liquidity management in microfinance institutions...

LIQUIDITY MANAGEMENT IN MICROFINANCE INSTITUTIONS-A

CASE STUDY OF SKS MICROFINANCE LIMITED

MUKTI KUMAR NANDA

Ph.D Scholar, Ravenshaw University, Cuttack, Odisha

ABSTRACT

SKS Microfinance Limited provides small value and short term income generating loans and other

financial services to the poor women of rural and urban locality of India in order to alleviate poverty.

In order to be sustainable in providing such services to these poor people, the company has to

maintain a sound financial position. This study aims to analyze the short term financial position by

computing the current ratio and quick ratio over a period of time from 2005-06 to 2014-15. The study

reveals that the company foregoes the return on investing the excess current assets or quick assets

while trying to maintain a healthy liquidity position. In other words there is no trade off between

liquidity and profitability. Similarly, we have also analyzed the cash flow of the company for a period

of seven years starting from 2008-09 to 2014-15. The erratic position of cash and cash equivalent over

the period shows that the company does not have a full proof policy on liquidity management.

Key Words: MFI, NBFC, JLG, GLP, Liquidity, Profitability

1.0 INTRODUCTION

Micro Finance may be defined as "provision of thrift, credit and other financial services and products

of very small amounts to the poor in rural, semi urban or urban areas, for enabling them to raise their

income levels and improve living standards". At present, a large part of micro finance activity is

confined to credit only. Women constitute a vast majority of users of micro-credit and savings

services.

According to the United Nations, microfinance institutions can be broadly defined as provider of

small-scale financial services such as savings, credit, insurance and other basic financial services to

poor and low-income people. The term ―microfinance institution‖ now refers to a wide range of

organizations dedicated to providing these services and includes Non Government Organizations

(NGOs), credit unions, co-operatives, private commercial banks, Non-Banking Finance Companies

(NBFCs) and parts of State-owned banks. Microfinance is a dynamic field and there is clearly no best

way to deliver services to the poor and hence many delivery models have been developed over a

period of time.

Access to financial services has been recognized as a human right. Strengthening credit-delivery

services and increasing their outreach has always been an important component of Indian

development strategy. A large number of the poor continued to remain outside the fold of the formal

banking system, in spite of the expansion of the wide network of the organized banking system deep

into rural areas. Market and the government both failed to provide credit access to the poor. In fact the

failure of institutional initiatives of rural credit and to the weaknesses of the exploitative informal

system of credit gave birth to Microfinance institutions.

Microfinance institutions (MFIs) are the organisations or associations of individuals that provide

financial services to the poor. These institutions lend through the concept of Joint Liability Group

(JLG). A JLG is an informal group comprising of 5 to 10 individual members who come together for

INTERCONTINENTAL JOURNAL OF FINANCE RESEARCH REVIEWISSN:2321-0354 - ONLINE ISSN:2347-1654 - PRINT - IMPACT FACTOR:1.552VOLUME 4, ISSUE 6, JUNE 2016

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the purpose of availing bank loans either individually or through the group mechanism against a

mutual guarantee. In India, there is a wide range of such organisations with diverse legal forms,

varying significantly in size, outreach, mission and credit delivery borrowers. In the process, the basic

reason for their methodologies.

1.1 SKS MICROFINANCE-AN OVERVIEW

SKS was started in 1996 by a young entrepreneur, Vikram Akula. When pursuing his Ph.D. in

Political Science at the University of Chicago, Vikram had the vision of starting a microfinance

institution to uplift the poorer sections of the society in India. His dissertation was in the area of

poverty alleviation strategies which focused on ‗How to scale microfinance faster‘. While studying in

the US, Vikram realized that microfinance institutions could sustain themselves in the long run only

by following a for-profit model.

