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SKS Microfinance Pvt. Ltd. empowering the poor to become economically self-reliant Vikram Akula, Founder and CEO. Microfinance is Anchored on Credit for the Poor. A "poor" client without access to capital. a "small" loan through a group model. an income-generating activity. to use for.

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SKS Microfinance Pvt. Ltd.

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    1. SKS Microfinance Pvt. Ltd. empowering the poor to become economically self-reliant Vikram Akula, Founder and CEO

    2. Microfinance is Anchored on Credit for the Poor A "poor" client without access to capital a "small" loan through a group model an income-generating activity • to use for • gets • The term "poor" can be based on national poverty level, asset wealth, or housing conditions • A frequently-used definition is living on less than USD2 a day. ~3 billion people fit this definition according to the World Bank • Typically a type of self-employment • Loans often intended for cottage industries • Livestock-raising • Crafts • Small restaurants • Many purchase materials for service provision: • Rickshaw • Shoe-shine equipment • Loans from MFIs in the developing world can be as small as $15 • Major organizations give loans of up to $1,000 • Loans are given through a group in which everyone serves as a guarantor

    3. There is a Huge Unmet Financial Need for the Poor in India • Demand from 160 million Poor and Vulnerable Households in India • $ Billion • $50 billion • While there has been significant growth in access to finance in the last decade, there is still a huge unmet demand • 25x Growth Factor • $2.0 billion • Oustanding to poor households • Total finance needed by poor households Source: World Bank; CGAP (Occasional Paper #8, 2004)

    4. SKS Empowers The Poor to Become Economically Self-Reliant SKS Mission To provide financial services to the poor in a sustainable manner Current Outreach • Close to 300,000 members • $80 million disbursed • $29 million outstanding SKS Vision – “7 by 7” 700,000 poor families by March 2007 Launched prior to 2006-07 Launched in 2006-07

    5. Banks Don’t Lend to the Poor Because of High Risks and High Transactions Costs… Collateral free loans to poor women High risks due to… A large number of very small loans to rural locations High transaction costs due to… …so village loans sharks exploit the poor’s lack of access to credit charging up to 36-72% interest


    7. No Standards • Manual Processes The Industry has Been Less Successful at Reducing Transaction Costs • High variance in processes and procedures makes it difficult to ensure quality and scale • Manually-intensive systems leads to high costs as well as scope for error and fraud

    8. SKS Overcomes Barriers of Costs by Streamlining and Automating • Standardized, scalable business processes • Automation through deploying technology

    9. SKS Has One of the Fastest Growth Rate of Any MFI in the World • Member Outreach Normalized for Time • (8 years of Operation) • SKS CFTS Grameen Koota BSS Share (SML) ASA Year The MIX Market named SKS the Fastest Growing MFI in the world between 1998-2004

    10. SKS Offers Working Capital and Consumption Products • Interest Rate (Effective) • Purpose • Terms Working Capital Loans • Small enterprise Starting at Rs. 10,000 ($222) 50 weekly repayments 25.6% Income Generating Loans (IGL) 25.6% Mid-Term Loans (MTL) Small enterprise Starting at Rs. 10,000 ($222) 50 weekly repayments • Small • enterprise Individual Loans (ILP) Starting at Rs 20,000 ($444) 12-24 monthly repayment 23% Emergency Loans 20 weeks Bullet repayment 0% Emergencies Insurance • Loan Cover Insurance for member and husband 1% of loan amount N/A

    11. Borrowers can earn a return on investment from 25% to 250% Agriculture Services Animal Husbandry Production Trade

    12. SKS Has Achieved Industry Leading Growth SINCE 1998

    13. Customer Focus Participatory product design Field staff mirror clients Professional Management Financial services and social development experts Transparency and Good Governance Broad-based management team with world-class experience (McKinsey, Merrill Lynch) Standardization - Scalable and Streamlined Business Processes ABN AMRO Process Excellence Award Grameen Foundation Excellence Award Automation - Technology Infrastructure World Bank-CGAP Pro-Poor Innovation Award Winner Digital Partners SEL Award Winner UC Berkeley School Social Venture Comp. Finalist Stockholm Challenge Finalist World Bank Dev. Marketplace Semi-Finalist Our Key Strengths Include Standardization and Automation Plus… Only MFI in India to receive MIX and World Bank-CGAP transparency awards

    14. Award Winning MIS Helps Reduce Risks and Transaction Costs Business Plan Operational Financial USER FRIENDLY DESIGNED FOR SCALE INTEGRATED WITH ACCOUNTS EXTENSIVE REPORTING

