In a release from IndiaMicrofinance.com, it is reported that SKS Microfinance, an Indian microfinance institution (MFI) which claimed assets of USD 596 million for 2009, will be able to lower its retail lending rates by 200 basis points to 26.3 percent by lowering its costs of funds through the issuance of non-convertible debentures (NCDs) and commercial paper.
The use of NCDs and commercial paper has proved successful for SKS in the past, as MicroCapital reported on March 16, 2009, “SKS sold USD 4.8 million NCDs to YES Bank and generated another USD 4.8 million through the issuance of commercial paper. The NCDs purchased by YES Bank will mature in one year and carry an annual interest rate of 10.5 percent. In a related report, MicroCapital cited the Press Trust of India stating the standard the cost of capital for MFIs is 12 to 13 percent.
An NCD is a debt instrument issued for a fixed term that cannot be converted into equity. NCDs are attractive to investors as they typically offer higher returns than fixed deposits. They are, however, still exposed to corporate risk.
Commercial paper is an unsecured obligation issued by a corporation or bank to finance its short-term credit needs, such as accounts receivable and inventory.
About SKS Microfinance:
SKS Microfinance was founded in India in 1998. In 2005, it transformed into a for-profit non-banking financial company. As of September 2009, SKS had 3.5 million active borrowers and 1,676 branches, compared with 771 in March of 2008. According to the MIX Market, the microfinance information clearinghouse, its total assets as of 2008 were USD 596.2 million, with a return on assets of 3.68 percent and return on equity of 18.72 percent. SKS products include: income generating loans, mid-term loans, individual loans, loan cover insurance and health insurance.
By Matthew Fox, Research Associate
Sources and Additional Resources:
IndianMicrofinance.com: SKS Microfinance Plans to Lower Its Cost of Funds for the Benefit of Consumers: http://indiamicrofinance.com/blog/microfinance/mfis-in-india/sks-microfinance-plans-cost-funds-benefit-consumers.html
MicroCapital Brief: Indian SKS Microfinance Issues Bonds and Commercial Notes, and Announces a $963.6m Borrowing Plan to Finance Rapid Growth, March 16, 2009: https://www.microcapital.org/microcapital-story-indian-sks-microfinance-issues-bonds-and-commercial-notes-and-announces-a-9636m-borrowing-plan-to-finance-rapid-growth/
MicroCapital Brief: Non-Convertible Debentures (NCDs) Gain Popularity as New Source of Fundraising for Indian Microfinance Institutions (MFIs) January 20, 2010: https://www.microcapital.org/microcapital-brief-non-convertible-debentures-ncds-gain-popularity-as-new-source-of-fundraising-for-indian-microfinance-institutions-mfis/
MicroCapital Universe: SKS Microfinance: https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=SKS+Microfinance
InvestorWords.com: Commercial Papers Definition: http://www.investorwords.com/961/commercial_paper.html
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