After returning to India from the US, he faced lot of difficulty in starting a new microfinance

organization as he couldn‘t raise the required funds. Finally, he started SKS by raising an initial

amount of Rs. 2.36 million from 357 people (mostly from his family and friends). Vikram was

inspired by Bangladesh banker Muhammad Yunus and SKS was established based on Yunus‘s

Grameen Bank model. SKS was initially registered as SKS Society, a Non-governmental

Organization (NGO), in 1997 and it started its operations in Tumnoor Village in Medak District,

Andhra Pradesh, in 1998. SKS expanded its operations rapidly and in course of time, it won several

awards for its achievements. Most of the money it received in the form of awards was also reinvested

to fund the expansion of its operations.

By the year 2003, Vikram had arrived at the idea of converting SKS into a for-profit organization to

fuel its growth. Toward that end, he founded a private company called SKS Microfinance Pvt. Ltd.

and five for-profit Mutual Benefit Trusts (MBTs). The objective was to enhance the social and

economic welfare of the company and MBTs‘ members. Vikram raised US$ 500,000 in 2003 through

donations via MBTs and invested the amount in SKS Microfinance Ltd. to become its sole owner.

In 2005, the Company registered with and has since been regulated by the RBI as a Non-Deposit

Taking Non-Banking Financial Company (NBFC-ND). In 2009, the Company became a public

limited Company. The Company completed its IPO and its equity shares were listed on Bombay

Stock Exchange (BSE) Limited and the National Stock Exchange (NSE) of India Limited in August

2010. In November 2013, the RBI re-classified the Company as an NBFC-MFI permitting it to carry

on the business of a Non-Banking Financial Company - Micro Finance Institution, a separate category

of Non-Deposit Taking Non-Banking Financial Companies engaged in microfinance activities.

The Company is one of the largest MFIs in India by Gross Loan Portfolio (GLP) as also number of

Borrowers and branches as on March 31, 2015, and the only microfinance Company to be publicly

listed in India. The Company is primarily engaged in providing microfinance to economically weaker

individuals in India, who are classified by the Company as its ―Members‖. Further, the Company

classifies Members whose loans are outstanding as ―Borrowers‖.

The Company‘s core business is providing small value loans and certain other basic financial services

to its Members. Its Members are predominantly located in rural areas in India, and the Company

extends loans to them mainly for use in small businesses or for other income-generating activities and

not for personal consumption. These individuals often have no, or very limited, access to loans from

institutional sources of financing. The Company believes that non-institutional sources typically

charge very high rates of interest.


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In its core business, the Company utilizes a village-centric, group-lending model to provide unsecured

loans to its Members. This model relies on a form of ‗social collateral‘, and ensures credit discipline

through peer support within the group. The Company believes this model makes its Members prudent

in conducting their financial affairs and prompt in repaying their loans. Failure by an individual

Borrower to make timely loan repayments will prevent other Members in the group from being able to

borrow from the Company in future. Therefore, the group will use peer support to encourage the

delinquent Borrower to make timely repayments or will often make a repayment on behalf of a

defaulting Borrower, effectively providing an informal joint guarantee on the Borrower‘s loan.

In addition to its core business of providing micro credit, the Company uses its distribution channel to

provide certain other financial products and services that its Members may need. The Company offers

loans for the purchase of mobile phones and solar lamps. The Company also operates a number of

pilot programmes that it may gradually consider converting into separate business verticals or operate

through subsidiaries, subject to satisfactory results of the pilot programmes and receipt of regulatory

approvals. The existing pilot programmes primarily relate to giving loans to its Members for the

purchase of certain productivity-enhancing products such as sewing machines, bio-mass stoves and

loans against gold as collateral. The Company intends to expand its involvement in these other

financial products and services to the extent consistent with its mission, client-focus and commercial

viability.

Borrowers undergo financial literacy training and must pass a test before they are allowed to take out

loans. Weekly meetings with borrowers follow a highly disciplined approach. Re-payment rates on

collateral-free loans are more than 99% because of this systematic process. SKS microfinance also

offers micro-insurance to the poor as well as financing for other goods and services that can help them

combat poverty.

