SKS Microfinance Limited is a Hyderabad based company that was founded in 1998 as a Non-Bank Finance organization licensed by the Reserve Bank of India. Vikram Akula was the founder and until November 23, 2011, he was the Executive Chairman of the company. SKS was incorporated in 2003 and is the largest Micro Finance Institutions in India based on its outstanding loan volume, member base (they call their borrowers as ‘members’) and the number of branches operating in the country.
On July 28, 2010, SKS Microfinance was listed in the Bombay Stock Exchange. Founder Vikram Akula named the company as ‘Swayam Krishi Sangham’ or SKS, which means self-help group. The mission of SKS was providing different financial services to Indian households that come under ‘Low – Income’ or ‘Poor’ category. In India, SKS operates in 18 states. These include: Andhra Pradesh, Maharashtra, Karnataka, Madhya Pradesh, Chhattisgarh, Orissa, Bihar, Jharkhand, Rajasthan, Gujarat, Punjab, Haryana, Uttar Pradesh, Uttaranchal, West Bengal, Kerala, Tamil Nadu, and Delhi.
The products of SKS Microfinance include life insurance and an array of financial loans. It offers loans for Income Generation; Mid- and Long-term Loans. Income-generating loans are provided for purchasing products like solar lights, cook-stoves, water purifiers, bicycles, mobile phones and sewing machines. SKS issues loans secured on gold jewellery. The social benefits of financial services and products by SKS include: Creating Self-employment for women by giving them financial assistance and supporting their business. These businesses include raising livestock, tailoring, running local provision shops and so on.
SKS introduced the concept of group lending which helps to minimize occurrence of moral hazards, improper selection of group members and discrepancy of information. Instead of assets as collateral for their loans, they build ‘Social collateral’ which works better in a country like India which is a society that is highly community-centric. In November of 2015, SKS Microfinance Ltd. did an interest-cut by 1% and brought down the rate to 19.75% for women borrowers. Lower interest rates can attract more borrowers in an increasingly competitive market. This made SKS the only micro-finance company to offer lending at below 20% rate on the loans for core income generation.
The name SKS Microfinance Limited was changed to Bharat Financial Inclusion Limited on June 13, 2016.
What is Microfinance?
The concept of modern microfinance was first introduced by Muhammad Yunus who introduced the concept of Grameen Bank in Bangladesh where the bank is mainly funded by deposits made by the borrows and non-members of the bank. This concept works great in Bangladesh where 97% of the customers are women and the loan is repaid by them more than 97% of times. This rate of loan recovery exceeds all banking systems. This concept brought Mr. Yunus a Nobel Prize.
However, this concept is not applicable in India since Micro Finance Institutions are not allowed to collect deposits as per the laws of the land. And that is the reason these institutions in India have to go public. Microfinance refers to certain financial services which are not limited to providing loans but also things like savings, insurance and transfer of funds. These services are provided to the entrepreneurs and small business owners who otherwise do not qualify for a loan from a standard bank. Microfinance loans require no collateral and the poorer section of the community can avail these facilities to establish a livelihood for themselves. Though no collateral is required, the companies emphasize on repay of loans within a period of one year generally.
Micro loans are more common in the still-developing countries and to the people engaged in different professions like fishing, carpentry, transportation, etc. This utilizes the concept of single-time influx of money to boost small businesses and help the poorer section of the society.
Bharat Financial Inclusion Limited (formerly SKS Microfinance)
Bharat Financial Inclusion Limited (BFIL) is the microfinance company that extends micro loans and other financial services to the millions of women in thousands of villages and slums in urban areas across India from poor section of the society to start some business initiative and become financially better off. BFIL achieved this For-profit model of providing microfinance with proper use of technology and best business practices in an effort to eradicate poverty in India.
BFIL provides small loans ranging from Rs 2,000 to Rs 12,000 to poor women to initiate simple businesses like opening a tea stall, rearing animals to earn from selling the milk produced by the cattle and goats and other small businesses based on the local economy. BFIL has the mission to provide financial services to the economically weaker sections. Their target is to serve 50 million households all over India and beyond. They target to create a microfinance model that will be commercially viable and will deliver high value to its customers through their products, processes and the people. BFIL wants to achieve these through ethical business practices by being transparent and respectful to their customers and understanding their requirements.
In India, poor people are having very limited access to financial services and BFIL targets this underserved section to serve with diverse microfinance products by creating a distribution network across India. BFIL emphasizes on giving the basic financial access and services to the poor families which in turn will give them opportunities to enhance their financial well-being and improve their standards of living. BFIL further aims to provide quality and value added services and goods to their members at the rates less than market rate through their network.
Method of operation for Bharat Financial Inclusion Limited
Bharat Financial Inclusion Limited used the Joint Liability Group (JLG) model to serve its members who are the women from poor and underserviced communities in India. Joint Liability Group is the group lending technique where each of the group members guarantee the loans of each other. JGL is done by creating a group of five members without the bias of religion and caste. BFIL lends a collateral-free loan to each individual member in the group and all members of that group act as guarantors for one another.
