How SKS is expanding the reach of microfinance.

1. “Empowering the Poor”
Oct 2008
Vikram Akula, Founder and CEO

2. SKS HAS USED THE GRAMEEN BANK MODEL TO PROVIDE 3.2
MILLION MEMBERS CLOSE TO $1 BILLION WITH A 99% REPAYMENT
SURVEY A VILLAGE RECRUIT MEMBERS
DELIVER DOORSTEP SERVICE PROVIDE TRAINING 2

3. BORROWERS UNDERTAKE A RANGE OF ACTIVITIES
Others Agriculture
7% 3%
Services 23%
25% Live Stock
9%
Production 33% Trade
3

4. MICRO-LOANS ENABLE THE POOR TO EARN INCOME
Upper Poor
70 million
households
in India with some
assets
($1-$2/day PPP) Micro-
entrepreneurs
earn
Very Poor returns (ROI)
80 million of 100%
households
in India with no
assets
(up to $1/day PPP)

5. THERE IS A HUGE UNMET DEMAND FOR MICROFINANCE
Projected micro-credit demand, in crores
$55 Billion
covered in part by
moneylenders and
informal sources,
but largely untapped
$5 Billion
Current micro-credit by Total micro-credit demand,
MFIs India
5

6. MOST MFIs ARE NOT ABLE TO SCALE
2% of MFIs serve
>100,000 Clients
(49 Institutions) 73% of MFIs Serve
<2,500 Clients
9% of MFIs serve (2321 Institutions)
10,000 – 100,000 Clients
(276 Institutions)
Close to 90%
16% of MFIs serve of MFIs serve
2,500 – 10,000 Clients less than
(515 Institutions) 10,000 clients
6

7. THERE ARE 3 CONSTRAINTS TO SCALING MF... AND THE SKS SOLUTION
(1) Profit model to get commercial capital
Capital
(2) Scalable processes from the business world
Capacity
(3) Technology to automate/lower transaction costs
Costs
7

8. 3 CONSTRAINTS TO SCALING MF... AND THE SKS SOLUTION
(1) Profit model to access commercial capital
Capital
(2) Scalable processes from the business world
Capacity
(3) Technology to automate/lower transaction costs
Costs
8

9. PROFIT-ORIENTATION LED TO $128m IN EQUITY AND A PORTFOLIO OF
$400M
INVESTORS LENDERS
Sandstone Capital
Kismet Capital
Yatish Trading
Ravi & Prathiba Reddy
Foundation
Vinod Khosla
9

10. 3 CONSTRAINTS TO SCALING MF... AND THE SKS SOLUTION
(1) Profit model to access commercial capital
Capital
(2) Scalable processes from the business world
Capacity
(3) Technology to automate/lower transaction costs
Costs
10

11. SKS DRAWS FROM SCALABLE BUSINESS MODELS
SKS factory-style recruitment & training draws on
SKS trains
over 1,000
new loan
200%
annual officers per
growth month
SKS’ standardized operational model draws on
Field office
Field office SKS adds
Field office
150
branches
and 350,000
Shared members a
back office 11
month

12. 3 CONSTRAINTS TO SCALING MF... AND THE SKS SOLUTION
(1) Profit model to access commercial capital
Capital
(2) Scalable processes from the business world
Capacity
(3) Technology to automate/lower transaction costs
Costs
12

13. SKS DEPLOYS TECHNOLOGY TO LOWER COSTS
Industry Leading MIS:
USER FRIENDLY SCALEABLE ACCOUNTING REPORTING
Real-time Data Transfer:
Head Office
Server
Internet The majority of SKS
Database branches transfer
portfolio data through the
internet, enabling
D
B
D
B management to quickly
3 4 respond to potential
3 D 4
B
2
2
problems
D B D5
1 B5
1
13

14. SKS HAS SCALED TO 16 STATES WITH 3.2 MILLION MEMBERS
As of Aug 31, 2008
• 3.2 million Members Branch
• $980 Million Disbursed office
• 6.4 Million life insurance policies
• 1.1 million health insurance lives
• 400k whole life insurance
• 99% On-time Repayment Rate
• 11,490 employee base
• 1,260 branches
• Over 50,000 villages and slums
SKS is one of the
fastest growing MFIs
in the world, with an
annual growth of 200%
14