1.2 OBJECTIVES OF THE STUDY

The objectives of the study are:

1. To evaluate the liquidity position and

2. To examine the liquidity management policy of the company under study.

1.3 SCOPE OF STUDY, SOURCES OF DATA AND HYPOTHESES

This study is confined to a single MFI, i.e. SKS Microfinance Ltd and the period of the study

is from 2005-06 to 2014-15.

All relevant data are extracted from the annual financial statements of the company. Some

data are also drawn from the web site of the institution under study.

The two hypotheses mentioned below are taken in the present study.

(i) The company maintains a tradeoff between liquidity and profitability

(ii) The company follows a clear policy of maintaining cash and cash equivalents.

1.4 LITERATURE RVIEW

Profitability is the main form of measuring the economic success of a firm in relation to the capital

invested in it. This economic success of a firm is arrived at by computing the net accounting profit.

According to Shim and Siegel (2000, pp.46-47) liquidity is the company‘s capacity to pay off the

maturing short-term debt (within one year). Maintaining adequate liquidity is one of the corporate

goals to continue the business operation. Solvency and liquidity are two concepts that are closely


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related and reflect upon the actions of company‘s working capital policy. A low liquidity level may

lead to increasing financial costs and result in the incapacity to pay its obligations.

According to the research conducted by Chandra in 2001, normally a high liquidity is seen as a sign of

financial strength. However, some authors like Assaf Neto believe that a high liquidity can be as

undesirable as a low one. This would be a consequence of the fact that current assets are usually less

profitable than fixed ones. Money invested in assets generates less revenue than fixed assets, thus

representing an opportunity cost.

According to Assaf Neto (2003, p.22), the greater the amount of funds invested in current assets, the

lower the profitability, and by the same time the less risky is the working capital strategy. In this

situation, the returns are lower in the case of a greater financial slack, in comparison to a less liquid

working capital structure. Conversely, a smaller amount of net working capital, while sacrificing the

safety margin of the company, by raising its insolvency‘s risk, positively contributes to the

achievement of larger return rates, since it restricts the volume of funds tied up in assets of lower

profitability. This risk-return ratio behaves in a way that no change in liquidity occurs without the

consequence of an opposite move in profitability.

However, Hirigoyen (1985) argues that mid-term and long-term relationship between liquidity and

profitability could be positive, meaning that low liquidity would lead to lower profitability due to a

greater need for loans and low profitability would not generate sufficient cash flow, thus forming a

vicious circle.

A company with low liquidity and high profitability will have to increase it‘s lending, resulting to

increased financial costs. This would certainly lead to increasing interest rates, given that resources

cheap are depleting rapidly. In addition, enlarging the level of the debt, company‘s credit risk

increases, causing increasing interest rates charged by their financiers. Under these conditions, the

company must plan to obtain from suppliers more time, resulting in the acquisition of more expensive

materials. Also, the enterprise will not be able to enjoy discounts offered by anticipating financial

payments instead bear interest and late payment penalties for various bills, taxes and others. After all

this process liquidity problems might get bigger.

Moreover, a firm that has low profitability and high liquidity does not generate sufficient resources to

finance expansion of its working capital needs, acquiring new assets, overdue loans, etc. And finally

the liquidity turns out to become lower.

Thus Hirigoyen, profitability and solvency are a necessary condition for the existence of a healthy

company and both of them are the subject to the strategy adopted in the medium and long term.

With respect to business management, cash flow is viewed as the ‗lifeblood‘ of a business (Schaeffer

2002) as cash must be available when it is needed. Therefore a company‘s ability to manage cash is

vital to survival and wealth (Sharma, R & Jones 2000). Predicting cash flows of future periods can

help a manager identify future financial problems (Kelly & O'Connor 1997). Cash flow prediction

allows the company to know its cash position and to make the necessary expenditures for such items

as debt repayment, acquisitions and payment of expenses (Plewa & Friedlob 1995). In addition, the

difference between forecast and actual cash flows needs to be analysed to understand and measure a

firm‘s performance.

