SKS Microfinance plans to lower it's cost of funds for the benefit of consumers

In addition to its planned Initial Public Offering (IPO) next month, SKS Microfinance is also planning to raise resources through other financial instruments such as commercial papers and non convertible debentures (NCD’s) which will bring down the cost of it’s funds by upto 200 basis points.

Lower cost of funds for SKS can decrease the average borrowing cost for customers and it could come down to as low as 26.3 per cent from the current 28.3 per cent.

SKS Microfinance

SKS Microfinance currently grants small loans that begin from Rs 2,000 and can go up to Rs 12,000 to poor women.These women are generally engaged in micro-enterprises which can range from cattle breeding and goats rearing, to opening a tea stall or a petty shop.The company uses the Joint Liability Group lending model where women guarantee each other’s loans and was first pioneered by the Grameen Bank of Bangladesh.

Pointing out that SKS Microfinance charges enough interest to cover it’s costs and invests retained earnings in growth, Mr Akula said the ultimate cost to the borrower is high because of the following reasons.

Breakup of Interest Rate Charged by SKS Microfinance

1.Cost of funds (8.5 per cent),
2.Cost of personnel(6.4 per cent),
3.Profit (5.1 per cent),
4.Administrative cost (4 per cent),
5.Corporate tax (2.8 per cent) and
6.Loan loss provision (1.5 per cent).

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