Bharat Financial Inclusion Limited designed the size of the loans keeping in consideration the cash flow to the members and their repayment capacity. Because of the daily cash flow of their businesses and the lack of proper savings facility, the weekly collection protocol of BFIL is preferred for its members. Initially BFIL offers small size loans with easy repayment and encourages members for daily savings and trains them to gradually be able to manage the loan and repayment schedules.
BFIL delivers financial services to its members at their doorsteps, thus ensuring convenient, time saving and cost effective services to them. The employees of BFIL brings collection and disbursement facilities to its members adding value to the services.
There are several aspects of modus operandi for Bharat Financial Inclusion Limited which makes its function successfully in its own field. These are discussed as following.
(1) Selection of Villages – Employees of BFIL conduct surveys in villages before starting operations there. Certain criteria need to be fulfilled to initiate operations like the village population, political stability poverty level, occupations for the livelihood, connectivity and infrastructure to support the operations in the place.
(2) Projection Meeting – Once a village gets selected, the people there are introduced by the company people about its products and services as well as the purpose and the method of operation. This gives the people of the village initial awareness of the program and they are encouraged to get informed by the existing members about the benefits so that an informed decision making can happen and people can join the company as members who can borrow micro loans from BFIL.
(3) Formation of Groups – Groups are formed where each group consists of five self-selected women members. They get loans individually but as a group serves as the guarantor for one another. Typically a 5-member group is optimum to cover the default risk and repayment for one member and to implement group dynamics and peer support relationship effectively.
(4) Training the Group – Referred as Compulsory Group Training (CGT) by the company, it is a two-days training program that consists of 3 hours sessions. This is formulated to provide training about these products, product delivery methods and processes of BFIL and to prepare members to develop credit awareness and credit discipline. This training also imparts understanding of the importance of taking responsibility collectively, to identify the leaders for their groups and pledging the verbal commitment of the group members towards the company and the team. A verbal test is conducted on the training by the branch manager. Only after successful completion of the test, a person is accepted officially as the member of the company.
During training period, the company collects quantitative data about its potential members to ensure that the requirement for qualification is fulfilled and procure base-line data for future analysis.
(5) Centre Meetings – A minimum of 4 and a maximum of 10 groups (each of 5 members) come under one centre. This meeting is conducted once a week and at a convenient location. Centre Leader and Deputy Centre Leader conduct these meetings efficiently while all members need to be present. These meetings are held early in the morning to minimize disturbances of daily activities. All financial transactions are conducted in these meetings as well as they discuss about new loans. Strict discipline is mandatory in the meetings to follow the credit discipline.
(6) Checking the loan Utilization –Employees of BFIL check the utilization of the loan which is meant only for activities related to income generation and not for personal consumption. The loan has to be utilized within 30 days otherwise the members need to return the loan amount to BFIL.
(7) Use of Technology in the Operation – Technology is the big differentiator for BFIL in the microfinance industry and plays a major role for their customer service. Bharat Financial Inclusion Limited created a MF Technology platform in-house which is of industrial standard. This helped them to increase their customer base. Their other technology products help the next phase growth and created communication network. BFIL has strategic partnership with companies like Wipro, HCL, Microsoft, and Reliance to set the technology platform to enable them to handle challenges in the business.
Because of the systematic method of operation and step by step evaluation before funding helps the company to attain a re-payment rate of over 99% on the collateral-free loans.
Business Partners and Alliances
BFIL is having alliances and partnerships with many and diverse business institutions. A list of its partnership companies are as follows:
(1) Financial Institutions consists of Banks like Andhra Bank, Axis Bank, Bank of India, Bank of Maharashtra, Citi Bank, DCB Bank, Dena Bank, HDFC, HSBC, ICICI Bank, IDBI, IDFC, IndusInd, J&K Bank, Kotak, RBL, SIDBI, South Indian Bank, State Bank of India, State Bank of Mysore and Yes Bank.
(2) Insurance Partners include Bajaj Allianz, EXIDE Life Insurance and HDFC Life.
(3) BFIL has Investment partners from India and abroad. Indian equity partners are SIDBI, Bajaj Allianz and Yatish Trading while Global equity investors include Kismet Capital, Sandstone Capital and Silicon Valley Bank.
(4) Associations – BFIL works with different microfinance associations and networks that bring it to the microfinance platform globally and at home to get information and sharing of knowledge and experience. These institutions are: Asia Micro-Insurance Network, Microfinance Network, The MIX Market and Sa-Dhan.
(5) Supporters – An array of institutions and individuals are supporters of BFIL in its mission. These include:
Bill and Melinda Gates Foundation, CGAP, Crystal Springs Foundation, Digital Partners, Ford Foundation, Grameen Foundation USA, Hindu Temple Society Of Capital District, Lekha Singh, MIT Poverty Action Lab, Ravi & Pratibha Reddy Foundation, Sandeep and Vidhya Tungare, Sanjiv Sindhu, Sreekanth & Sudhakar Ravi, Swiss Development Agency, The Echoing Green Foundation, The i2 Foundation, India Development Service, Maharashtra Foundation, Thunga Family, Ravinder Reddy & Bharat Bhushan, Late Sitaram Rao, and the Auditor company: S R Batliboi & Co
Working Capital for the Company
Reserve Bank of India has the specification for Non-Banking Financial Companies and the Micro-finance Institutions like BFIL (that became NBFC-MFI on November 18, 2013) to maintain a minimum capital adequacy ratio of 15%. And BFIL is able to maintain a much higher capital adequacy (31% as on September 30, 2013).