In addition, cash flows are expected to be a natural alternative performance indicator to evaluate a

firm‘s performance because earnings are not informative when they are transitory and extreme and


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cash flows are already available to be used in cash flow statements (Cheng, Yang & Clubb 2003). The

investors also consider cash flow a sustainable performance measure for a firm‘s valuation.

Cash flows from operations is used to calculate free cash flow. Free cash flow is money earned from

operations after provision for capital expenditures at the end of an accounting period. It is basically

defined as net cash flow from operating activities less capital expenditures and dividends on preferred

stock (Lees & Leibman 2000; Williamson 2003). It shows the ability of the company to generate cash

from its operations after spending money on the capital expenditures (Chang 2002). Without free cash

flow, it is difficult for a business to 37 pursue new opportunities, acquire other businesses or pay

dividends. Free cash flow analysis helps managers identify the capital available for reinvestment in

enhancing the company‘s growth. In turn, analysing free cash flow can separate the firms with a high

ability to internally grow from firms with a low ability to grow. In addition to reinvestment, the

company can distribute free cash flow to pay dividends to shareholders (Hackel, Livnat & Rai 1994).

As a result, the free cash flow may be considered to assess the ability of companies to pay dividends

on common stock.

1.5 IMPORTANCE OF LIQUIDITY MANAGEMENT

Liquidity management deals with ensuring that sufficient cash and liquid assets are maintained by the

financial institution in order to support the expenses of the institution and to satisfy the demands of

client, for saving withdrawals and loans. A detailed estimation and daily analysis of the timing and

size of inflows and outflows of cash in the coming days and weeks is involved in the liquidity

management, in order to minimize the proficiency of risks that the depositors might face, not being

able to access their funds on demand. Thus, Maurer and Klaus (1999) state that a computerized or

manual management information system sufficient enough to generate the information required to

make liquidity projections and realistic growth, necessary for financial institutions to manage the

liquidity. The information that is needed to manage liquidity are, the micro financing institution‘s

actual deposit liabilities as of a particular date according to the name of the client, amount deposited,

maturity period and account type; a history of loan and deposit outflows and inflows; and a history of

complete, day to day cash demands to determine the cash required to be kept in demand deposit and

on- site type of accounts.

Many microfinance institutions are on a development path of becoming a proper financial

intermediary, providing not just loans but also a complete range of banking services like cash

deposits, checking, savings, non- cash payments and other essential banking services (Goldberg &

Palladini, 2010). Systematic planning is required to deal with the complex liquidity management tasks

in order to deal with the varying demands of loans and the varying erratic deposits. According to

Bankakademie (2000), the highest concern of all microfinance institutions is that of the liquidity

because of the MFI operations‘ growing size which makes the liquidity a regional economic issue of

importance.

1.6 LIQUIDITY RATIOS

Liquidity ratios measure the short term financial position of a firm. These ratios are calculated to

comment upon the short term paying capacity of a concern or the firm's ability to meet its current

obligations. The liquidity ratios of SKS microfinance is studied to find out whether the firm is able to

pay off its the short term debts. It is studied by calculating Current Ratio and Quick Ratio.


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1.6.1 Current Ratio

The current ratio measures a firm's ability to pay off its short-term obligations out of its current assets.

Current assets are the assets which can be converted into cash within one year and the current

liabilities are due to be paid within one year too.

The current ratio is calculated by dividing current assets by current liabilities. This ratio is stated in

numeric format rather than in decimal format. The usual formula for calculating current ratio is;

Current Ratio = Current Assets/Current Liabilities

This ratio expresses a firm's current debt in terms of current assets. So a current ratio of 4 would mean

that the company has 4 times more current assets than current liabilities. The current assets of SKS

Microfinance consist of receivables, short term loans and advances, cash in hand, cash at bank and

other current assets such as non-current bank balances, interest accrued but not due on portfolio loans,

interest accrued and due on portfolio loans, interest accrued but not due on deposits placed with

banks, interest strip on securitisation transactions, unbilled revenue and others unsecured, considered

good. Similarly, short term borrowings, other current liabilities, provisions and deferred tax liabilities

form the current liabilities. Relevant data of current assets and current liabilities along with the current

ratios are shown year wise from 2005-06 to 2014-15.