15. SKS GROWTH IS EXPONENTIAL
No of borrowers (‘000)
2000
SKS
1800
1600
1400 Share*
1200 Spandana*
Bandhan
1000
800
600
400
200
0
2005 2006 2007 2008
* Oral reports from Managing Directors
15

16. SKS’s GOAL IS TO SCALE TO 15 MILLION BY MARCH 2011
No of borrowers (‘000)
15,000,000
12,000,000
9,000,000
6,000,000
3,000,000
0
5
6
7
8
9
0
1
r-0
r-0
r-0
r-0
r-0
r-1
r-1
Ma
Ma
Ma
Ma
Ma
Ma
Ma
16

17. SKS HAS ALSO CREATED A DISTRIBUTION CHANNEL TO THE BOP
Enterprise
Consumer
Fund Based
Housing
Financial
Education
Services
Remittances
Fee Based Insurance
Investment
Products
Savings
Food (Perishables and
Non-Perishables)
Commercial
Electronics
Non-
Financial
Consumer Packaged
Non- Goods (FMCG)
commercial
Health (e.g. de-worming)
Disaster Management

18. SKS ALSO EXTENDS ITS REACH TO THE ULTRA POOR – A SECTION
UNTOUCHED BY TRADITIONAL MICROFINANCE
Upper Poor
(70 million
households)
Have some
assets
Very Poor
(70 million
households)
Have no assets
but can work
Ultra Poor
(10 million households)
extreme poverty
18

19. ULTRA POOR PROGRAM PROVIDES ECONOMIC, SOCIAL AND HEALTH INPUTS
An asset,
A sustainable
An ultra poor training + to
gets entrepreneurial
member health & social begin activity
inputs
with initial support from
Ravi & Prathiba
Reddy Foundation
19

20. EMPOWERING THE POOR TO BECOME ECONOMICALLY
SELF-RELIANT
SKS Microfinance Pvt Ltd.
www.sksindia.com
info@sksindia.com
CONFIDENTIAL - This presentation is solely for viewing. No part of it may be circulated, quoted, or reproduced for distribution
without prior written approval from SKS Microfinance.
20

21. Working Draft - Last Modified 8/14/2007 11:56:05 PM
Last Modified 8/14/2007 11:56:05 PM Printed
21
OUR MOBILE BANKING PILOT HAS THE POTENTIAL TO DRAMATICALLY
CUT COSTS AND IMPROVE SERVICE

22. INTERNAL AUDIT WILL PLAY A CRITICAL ROLE IN CAPACITY BUILDING
AND PROCESS MONITORING
• Strengthening of IA Dept.
- 265 strong headcount
Audit Update
- Every branch to be inspected at least once in a month
- Grading system introduced and linked to Performance appraisal
- World’s first MFI to have ISO – 9001 certification for Internal Audit
processes
• Risk Management
- Risk Management Framework implementation by PWC
Metric As of March 31, As of March 2008 June 30, 2008
2007
IA team 53 178 265
headcount
Improvement in Head Internal Veteran Ex- KPMG Ex- KPMG
IA process
Validation Nil ISO – 9001 ISO – 9001
Branches 275 771 1062
Branch per IA 5.18 4.33 4.00
member
Inspection Once in every 2 Once in a month – every Once in a month – every
periodicity months branch branch
IA Grading N.A Implemented. Linked to
Performance Appraisal
22

23. MARGIN ON THE CORE PRODUCT ARE GOOD
Cost of Funds for SKS Loan Loss Profit is used for investment
for expansion in new areas.
Cost to the borrowers
from different provisioning for
APR 26%
commercial Banks like hardship cases
ICICI, HDFC, UTI, SIDBI (diminishing)
and others
Overheads and other Admin.
Related costs 4.1
26.0
9.1 1.8
Salary and Incentives for
the staff. Average field staff
salary is Rs. 8,000.
4.5
6.5
Personnel Admin. Cost of Loan loss Cost to
Cost Cost Funds Provision Profit Borrower
23