    15. Real-time, Online Data Transfer Leads The Industry Head Office Server Database • All SKS branches transfer portfolio data through the internet within hours of meetings, enabling management to quickly respond to potential problems Internet D 3 D 4 B 3 B 4 D 2 B 2 D 1 D 5 B 1 B 5

    16. SKS Has Over $22.7 million in Debt From Leading Financial Institutions HSBC’s first MFI loan in the world was to SKS Citibank’s first MFI loan in India was to SKS

    17. SKS NBFC Has Raised $ 3.2 Million from World-Class Equity Investors First and only microfinance investment made in Indian NBFC by Khosla, Unitus, Reddy/Tungare, and SIDBI • SKS • Borrowers • SKS • ESOP • Ravi Reddy & • Sandeep Tungare • Vinod Khosla • Founding CEO, • Sun Microsystems $480K $480K US$

    18. Vulnerable • Moderate poor • Poverty levels • Very poor • Northeastern states • Other parts of India • Destitute • South India • Geographies • (urban/rural) • Credit • Insurance • Savings • Money transfer • Products Our Business Plan for 06-07 Focuses on Horizontal Growth Priority Activity • Expand product line for “graduates” and non-borrowers • Expand into underserved geographies • Expand product range and new channels for all segments • Launch “SKS Assist” to target “destitute”

    19. APPENDIX

    20. Empowering the Poor to Become Economically Self-Reliant SKS Microfinance Pvt. Ltd. 301, 3rd Floor Babukhan Estates Basheerbagh, Hyderabad 500 001

    21. We Aim to Reach 700,000 Members by End of FY 06-07 • Actuals • March 06 • Targets • March 07 States 5 10 Members 202,000 700,000 Branches 80 375 Staff 852 2,400 Cumulative Disbursement $57 million $150 million Portfolio Outstanding $20 million $60 million

    22. SKS Will Need $84 million in Debt for FY 06-07 Off-Balance Sheet/ Partnership Term Loan Off-Balance Sheet Financing allows SKS to leverage relationships with key partners Traditional financing that capitalizes on strong lender relationships; usage constrained by capital adequacy norms Provides longest term facilities at lowest rates Other Off-Balance Sheet Financing

    23. To Acquire its Targeted On-Balance Sheet Debt, SKS Will Need an Additional $6 million in Equity for the Next Two Years Equity Required for FY 06 – 08 – $9.2 million $6 million Additional Equity Required 2nd round equity interest Several investors, foreign and domestic $3.2 million First Round Equity

    24. Internal Challenges to Growth 1 HR Management – Recruitment & Training Solution Increases velocity of training 10X, enabling accelerated deployment of large field force • Establish Factory-style Training 2 Operational Challenges (IT, Accounts/Finance, HR/Administration) Solution Field office • Create a World-Class Back Office • to support Lean Hub-and-Spoke • Architecture Field office Allows for lean delivery channel with a Hub-and-Spoke Architecture Field office Shared back office

    25. External Challenges to Growth 1 Political Opposition Solution • Build relationships with politicians, bureaucrats, officials • Educate population through communications channels – e.g. press, TV, public forums, etc. 2 Regulatory Constraints Solution • Work with RBI to reform current restrictions • (eg. savings) • Find alternative methods of delivering services • (e.g. whole life insurance with liquidity, correspondent banking)

    26. Our Business Plan for 06-07 Also Involves Vertical and Lateral Growth • Vulnerable • Moderate poor • Poverty levels • Very poor • Northeastern states • Other parts of India • Destitute • South India • Geographies • (urban/rural) • Credit • Insurance • Savings • Money transfer • Products Introduced term life insurance in all states and will expand to whole life, health, weather, and asset insurance Rolled out Individual Loan Product in AP and will expand to other states • 1 Expand product line for “graduates” and non-borrowers • Expand into underserved geographies • 3 Expand product range and new • channels for all segments • 4 Launch “SKS Assist” to target “destitute” “SKS Assist” Business Plan written and we are seeking funding Launching Pilot project with VISA this quarter

    27. SKS is Working With VISA to Fully Automate Microfinance • Helps process transactions • Facilitates back end settlement of funds at the each day association networks Request for Authorization Challenges: Current regulation prohibits merchants from distributing cash The economics may be difficult for local merchants (purchasing POS device, too few transactions, too little or too much cash to manage), necessitating a stimulation of a critical mass of customers • MFI originates relationship with clients • MFI authorizes a pre approved loan amount • Data sent • wirelessly • Approval/ denial • Initiates transaction Local Merchant with wireless POS SKS Member