Table 1 : Current Ratio of SKS Microfinance

Year Current Assets Current Liabilities Current Ratio

2005-06 94.78 16.43 5.77

2006-07 328.80 14.21 23.14

2007-08 1073.31 86.36 12.43

2008-09 3015.69 237.49 12.70

2009-10 4013.45 402.51 9.97

2010-11 4103.79 1464.30 2.80

2011-12 1377.16 871.98 1.58

2012-13 2180.94 1284.93 1.70

2013-14 2223.70 1405.43 1.58

2014-15 4318.25 1985.42 2.17

Average 2273.00 777.00 2.93

Source: Balance Sheets – SKS Microfinance

A careful analysis of the data reveals that the firm understudy had a higher current ratio from 2005-06

to 2010-11. Considering the ideal current ratio 2:1, it was very high during these years. It is

heartening to know that its current ratio was 23.14 during 2006-07. Keeping so much of current assets

to meet a small amount of current liabilities is not beneficial for the firm. The amount could have been

utilised otherwise profitably.

The study also reveals that since 2011-12, SKS India was able to reduce the current ratio to an

acceptable and practicable limit. The average current ratio is worked out to be 2.93 which mean the

ability of the firm to meet its short term obligations out of the current assets is very satisfactory.

1.6.2 Quick Ratio

The quick ratio or acid test ratio measures the ability of a company to pay its current liabilities out of

its quick assets. Quick assets are current assets that are either in cash form or can be converted to cash


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within 90 days. Cash, cash equivalents, short-term investments or marketable securities and current

accounts receivable are considered quick assets.

Short-term investments or marketable securities include trading securities that can easily be converted

into cash within the next 90 days. Marketable securities are traded on an open market with a known

price and readily available buyers. The quick ratio is often called the acid test ratio in reference to the

historical use of acid to test metals for gold by the early miners. If the metal passed the acid test, it

was pure gold. If metal failed the acid test by corroding from the acid, it was a base metal and of no

value.

The acid test of finance shows how well a company can quickly convert its assets into cash in order to

pay off its current liabilities. It also shows the level of quick assets to current liabilities. Quick assets

of SKS Microfinance includes trade receivables, cash and bank balances and short term loans and

advances while the current liabilities are nothing but the short term liabilities of the company under

study. The usual formula for calculating current ratio is;

Quick Ratio = Current Assets/ Current Liabilities

Table 2 : Quick Ratio of SKS Microfinance

Year Quick Assets Current Liabilities Quick ratio

2005-06 94.39 16.10 5.86

2006-07 327.76 14.21 23.07

2007-08 1068.88 86.36 12.38

2008-09 2984.11 237.49 12.57

2009-10 3992.24 402.51 9.92

2010-11 4057.67 1464.30 2.77

2011-12 1317.06 871.98 1.51

2012-13 2142.74 1284.93 1.67

2013-14 2168.32 1405.43 1.54

2014-15 4253.74 1985.42 2.14

Average 2241.00 777.00 2.88

Source: Balance Sheets – SKS Microfinance

The above table shows the quick assets, current liabilities and their corresponding quick ratio of SKS

India year wise from 2005-06 to 2014-15. A look at the last column states that from 2005-06 to 2010-

11, the firm was maintaining a very high quick ratio. As compared to the standard quick ratio of 1:1, it

was very high. Even from 2011-12 till 2014-15, the firm‘s quick ratio is above the standard norm.

Such a high quick ratio, even though ensures high liquidity still it has an adverse impact on the

profitability. The excess liquid fund could have been deployed profitably otherwise. The average

quick ratio is worked out to be 2.88 which mean the ability of the firm to meet its short term

obligations out of the quick assets is very satisfactory.