24. …YET SKS IS AMONG THE LOWEST COST TO THE BORROWER
45
40
35
30
25
Cost of Borrow ing (%)
20
15
10
5
0
Bank RRB Coops Schemes SKS
Transportation Cost (Estimate)
Source: World Bank Study “Access To Finance”
Transaction Costs (Bribes, Broker Fees, etc.)
Interest Rate
24

25. AND FOR EACH OF THE TRACKS, SKS HAS ALIGNED STRONG
PARTNERS AND AGGRESSIVE TIMELINES FOR IMPLEMENTATION
Strategy Actions taken
• Effective license management • EA (enterprise agreement)
Licensing • Better manageability with Microsoft
• Flexibility for business growth
• Predictable planning and budgeting
• Improvements in price, quality and service • HCL as national vendor to
IT centralized • Effective process and methodologies supply desktops and allied
procurement • Global vendor / procurement strategy infrastructure
• Support business continuity • Ongoing
• Internet connectivity with voice & data on • Tulips - connectivity partners
Connectivity single net work • Goal to connect all offices by
• Online data transfer with efficient Apr 2008
LAN / WAN infrastructure
• Hybrid solution – MPLS / RF / VSAT
• World class data center facility • Partnered with Wipro for
Data center • 24/7 data management and protection Data center hosting
• Support mission critical applications • Operational by Feb 08 .
• Partnered with Dell for
servers, via Wipro
Software • Highly scalable web based applications • Selected Compulink as our
applications • Rich technology software strategic partner
• Affordable, scalable and upgradeable • Core Applications to go live
• Automated workflow systems by Apr 08
25

26. THE POOR IN THE DEVELOPING WORLD CAN EARN RETURNS
FROM 29% TO 236% FROM THEIR MICRO-ENTERPRISES
Activity Internal Rate Return on Invested Net Annual
of Return (%) Capital (%) Income ($)
Trade Vegetable Vending 50 57 143
General Store 14 29 144
Sweet Making Shop 145 147 1,010
Ice Cream Making 13 29 305
Agriculture Leasing mango trees 184 185 511
Leasing irrigated farm land 160 161 667
Services Operating a Flour Mill 52 59 409
Tailoring 121 123 307
Roadside Micro-diner 245 246 1,528
Livestock Goat rearing (1 goat) 58 65 40
Buffalo rearing 69 74 246
Production Pottery 235 236 520
Source: Examples from SKS Microfinance in India
26

27. FOUR MAIN FACTORS LIE BEHIND HIGH RETURNS FROM MICRO-ENTERPRISES
Process
They primarily rely on their own and their family’s
Use of family labor, which is low-cost, typically more productive
labor
than external labor, and usually has an expertise
in the chosen activity
Low Infrastructure costs are low or non-existent (e.g. Implications
infrastructure micro-general stores are run out of the home; • Low inputs result
costs pottery wheels are manually operated) in extremely high
returns on
investment
No taxes and They operate in the informal economy where
legal costs taxes and other legal costs are not applicable
Even at 25-30%, the interest rate on working
Capital costs capital loans are small (from 1-4%) compared to
are a small % the income streams and total business costs of
of total costs
poor clients
27

28. THE ROI ON TRADE ACTIVITIES ARE AS HIGH AS 52%
Occupation Description Annual Financials, IRR, ROI
Trade
Small General Store • Home-front stores that sell household items, Rev. +Rs.148,500 ($3,300)
from batteries and matchboxes to candles Exp. -Rs.142,000 ($3,160)
and candy Income Rs. 6,050 ($ 135)
• Units of sale are small, with high margins
• Up-front investment of Rs. 20,000 ($445) is IRR = 10% Avg. ROI = 26%
used to buy stock from wholesalers in towns
Vegetable Vending
• Women buy seasonal vegetables from Rev. +Rs. 49,500 ($1,100)
local farmers to sell in nearby towns Exp. -Rs. 43,075 ($ 960)
• Unit of sales are small, margins are high Income Rs. 6,425 ($ 143)
• Investment of Rs.10,000 ($225) is used to
IRR = 43% Avg. ROI = 52%
buy weighing scale, baskets and wooden
displays
Livestock
Buffalo Rearing • Invest in buffalos for income from milk Rev. +Rs. 22,600 ($502)
production Exp. -Rs. 11,550 ($257)
• Each buffalo yields 6 litres of milk a day Income Rs. 11,050 ($245)
which is sold at Rs. 8/litre
IRR = 69% Avg. ROI = 74%
• Up-front investment is used to buy a
single buffalo costing between Rs.
10,000 - 15,000
Source: Examples from SKS Microfinance in India 28

