goat

Agriculture
Lease of Farm Land
• Land is leased on a yearly basis for Rev. +Rs.48,000 ($1,067)
agricultural purposes Exp. -Rs.18,000 ($ 400)
• The up-front investment varies from Rs. Income Rs.30,000 ($ 667)
12,000 - 15,000 ($267 - $334) per acre
• Geographic and soil factors determine IRR = 160% Avg. ROI = 161%
crop selection and profitability
Tree Lease
• Generally 4-5 mango trees are leased to Rev. +Rs. 25,000 ($ 555)
individuals Exp. -Rs. 2,000 ($ 45)
• Seasonal business in the summer only Income Rs.23,000 ($ 510)
• Each tree yields ~1,000 mangoes in a
good season IRR = 184% Avg. ROI = 185%
• Yearly investment (leasing of mango trees)
is ~Rs. 10,000/year
Source: Examples from SKS Microfinance in India 22
THE ROI ON PRODU CTION ACTIVITIES ARE AS HIGH AS 236%
Occupation Description Annual Financials, IRR, ROI

Production
Sweet Making Shop • Sweets are generally made and sold daily Rev. +Rs. 182,400 ($4,050)
• Sales go up to 15 kg/day in peak Exp. -Rs. 136,800 ($3,040)
festivals and marriage seasons with a Income Rs. 45,600 ($1,010)
sale price of Rs. 80/kg
• Up-front investment of Rs. 25,000 IRR = 145% Avg. ROI = 147%
($555) is used for renting shop space
and raw materials

Ice-cream enterprise
• Home-made ice cream is sold door-to- Rev. +Rs. 43,200 ($ 960)
door by hired salespeople Exp. -Rs. 33,600 ($ 745)
• On average 600 ice-cream sticks are sold Income Rs. 9,600 ($ 305)
per day during the summer months
• Up-front investment of Rs.30,000 ($670) IRR = 9% Avg. ROI = 26%
is used to buy an ice-cream making
machine
Pottery
• Produce clay pots for local customers Rev. +Rs. 70,000 ($1,556)
Exp. -Rs. 46,600 ($1,036)
• Margins are up to 90% per pot with a 6
Income Rs. 23,400 ($ 520)
month peak season
• Investment of Rs.10,000/year is used to IRR = 235% Avg. ROI = 236%
buy clay, dust, and the pottery wheel

Source: Examples from SKS Microfinance in India 23

THE HIGHEST RETURNS ARE ON SERVICE ACT IVITIES, UP TO 222%
Occupation Description Annual Financials, IRR, ROI

Services
Tailoring
• Provide custom tailoring service for local Rev. +Rs. 82,200 ($1,830)
customers Exp. -Rs. 68,400 ($1,520)
• Generate ~Rs. 450/day during peak Income Rs. 13,800 ($ 305)
seasons
• Up-front investment of Rs.10,000 ($225) is IRR = 108% Avg. ROI = 111%
primarily used to buy a sewing machine and
other production material
Flour Grinding Services
• Grind wheat, corn and other grains for local Rev. +Rs. 45,600 ($1,013)
customers Exp. -Rs. 27,200 ($ 605)
• Daily throughput of 125kg of grain at the Income Rs. 18,400 ($ 408)
rate of ~Rs 2/kg
• Up-front investment of Rs. 25,000 ($555) is IRR = 52% Avg. ROI = 59%
used to buy grinding machine

Roadside Restaurant • Sell snack items and tea to local Rev. +Rs.148,500 ($3,300)
customers Exp. -Rs. 79,750 ($1,775)
• Sell an average of 300 cups of tea at Income Rs. 68,750 ($1,530)
100% margin
• Up-front investment of Rs.25,000 ($555) IRR = 221% Avg. ROI = 222%
is primarily used to lease space and buy
utensils, cooking supplies, and furniture
Source: Examples from SKS Microfinance in India 24
SOME FREQUENT LY ASKED QUEST IONS
Questions
Can the local economy support
an infusion of more enterprises?
(eg. how many general stores
can a village economy support?)
Can the natural resource base
support an infusion of more
enterprises? (eg. how many
more goats can you put in a
village?)
Do the poor have the knowledge
to take up new enterprises?
Answers
• Truly speaking new ventures are few as borrowers are often
refinancing existing activities (replacing high cost working capital
with low cost microfinance) as opposed to financing new
ventures.
• The burgeoning Indian economy can support more enterprises
(eg. urban middle class demand for milk and milk products
allows significant scope for increased milk supply)
• With many enterprises, there is scope for increase without
depleting natural resources (eg. goats eat virtually anything and
therefore do not significantly deplete environmental resources)
• But in some cases (such as irrigation water required for water-
intensive crops), there are environmental constraints and these
are best addressed by state-led natural resource management
• Borrowers often engage in refinancing existing activities in which
they already have a core competence
• Where borrowers take up new activities, they do so after seeing it
successfully undertaken and learning from other borrowers
• At the level of micro-enterprise – below Rs. 50,000 - significant
knowledge is not required—though movement into small and
medium enterprises may require training and other inputs
25
SKS BORROWERS ARE ENGAGED IN OVER 160 DIF FERENT ACTIVITIES,
SOME OF WHICH ARE LISTED BELOW
Agriculture (6%) Production (7%) Services (27%)
• Land Investment • Almariah manufacture • Food products • Tailoring
• Nursery • Blanket weaving • Road side Mi cro Dinner
• Stone cutting
• Tree leasing • Brick making • Small Flour Grinder
• Jaggery
• Land purchase • Cloth weaving • Laundry
• Fishing nets
• Land leasing • Mat weaving • Carpentry
• Irrigation • Mattress making • Power loom (purchase)
• Auto-Rickshaw
• Agri- machinery • Bed/Cot maki ng • Charakha (purchase) • Electrician
• Fertilizer • Rexine work • Bouquet making • Tent- House
Livestock (27%) • Beedi making • Pop corn machine • Centering

• Poultry • Herbal product maki ng • Steel Smelting Shop

• Leaf plate maki ng
• Buffaloes • Statue making • Weaving services
• Printing press
• Cows • Agarbati making • Watch Repairing
• Candle making
Trade (32%)
• Goats • Photo Copy Shop
• General Stores
• Sheeps • Thread making • STD Booth
• Ice Cream Making
• Fishery • Sweet making • Oil extracting unit
• Vegetable Trading
• Ox/ Plough bullocks • Spices (masala) • Juice shop
• Utensils / Cutlery
• Donkeys • Photo frame • Book binding
• Animal feed (Tavudu) • Pottery/ Burner (chullah) • Fruit selling • Welding Shop

26
SKS HAS PROVIDED 1.72 MILLION BORROWERS OVER US $550
MILLION WITH A 99% REPAYMENT RATE

SURVEY A VILLAGE RECRUIT MEMBERS

DELIVER SERVICES AT DOORSTEP PROVIDE TRAINING