1.6.3 CASH FLOW ANALYSIS

Complementing the Balance Sheet and Income Statement, the cash flow statement shows the amounts

of cash and cash equivalents entering and leaving a company. The cash flow statement allows

investors to understand how a company‘s operations are running, where its money coming from and

how it is being spent. Cash and cash equivalents are the most liquid assets found within the assets

portion of a company‘s Balance Sheet. Cash equivalents are assets that are readily convertible into

cash such as money market holdings, short term government bonds or treasury bills, marketable


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http://en.wikipedia.org/wiki/Asset

securities and commercial papers. Cash equivalents mature within three months whereas the maturity

period of short term investments are twelve months or less. Another important condition cash

equivalent need to satisfy is that investments should have insignificant risk of change in value.

Although cash equivalents are not cash, they are presented on the statement of financial position

together with cash using the title cash and cash equivalents.

Cash flow is determined by looking at three components by which cash enters and leaves a company.

These are

i) operating activities,

ii) investing activities and

iii) financing activities.

1.6.3.1 Operating Activities:

Operating activities are the principal revenue producing activities during the normal course of the

business of an enterprise. Therefore, they result from the transactions and events that enter into the

determination of net profit or loss. Cash from operating activities is computed by taking out the

difference between the operating receipts that causes cash inflows and operating payments that

involve outflows of cash.

Cash flow from operating activities of SKS India includes net profit plus interest on shortfall in

payment of advance income tax, depreciation and amortisation, various provisions made, portfolio

loans and other balances written off, etc. Similarly, the outflow of cash on operating activities include

loans and advances, change in current liabilities, trade receivables and other current assets etc.

1.6.3.2 Investing Activities

Investing activities are the acquisition and disposal of long term assets and other investments not

included in cash equivalents. It includes acquisition and disposal of fixed assets including intangibles,

acquisition and disposal of shares and debt instruments, cash advance and loans made to third parties

and cash receipts from repayment of loans and advances, cash receipts and payment in respect of

future contracts.

1.6.3.3 Financing Activities

Financing activities are the activities that result in changes in the size and composition of owner‘s

capital and borrowing of the enterprise. Cash flow from financing activities can be ascertained by

analysing changes in share capital, debentures and other borrowings.

The net cash flow from financing activities is calculated by adding issue proceeds from equity share

capital, preference share capital, debentures and other borrowing and deducting there from,

redemption of preference shares, debentures and dividend and interest paid on shares and debentures.


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Table 3: Net Increase / Decrease in Cash and Cash Equivalents

Particulars

2008-

09

2009-

10

2010-

11

2011-

12

2012-

13

2013-

14

2014-

15

Net Profit Before Tax 124.06 267.7 172.43

-

1323.75 -297.14 69.85 193.57

Net Cash (Used in)/From

Operating Activities -276.8

-

1226.16 -634.5 1340.72 -643.53 -132.45

-

1146.36


Investing Activities -229.94 14 0.74 -67.91 2.65 -23.55 30.01


Financing Activities 1563.91 670.93 245.43

-

1209.83 847.07 -87.12 2138.61

Net (Decrease)/Increase In

Cash and Cash

Equivalents 1057.17 -541.23 -388.33 62.99 206.19 -243.11 1022.25

Opening Cash & Cash

Equivalents 261.54 1318.71 777.48 389.15 452.14 658.33 415.21

Closing Cash & Cash

Equivalents 1318.71 777.48 389.15 452.14 658.33 415.21 1437.46

Source: Cash Flow Statements- SKS Microfinance

A perusal of the data shows that during 2009-10, 2010-11 and 2013-14 there was decrease in cash and

cash equivalents while a net increase is marked in the remaining four years of the study. It may be

mentioned here that cash and cash equivalent include cash in hand, cash at bank and marketable

securities reduced by bank overdraft and cash credits.

The closing cash and cash equivalents of the MFI under study shows a fluctuating character and the

ups and down is very eratic in some years. For example, during 2008-09 the closing cash and cash

equivalents was 1318.71 crores and in the very next year it was reduced to 777.48 crores i.e.

reduced by 41 per cent. Similarly, in the concluding year of the study the closing cash and cash

equivalents have registered a rise of more than three times than its preceding year. Thus, it seems the

firm does not have a clear cut policy for maintenance of cash and cash equivalents.