29. THE ROI ON AGRICULTURE INVESTMENTS ARE AS HIGH AS 185%
Occupation Description Annual Financials, IRR, ROI
Livestock
Goat Rearing
• Invest in goats for income from Rev. +Rs.1,800 ($ 40)
offspring Exp. -Rs. 50 ($ 1)
• Average of 3-4 offspring per year Income Rs.1,750 ($ 39)
with a sale price of Rs. 500 - Rs.700
• Investment of Rs. 2,250 is required IRR = 56% Avg. ROI = 63%
per goat
Agriculture
Lease of Farm Land
• Land is leased on a yearly basis for Rev. +Rs.48,000 ($1,067)
agricultural purposes Exp. -Rs.18,000 ($ 400)
• The up-front investment varies from Rs. Income Rs.30,000 ($ 667)
12,000 - 15,000 ($267 - $334) per acre
• Geographic and soil factors determine IRR = 160% Avg. ROI = 161%
crop selection and profitability
Tree Lease
• Generally 4-5 mango trees are leased to Rev. +Rs. 25,000 ($ 555)
individuals Exp. -Rs. 2,000 ($ 45)
• Seasonal business in the summer only Income Rs.23,000 ($ 510)
• Each tree yields ~1,000 mangoes in a
good season IRR = 184% Avg. ROI = 185%
• Yearly investment (leasing of mango trees)
is ~Rs. 10,000/year
Source: Examples from SKS Microfinance in India 29

30. THE ROI ON PRODUCTION ACTIVITIES ARE AS HIGH AS 236%
Occupation Description Annual Financials, IRR, ROI
Production
Sweet Making Shop • Sweets are generally made and sold daily Rev. +Rs. 182,400 ($4,050)
• Sales go up to 15 kg/day in peak Exp. -Rs. 136,800 ($3,040)
festivals and marriage seasons with a Income Rs. 45,600 ($1,010)
sale price of Rs. 80/kg
• Up-front investment of Rs. 25,000 IRR = 145% Avg. ROI = 147%
($555) is used for renting shop space
and raw materials
Ice-cream enterprise
• Home-made ice cream is sold door-to- Rev. +Rs. 43,200 ($ 960)
door by hired salespeople Exp. -Rs. 33,600 ($ 745)
• On average 600 ice-cream sticks are sold Income Rs. 9,600 ($ 305)
per day during the summer months
• Up-front investment of Rs.30,000 ($670) IRR = 9% Avg. ROI = 26%
is used to buy an ice-cream making
machine
Pottery
• Produce clay pots for local customers Rev. +Rs. 70,000 ($1,556)
Exp. -Rs. 46,600 ($1,036)
• Margins are up to 90% per pot with a 6
Income Rs. 23,400 ($ 520)
month peak season
• Investment of Rs.10,000/year is used to IRR = 235% Avg. ROI = 236%
buy clay, dust, and the pottery wheel
Source: Examples from SKS Microfinance in India 30

