SKS Microfinance Turns Heat on Rivals, Raises Ticket Size to 50K, Interest Rate Down at 19.75%

SKS Microfinance has announced cuts in its interest rates for the fourth time in a year bringing the interest rates on its micro-credit to 19.75%, the lowest in the industry, despite the fact that it was denied the Small Finance Bank status from the RBi. Interest rate of 19.75% is the lowest rate charged by any private sector MFI in the world.

SKS Microfinance on Friday said it has raised loan ticket size for one and two years of tenure to Rs 30,000 and Rs 50,000, respectively with the regulator’s approval. To be effective from today, December 7, the revised ticket size of loan is likely to impact the competitors considerably.

The revised ticket size will be applicable for a tenure of 52 weeks tenure with a maximum ticket size of Rs 30,000 and 104 weeks tenure for loans up to Rs.50,000.

While many MFIs followed suit by cutting down interest rtes, the sub-20% remains a challenge and it remains to be seen whether other MFIs will follow it or not.

Interest rate slashed

On November 27, 2015, SKS Microfinance Limited announced a 1% reduction in the interest rate charged to borrowers from 20.75% to 19.75% with effect from December 7, 2015, for all future disbursals. With this, the Company becomes the first micro finance institution to charge a sub-20% interest rate on its core Income Generating Loans (IGL) which are unsecured micro loans.

This is the fourth interest rate reduction, aggregating 4.8%, announced by the Company since October 2014. The reductions are consistent with the Company’s policy of passing on the cost advantages accruing from reduction in the cost of borrowing and economies of scale to its borrowers.

SKS Microfinance Limited could reduce its marginal cost of borrowing to 11.3% in Q2-FY16 from 13.6% in FY14 on account of downward adjustments in risk premium. Marginal cost of borrowing for H2-FY16 is expected to be lower than 11.3% given the Company has accessed refinance from MUDRA at 10% and issued commercial papers at 9.5% per annum in October and November 2015.

The Company attributed its sustained turnaround to improved profitability in FY15, Q1-FY16 and Q2-FY16,capital raise in May 2014, rating upgrade as also issuance of Commercial Papers and NonConvertible Debentures are the factors that drove the reduction in its cost of borrowing. Creditor confidence in SKS Microfinance Limited has also been boosted by the Company’s spotless repayment track record.

During the most difficult Andhra Pradesh microfinance situation, the Company did not join Corporate Debt Restructuring (CDR) and met all its financial obligations — amounting to Rs. 5,800 crore — to the banking system without any hair-cut or rescheduling, said a statement. SKS has a short-term credit rating of ‘A1+’ and a long-term rating of ‘A+’.

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