1.7 LIQUIDITY MANAGEMENT POLICY OF SKS MICROFINANCE

The liquidity management policy of the SKS microfinance is flexible which enables the managers to

quickly react to the unforeseen events. The liquidity policy of the SKS microfinance states the

following,

i) the authority responsible for the management of liquidity in the institution;

ii) the general methodology of managing liquidity in the institution;

iii) the process of monitoring the liquidity;

iv) the tools used to monitor the liquidity of the institution;

v) the details of the time frames in analysing the cash flow;

vi) also states the level of risk that the institution can handle in minimizing the cash to

improve the profitability;

vii) The SKS microfinance policy establishes the maximum and minimum value of the cash

assets and the amount of cash to be kept on- site. The details about the time frame in


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reviewing the liquidity decisions, including the assumptions considered to develop the

budget on cash flow,

viii) The policy also states the methods of handling excess of funds in the institution.

ix) The liquidity management policy of the SKS microfinance also states the maximum limits

of the amount to be deposited in other banks in order to limit or prevent the exposure to a

failure.

x) To reduce the potential risks of theft, fraud and mismanagement, the Company has been

implementing an integrated cash management system since July 2009 which is

operational in approximately 1,249 of its branches as of March 31, 2015. The system

utilizes an Internet banking software platform that interfaces with various banks to

provide the firm with real-time cash information for these branches and the loan activity

therein.

xi) The Company has adopted a cash investment policy that limits cash investments to

interest-bearing fixed deposit accounts. The Company does not invest cash in any other

instruments or securities.

1.8 CONCLUSION

The short term financial position of the company under study is very healthy as reflected by its

liquidity ratios such as current ratio and quick ratio. However, maintaining a very high level of current

ratio and quick ratio is not always advisable. A very high current ratio and quick ratio mean a high

level of current assets and quick assets respectively in relation to its short term or current liabilities.

Though these very high levels of current assets or quick assets strengthen the liquidity position of the

firm, also it negatively impacts the profitability of the institution by foregoing the return on

investment on these excess amount of current assets or quick assets.

A very high level of current ratio and quick ratio mean, SKS Microfinance Limited does not make a

sound trade off between liquidity and profitability making our first hypotheses false. Similarly, the

fluctuating character of the closing cash and cash equivalents of the company under study proves that

the firm does not have a clear cut policy for maintenance of cash and cash equivalents. The again

makes our second hypotheses false.

1.9 REFERENCES

1. Abdul Qayyum and Ahmad M: Efficiency and sustainability of microfinance institution in

South Asian. Pakistan Institute of Development Economics, 2006.

2. Ali, A. 1994: The incremental information content of earnings, working capital from

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3. AnandRaiandKanwalAnil: Financial performance of microfinance institutions: Bank vs.

NBFC. International Journal of Management and Strategy (1JMS), Vol. 11, Issue II, Jan

2011.

4. Bayeh Asnakew Knide: Financial sustainability of microfinance institutions in Ethiopia.

European Journal of Business and Management, Vol.4, No. 15, 2012.

5. Chotkunakitti, P 2005: Cash flows and accrual accounting in predicting future cash flows of

Thai listed companies. DBA thesis,. Southern Cross University.

6. https://www.sksindia.com/annual_reporting.php


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7. Michael Tucker and Gerard Miles: Financial performance of Microfinance Institutions - A

comparison of performance of Regional Commercial banks by geographic regions. Journal of

Microfinance, Vol. 6, No.1, 2003.

8. Pankaj.K. Agarwal and S.K.Sinha: Financial performance of microfinance institutions of

India: A cross sectional study. Delhi Business Review, Vol.11, No.2, July- Dec 2010.

9. Sen Mitali: Assessing social performance of MFIs in India. ICFAI Journal of Applied finance,

Vol. 14, No: 86, 2008, pp. 77-86.

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AIMS, International Conference on Management, January 6 – 9, 2013.


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