There was a new IPO unveiled today and it supports a good cause as well. SKS Microfinance (SKSM:IN), an Indian company that provides microloans to the poor saw its first market action today. Microfinance is a severely overlooked area by most financial institutions. For the most part, commercial banks are not interested in getting involved in the microloan industry. The profit margin is not large enough for one and banks do not loan money to the impoverished. So, SKS has little competition from large financial institutions in this market.
The Market
SKS Microfinance raised $348 million dollars from its initial public offering. The company offers loans as low as $43. The maximum loan amount is $260. Loans can be used for any entrepreneurial venture from livestock to agriculture. These loans are extended to women only and are to be used to help their families emerge from poverty in India. This may not seem like a great deal of money but it is a big help in a country where the average person can survive off of under $2 dollars a day. Over 800 million Indian residents survive off of this amount.
SKS Microfinance provides collateral free loans to its customers. The company has a remarkable repayment rate of 99%. SKS has 2,029 branches in 341 districts. The Indian market is ripe for this type of business. According to Reuters, there are an estimated 120 million homes without banking services. Loans to the poor will grow 40% annually over the next few years. SKS should directly benefit from this emerging market.
Microloan Business
The Indian market is seeing increased competition from other microfinance firms and high interest moneylenders. SKS charges a flat interest rate of 12.5% to 15% for most loans. This equates to a 26.7% to 31.4% effective interest rate. Banks charge them 11 to 14% to borrow capital so the company’s maximum profit would range from 15 to 20%. These rates may seem high until you realize that most high interest moneylenders require collateral and charge rates as high as 120%.
The future looks bright for SKS. The initial public offering is attracting heavyweights in the financial community. Billionaire George Soros, venture capitalist Vinod Khosla, and Infosys Technologies founder N.R. Narayana Murthy all invested in the initial public offering. There was incredible demand for shares with investors bidding the stock to new highs. The stock is up nearly 20% in its first day of trading.
Final Take
This is a company that I would definitely be interested in investing in. I like the concept of providing loans to the needy to fund entrepreneurship. The company is providing a needed service and making a profit for it. The high repayment percentage demonstrates that the company is doing an outstanding job of structuring suitable loan products for individuals.