In 2005, after BFIL was transformed in for-profit Non-Banking Financial Company, it started to raise both debt and equity capitals to continue with its growth plans. The company also introduced mainstream financial tools into microfinance sector and maintains a high level of accounting and financial transparency.
Debt Capital is used for funding the growth of the company. Traditionally Microfinance Sector depends on the commercial banks for funding. Additionally BFIL issued debt securities that are privately and publicly traded. They also raised loans having different maturities, from international and domestic banks and by securitization of their loan portfolio. They also raised debt funding from public and private sector domestic banks, foreign private banks and from the institutional investors. Apart from debt securities, BFIL also raised debt funds by other financial instruments like Rated bonds, 5-year term loan, Cash credit limit, Assignment of receivables with public and private sector banks, Commercial Papers, Rated pooled securitization, Subordinated debt with 8 years term and Listed Debt securities that were placed with Foreign Institutional Investors.
Equity capital raising for BFIL should not contradict the investors’ interest against the social mission to empower the poor section of the society. Their main equity fund raising is from the commercial sector. A wide range of investors are in the list of BFIL’s equity capital portfolio like the Venture Capitalists, Government-backed development funds from SIDBI to Angel Investors, Private equity as well as equity from mainstream financial institutions.
Products offered by Bharat Financial Inclusion Limited
BFIL offers proprietary as well as Distributor products. These are as follows:
(A) Proprietary Products
(1) Income Generating Loans (IGL) also known as Arambh – These Loans range from Rs9,100 to Rs 20,010 for the first time loan applicants. The amount of the subsequent loans are determined by previous credit history. The increments could be made up to the maximum limit of Rs 29,565 in set increments. The term of these loans is for 50 weeks and the payment schedule for principal and interest is on weekly basis. The annual interest rate for these loans is 19.75% and loan processing fee is 1%.
(2) Mid Term Loans (MTL) also known as Vriddhi – Here the first time loan amount ranges from Rs 9,100 to Rs 15,010. The amount of subsequent loans is determined by previous credit history and could be increased up to a maximum of Rs 15,010 in set increments. This scheme becomes available between 19th and 46th weeks of an Income Generating Loan cycle and could continue till the 96th week of Long term loan cycle. The term of these loans is for 50 weeks and the payment schedule for principal and interest is on weekly basis. The annual interest rate for these loans is 19.75% and loan processing fee is 1%.
(3) Long Term Loan – Here the first time loan amount ranges from Rs 30,915 to Rs 38,635. The amount of the subsequent loans is determined by previous credit history and could be increased up to a maximum of Rs 49,785 in set increments. The loan term is of 2 years or 104 weeks and the payment schedule for principal and interest is on weekly basis.
This loan is available only if the members have completed 2 Income Generating Loans cycles. The annual interest rate for these loans is 19.75% and loan processing fee is 1%.
Benefits of the above three types of loans include providing financial assistance to self-employed women towards sustenance of their business enterprises, like running local retail shops (Kirana stores), raising livestock, and providing jobs like tailoring and other assorted occupations and services.
(4) Loans for Other Products – Apart from above loans, certain other loans are provided for purchasing Biomass Cook Stove, Solar Light, Water Purifier, Mobile Phone, Bicycle and Sewing Machine. The loan amount ranges from Rs 1,799 to Rs 5,290. The loan term is 25 weeks. The annualized interest rate varies from 19.6% to 19.7% based on the product type.
These loans help people to purchase specific products and increase their productivity and ability to generate income.
(B) Distributor Product includes Life Insurance.
This requires weekly payment of Rs 20 and the payment term is for 5 years. The benefits of this life insurance products are:
- In case of death of the insured person, BFIL disburses the full sum assured of Rs 5,000 to the beneficiary. Additionally, BFIL provides the account value, which is equal to the aggregate of the premiums paid plus interest accrued, if any, minus any administrative charges for the policy.
- In case of the accidental death of the holder, the beneficiary is paid Rs 10,000 plus the account value
- In cases where no death occurred, BFIL disburse the account value to the policy holder once the insurance policy matures in five years.
New Initiatives of Bharat Financial Inclusion Limited
Being present in 15 states, and in over one lakh villages in India and having 1256 branches in all these locations, BFIL is taking benefit of its network and going to diversify into other financing verticals like solar lamp and mobile handset financing and financing against gold as collateral.
Rural India uses kerosene lamps at night to light their homes. It poses serious health hazard over long exposure due to poor ventilation in their homes. BFIL partnered with solar lamp manufacturer -‘d light’, to make solar lamps available to its members. It will be a healthier option for poor people to lighten up their dwellings.
BFIL partnered with Nokia to provide mobile financing to its members to purchase mobile phones at a comparatively lower price and with an easy paying option in small, easy instalments. This helped members in their business by improved communication.