After founder Vikram Akula, SKS to seek small bank licence

MUMBAI: SKS Microfinance, the country’s only listed micro lender, plans to convert itself into a small bank as it seeks to reduce cost of funds and improve profitability.
A top executive at the company told ET that the company will apply for a small bank licence, a move that may put it in direct competition with its estranged founder Vikram Akula, who also plans to set up a small bank.

“SKS is preparing to apply for a small bank licence as it meets all necessary criterions like net worth, PSL (priority sector lending) and branch network,” said the executive on condition of anonymity. “We can cater to the need of financial inclusion and it will help us bring down our cost of funds.” SKS refused to comment.

According to the Reserve Bank of India (RBI) guidelines, a micro finance institution (MFI) that receives a banking licence has to transfer all activities that a bank can undertake into the bank.

Last year, Bandhan Financial Services, a Kolkata-based MFI, had received RBI’s in-principle approval to set up a bank, along with IDFC.

The executive quoted above said it makes sense for an MFI to apply for a small bank rather than for a universal bank because MFIs would not like to get into exotic derivatives products or invest in setting up treasury desks.

In December, Vikram Akula had bought a 26 per cent stake in a start-up Vaya Finserv, which is eyeing a small bank licence.

RBI had allowed existing nonbanking finance companies (NBFCs), MFIs (NBFCs), MFIs and local area banks with 10 years of experience to apply for conversion into a small bank. MFIs have an edge given their experience in handling small-ticket loans. Large enterprises and large industrial houses are not allowed to apply for a small bank licence.

RBI, which released the final guidelines for small banks on November 27, has extended the deadline for submission of applications to February 2. The regulator had received 176 queries for a small bank licence.

RBI issued guidelines for small and payments bank licences in November, and set the entry capital required to set up a bank at Rs100 crore. It has stipulated that at least 50 per cent of an NBFC’s loan portfolio should constitute loans and advances of up to Rs 25 lakh lending primarily to micro enterprises.

One big advantage for MFIs to convert into a small bank is the low cost of funds. Currently, MFIs borrow at 12-14% from banks and lend at 22-24%.

Like banks, small banks will have to maintain statutory liquidity ratio (SLR) and cash reserve ratio (CRR) that will add to their cash pressure.

Hyderabad-based SKS Microfinance got into trouble after the Andhra Pradesh government issued an ordinance in October 2010 prohibiting MFIs from recovering loans. It affected the financial health of the company, pushing it into losses for eight straight quarters.

Turnaround for the company came only during the quarter to December 2013. SKS Microfinance reported a profit of Rs 106 crore for the quarter to September 2014. The MFI has a capital adequacy ratio (CAR) of 33%.

The company mainly operates through rural branches and over 90% of its presence is in these areas.