    28. Board of Directors Name Nominated By • 1. Gurchuran Das • Former CEO of Proctor& Gamble India, author • 2. Ravi Kumar (Proposed) • Managing Director & CEO of National Commodities • & Derivatives Exchange Ltd. (NCDEX) • 3. Shekhar Iyer • Chief Operating Officer, Vistaar Technologies • 4. Geoff Woolley • Founding Partner, Dominion Ventures; Chairman, • European Venture Partners • 5. R.M. Nair • GM SIDBI • 6. Sitaram Rao • Development Consultant, Chartered Accountant, • and Cost Accountant • 7. Vikram Akula • Founder and CEO, SKS Microfinance Vinod Khosla Independent Director Reddy/Tungare Unitus Lenders Consortium/SIDBI SKS Mutual Benefit Trusts SKS Mutual Benefit Trusts

    29. In India, there are ~ 1,000 MFIs Reaching 10 Million Poor • MFI Distribution (%) • Description • Tier 1 – mature and best known MFIs with strong operational and financial track record, RBI-regulated. Over 1 lakh clients. Top 10. • 1 • 1 • 2 • 9 • Tier 2 – Successful but smaller, younger or lesser known MFIs, at or near profitability • 3 • ~1,000 microfinance institutions • 20 • Tier 3 – Approaching profitability, shortcomings due to young organization, lack of capital, weak MIS • 4 • 70 • Tier 4 – Mix of unprofitable MFIs: start-ups, weak institutions, or NGOs microfinance is not the focus Source: GFUSA (“Tapping the financial markets for Microfinance”)

    30. SKS Charges Interest Sufficient to Cover Costs • Profit is Used for • Dividend for the borrowers • Future expansion in other areas Cost of Funds for SKS from different commercial Banks like ICICI, HDFC, UTI, SIDBI and others Loan Loss provisioning for hardship cases Cost to the Borrowers 12.5% Flat=23.6% diminishing Overheads and other Admin. Related costs Salary and Incentives for the staff. Average field staff salary is Rs. 5,000 Total staff strength about 500 • Loan loss Provision • Cost to Borrower • Personnel Cost • Admin. • Cost • Cost of Funds • Profit Source: SKS MPL Financial Statements

    31. SKS is the Lowest Cost to the Borrower Source: World Bank Study “Access To Finance”


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

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

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

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

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

    38. Can the local economy support an infusion of more enterprises? (eg. how many general stores can a village economy support?) • Can the natural resource base support an infusion of more enterprises? (eg. how many more goats can you put in a village?) • Do the poor have the knowledge to take up new enterprises? SOME FREQUENTLY ASKED QUESTIONS • Questions • Answers • Truly speaking new ventures are few as borrowers are often refinancing existing activities (replacing high cost working capital with low cost microfinance) as opposed to financing new ventures. • 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) • With many enterprises, there is scope for increase without depleting natural resources (eg. goats eat virtually anything and therefore do not significantly deplete environmental resources) • But in some cases (such as irrigation water required for water-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 • Where borrowers take up new activities, they do so after seeing it 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


    40. Expanding Operations: New Areas MaharastraPune Satara Solapur Sangli Kolhapur Aurangabad Jalna Beed Buldhana Nashik Dhule Ahmadnagar Thane Nagpur Bhandara Chandrapur Wardha Yavatmal Amravati Orissa Sambhalpur Jharsugudar Deogarh Sundargh Cuttack Dhenkanal Karnataka Bangalore Tumkur Kolar Mahdya Dharwad Bagalkot Belgaum Gadag Davangiri Haveri Bihar Patna Vaishali Muzaffarpur Saran Buxar Bhojpur Bhagalpur Banka Munger Khagaria Begusarai Madhya Pradesh Jabalpur Katni Damoh Sagar Narsimhapur Ratlam Rajgarh Vidisha Bhopal Raisen Hoshangabad Uttar Pradesh Lucknow Unnao Barabanki Rae Bareilly Faizabad Agra Mathura Hathras Firozabad Etawah West Bengal Calcutta Haora South 24 Pargannas North 24 Pargannas Rajasthan Jaipur Dausa Alwar Jharkhand Ranchi East Singhbhum ChattishgarhBilaspur Durg Raipu