what is microfinance sks

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http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4284

What is microfinance?

Microfinance is the supply of loans, savings and other financial services to the poor. The term

micro is in reference to the small amounts typically involved in the practice. These services aresmallmicro because a person who does not have a lot of money most likely will not need aloan of several thousand dollars. However, a loan of a few hundred dollars may make a hugedifference in their lives, giving them the ability to purchase livestock for a small farm, a sewingmachine to help make accessories and clothes, or supplies for a small store, for example.

The poor throughout the developing world frequently are not part of the formal employmentsector. They may operate small businesses, work on small farms or work for themselves orothers in a variety of businesses. Many start their own micro businesses, or small businesses,out of necessity, because of the lack of jobs available.

What is a microfinance institution?

A microfinance institution (MFI) is an organization that provides microfinance servicesloans,savings, maybe even insuranceto the worlds poor. An MFI can operate as a nonprofit such asa non government organization (NGO), credit cooperative, non bank financial institution (NBFI),or even a formal, regulated for profit bank.

MFIs differ in size and reach; some serve a few thousand clients in their immediate geographicalarea, while others serve hundreds of thousands, even millions, in a large geographical region,through numerous branches. Many MFIs offer services beyond loans and savings, includingeducation on business and financial issues and social services focused on health and children

Why dont poor people just use traditional banks?

Poor people in developing countries usually do not qualify for any type of services from theformal banking sector: they typically have no credit history, and most are not employed in theformal sector, so there is no record of employment. Moreover, they are unable to providecollateral. And in many parts of the world, opening a savings account at a traditional bankrequires a certain amount of money be deposited, and poor people, although statisticallyexcellent savers, do not have the large sum of money required to open a savings account.

Yet, people living in poverty, like everyone else, need access to a diverse range of financial

services to help run a small business, manage risks, and plan for a more stable future.

Why are microcredit interest rates so high?

Like other financial institutions, MFIs charge an interest rate for the loans they give their clients.This is a way for the MFI to be self-sustaining so that it can be a stable, long term provider offinances in its area of operations. A self-sustaining MFI is critical to the health of the sector andfor it to continue to provide microfinance services to its clients. However, because managing
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many small loans costs more money for any institution than managing one large loan, an MFItypically needs to charge higher interest rates to cover their costs

What are some of the ways that people use their microfinance loans?

The ways in which people use their loans vary as much as the ways people earn a living. Somebuy livestock; a sewing machine and fabric to make cloths and accessories; stock for a localstore; a tractor or seed and other farming equipment and supplies. The possibilities are endless asto what a micro-entrepreneur can do with his or her loan.

Are poor people able to repay their loans?

Microfinance clients have excellent track records for repayment. Repayment rates formicrofinance loans on a global level average about 97 percent.

Arent the poor too poor to save?

The poor already save in ways that we may not consider as normal savings - investing inassets, for example, that can be easily exchanged for cash in the future (domestic animals forinstance). After all, they face the same series of sudden demands that we all face: illness, housingrepairs, school fees, burial fees.

Does microfinance really help solve poverty?

Poverty is a very complicated issue, and many different approaches and tools are required toaddress it. Microfinance is one tool that is appropriate for millions of the working poor to liftthemselves out of poverty. However, microfinance is not the only answer, and in fact is not

always appropriate. For instance for the extreme poor, or those who are sick and/or unable towork, microfinance may not be an appropriate tool.

How did SKS Microfinance start? What are the origins of SKS?

SKS stands for Swayam Krishi Sangam, which in Hindi means self-cultivation society. Dr. Vikram Akula,

Founder and Chairperson, founded SKS in 1997 and launched operations in 1998 in Andhra Pradesh,

India with the mission to eradicate poverty. In 1996-97, while still a PhD graduate student, Akula raised

$52,000 in seed funding from 357 family members and friends to start SKS as a non-profit organization.

In 2005, SKS converted into a non-banking financial company (NBFC) which is regulated by Indias

central bank, the Reserve Bank of India (RBI).

What does SKS do?

Our core business is distributingincome generation and productivityloans that begin at Rs. 4,000(about $90) to poor women so they can start and expand simple businesses and increase theirincomes. Their micro-enterprises range from raising cows and goats in order to sell their milk, toopening a village tea stall. SKS does not distribute consumer loans to buy, for example, gold,televisions or clothing.


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SKS also distributes and administersmicro-insurance to the poor as well as financing for othergoods and services that can help them combat poverty.

Who are SKSs customers? How do they get loans?

SKS offers loansonly to poor women in India who typically make less than $2 a day when theyjoin as borrowers. The majority of SKS customers are in rural India, across 19 states. Loanofficers assess whether potential borrowers fall below the poverty line.

SKS uses the joint liability group lending model where women guarantee each others loans.

Over three days, borrowers undergo financial literacy training and must pass a test before theycanapply for loan. SKS approves new loans based on initial screening ofthe applicant andapproval of the other members in the group. . Weekly meetings with borrowers in their villagesfollow a highly disciplined approach. Re-payment rates on our collateral-free loans are more than99% because of this systematic process.

Why does SKS lend only to women?