31. THE HIGHEST RETURNS ARE ON SERVICE ACTIVITIES, UP TO 222%
Occupation Description Annual Financials, IRR, ROI
Services
Tailoring
• Provide custom tailoring service for local Rev. +Rs. 82,200 ($1,830)
customers Exp. -Rs. 68,400 ($1,520)
• Generate ~Rs. 450/day during peak Income Rs. 13,800 ($ 305)
seasons
• Up-front investment of Rs.10,000 ($225) is IRR = 108% Avg. ROI = 111%
primarily used to buy a sewing machine and
other production material
Flour Grinding Services
• Grind wheat, corn and other grains for local Rev. +Rs. 45,600 ($1,013)
customers Exp. -Rs. 27,200 ($ 605)
• Daily throughput of 125kg of grain at the Income Rs. 18,400 ($ 408)
rate of ~Rs 2/kg
• Up-front investment of Rs. 25,000 ($555) is IRR = 52% Avg. ROI = 59%
used to buy grinding machine
Roadside Restaurant
• Sell snack items and tea to local Rev. +Rs.148,500 ($3,300)
customers Exp. -Rs. 79,750 ($1,775)
• Sell an average of 300 cups of tea at Income Rs. 68,750 ($1,530)
100% margin
• Up-front investment of Rs.25,000 ($555) IRR = 221% Avg. ROI = 222%
is primarily used to lease space and buy
utensils, cooking supplies, and furniture
Source: Examples from SKS Microfinance in India 31

32. SOME FREQUENTLY ASKED QUESTIONS
Questions Answers
• Truly speaking new ventures are few as borrowers are often
Can the local economy support refinancing existing activities (replacing high cost working capital
an infusion of more enterprises? with low cost microfinance) as opposed to financing new
(eg. how many general stores ventures.
can a village economy support?) • The burgeoning Indian economy can support more enterprises
(eg. urban middle class demand for milk and milk products
allows significant scope for increased milk supply)
Can the natural resource base • With many enterprises, there is scope for increase without
support an infusion of more depleting natural resources (eg. goats eat virtually anything and
enterprises? (eg. how many therefore do not significantly deplete environmental resources)
more goats can you put in a • But in some cases (such as irrigation water required for water-
village?) intensive crops), there are environmental constraints and these
are best addressed by state-led natural resource management
• Borrowers often engage in refinancing existing activities in which
they already have a core competence
Do the poor have the knowledge • Where borrowers take up new activities, they do so after seeing it
to take up new enterprises? successfully undertaken and learning from other borrowers
• At the level of micro-enterprise – below Rs. 50,000 - significant
knowledge is not required—though movement into small and
medium enterprises may require training and other inputs
32

33. SKS BORROWERS ARE ENGAGED IN OVER 160 DIFFERENT ACTIVITIES,
SOME OF WHICH ARE LISTED BELOW
Agriculture (6%) Production (7%) Services (27%)
• Land Investment • Almariah manufacture • Food products • Tailoring
• Nursery • Blanket weaving • Road side Micro Dinner
• Stone cutting
• Tree leasing • Brick making • Small Flour Grinder
• Jaggery
• Land purchase • Cloth weaving • Laundry
• Fishing nets
• Land leasing • Mat weaving • Carpentry
• Power loom (purchase)
• Irrigation • Mattress making • Auto-Rickshaw
• Agri- machinery • Bed/Cot making • Charakha (purchase) • Electrician
• Fertilizer • Rexine work • Bouquet making • Tent- House
Livestock (27%) • Beedi making • Pop corn machine • Centering
• Herbal product making • Leaf plate making • Steel Smelting Shop
• Poultry
• Statue making • Printing press • Weaving services
• Buffaloes
• Agarbati making • Watch Repairing
• Cows
• Candle making Trade (32%) • Photo Copy Shop
• Goats
• Thread making • General Stores • STD Booth
• Sheeps
• Ice Cream Making • Oil extracting unit
• Fishery • Sweet making
• Vegetable Trading • Juice shop
• Ox/ Plough bullocks • Spices (masala)
• Utensils / Cutlery • Book binding
• Donkeys • Photo frame
• Animal feed (Tavudu) • Pottery/ Burner (chullah) • Fruit selling • Welding Shop
33

34. BANKS HAVE TYPICALLY NOT LENT TO THE POOR BECAUSE OF
HIGH RISKS AND HIGH TRANSACTIONS COSTS…
High risks because… the poor have no collateral
High transaction costs because… a large number of very small loans
…so village loans sharks
exploit the poor’s lack of
access to credit charging 36-
72% interest

35. MICROFINANCE USES GROUP LENDING TO OVERCOME RISK AND
PROVIDE LOANS AND OTHER FINANCIAL SERVICES TO THE POOR
A quot;poorquot; client a quot;smallquot; loan an income-
to use
without access gets through a generating
for
to capital group model “enterprise”