There are three reasons why SKS lends only to women. Women tend to use resources moreproductively than men; they are more likely to invest most of their income back into thehousehold; and they are more likely to avoid risky ventures and instead use loans to undertakesmall, manageable activities. Women have demonstrated themselves to be excellentmicrofinance customers. By providing loans to women, SKS expects to see a rise in householdincome that benefits the entire family.

What does SKS do besides distribute loans?

Through its distribution network, SKS also distributes and administersmicro-insurance to thepoor as well as financing for other goods and services that can help them fight poverty. We workwith Indian insurer Bajaj Allianz to offer life insurance to our borrowers, and with Nokia andAirtel to help borrowers finance mobile phones. SKS is working with Metro, the Germanwholesaler, to help finance quality inventory for the small shops of our borrowers so poor peoplecan access quality goods at lower prices. We are piloting housing loans with technology andfinancial assistance from HDFC and have also piloted financing of water purifiers and solarlamps

Does SKS participate in philanthropic activities?

The non-profit SKS Society (http://www.sksngo.org/), supports and trains the ultra poor -- thedestitute and disabled who cannot participate in mainstream microfinance. It is also working on acampaign to distribute deworming tablets to Indian children to rid them of intestinal worms, inpartnership with Deworm the World, a global non-profit.SKS educational society runs a networkof budget rural elementary schools that cater to the children of low-income people

What is your interest rate?


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"We charge an interest rate of 24.55% per annum across India."

This seems high. How do you set your interest rates?

At face value, these rates may seem high but it is expensive to distribute micro-loans, which iswhy many conventional banks dont do it themselves.

In India, government regulations prohibit microfinance institutions from accepting savingsdeposits. Therefore, we have to borrow funds from commercial banks to on-lend to ourcustomers. Banks typically charge us 11-14% interest to borrow funds.

Next, our loan officers must travel to remote rural villages by motorbike and manually distributeloans and collect payments from our women borrowers at their doorstep each week. This is alabor-intensive and costly process.

Can a poor person pay off a loan with such a high interest rate?

They can and do. At SKS, re-payment rates are more than 99%. For many poor people, their onlyoption for financial services is a local moneylender who can charge rates as high as 40%-70% ormore.

Our borrowers can comfortably repay because when they start a micro-business -- whetherselling vegetables or raising livestock -- their return on investment (ROI) is very high, This isbecause they have low overhead costs, no tax or legal costs, and are able to quickly increase theirincomes with even a small amount of start-up capital.

Even if a poor person has access to a rural bank, they have to pay transportation costs to reachthe branch and often lose wages because of the time spent traveling from village to bank.Considering these factors, the cost of a bank loan, or total cost of borrowing, is higher than itsstated interest rate.

SKS hopes to lower interest rates and has already done so in states where we have reduced ourcost of operations. We have urged the Indian government to allow banking via mobile phonesand we recommend that microfinance institutions be allowed to accept savings. These kinds ofpolicy reforms would bring down the cost of microfinance loans and allow SKS to pass savingson to borrowers by lowering interest rates

Is over-indebtedness a problem among microfinance borrowers?

We are very concerned when borrowers cannot comfortably repay their loans and we try our bestto protect the interests of our borrowers and ensure that defaults do not occur. But although thereare incidences of default, these cases are a small percentage of the overall loan portfolio at bothSKS and in the industry.


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SKS served 5.3 million clients as of September 2009 and has maintained repayment rate of morethan 99%.

Microfinance institutions in India served 22 million clients in 2009 and have consistentrepayments rates of 95% and aboverepayments that clients could not make if they were not

generating regular income, given the weekly repayment schedule that most microfinanceinstitutions follow.

The Microfinance Information Exchange (MIX), the Washington-based non-profit informationplatform, reports that the average repayment rate of leading MFIs in India which have the lions

share of clientsis 98%

How do you know a borrower understands the terms of her loan? How do you protect theinterests of your clients and ensure against over-indebtedness?

We have many measures in place to protect the interests of our borrowers. We first require

potential members to take financial literacy training and pass a test over three days todemonstrate they understand interest rates, loan installments, and re-payment schedules. Wemake small loans exclusively for income-generating activities, not for consumption. We lendonly to women who borrow in interdependent groups of five. Women tend to be more carefulwith their use of loans than men.

Our loan officers have never been incentivized by collection rates or the size of loans disbursed.SKS emphasizes fair loan collection practices when we train loan officers. We condemn strong-arm collection practices.

SKS is committed to transparency on interest rates. Loan officers disclose interest rates to

potential borrowers and we print this information in the SKS passbooks carried by eachcustomer.

SKS has also taken the lead on transparency and code of conduct initiatives, such as the globalSmart Campaign launched in 2009 by the Center for Financial Inclusion in Washington.www.smartcampaign.org

SKS is also part ofMFIN, a new microfinance industry association launched in India in early2010. MFIN has adopted a self-regulatory code of conduct, which includes limiting borrowersgroup loan sizes to less than Rs. 50,000 total from three microfinance institutions; sharing datawith credit bureaus; and a whistleblower policy on code of conduct violations, among other

guidelines. MFIN has also pledged investment of Rs. 2 crore (about $434,000) to set up a newmicrofinance credit bureau, which aims to check over-indebtedness and multiple borrowing
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