What is the size of the market?

The estimated market for credit in rural areas stands at Rs 240,000 crore while what is disbursed by the government is only Rs 30,000 crore. Microfinance currently has achieved only a 15 per cent penetration of the rural credit need.

We work through what is called a joint liability system which has been borrowed from Grameen Bank. After SKS has selected a village, we have a village public meeting in which we ask the women to make a group of five. When a loan is given to one particular woman, the entire group is responsible that the loan gets repaid. So the repayment works through peer pressure. Also, if a person is not able to repay part of the loan, it is repaid by someone else in the group. We too give all our loans only to women, and also take the loan back in small weekly repayments. But unlike Professor Yunus’ model of no-profit-no-loss, SKS believes that unless a microfinance institution is profitable, it cannot leverage capital and equity.

How do you evaluate proposals?

We give loans of a maximum of Rs 10,000 on income-generating activities like livestock and kirana stores. If a farmer buys a buffalo or goat, it will give birth to two more, each of which will give him 50 per cent extra return in terms of milk, so that leads to a huge overall return on his initial investment. Our staff are trained in the minutest details and our technology platform allows us to handle 600 clients a week as compared to 350 for the average microfinance institution.

Aren’t your interest rates very high?

We charge a diminishing rate of interest at a national average of around 26 per cent in which our own borrowing cost is around 11 per cent, 9 per cent is our manpower costs, 3 per cent is additional costs like electricity, 2 per cent is taken as loan loss provision which is an RBI guideline, and 1-2 per cent is our profit margin. However, in certain states when we reach a certain benchmark of transactions, we cut down on the interest rate since our costs are lower. For instance, in Andhra Pradesh and Karnataka, we have got the rate of interest down to 24 per cent. Compare this with 50-60 per cent charged by the moneylender. Also, in the case of banks, the real cost of borrowing — if you include the number of trips the farmer has to make — could be as high as 36 per cent.

Are you going beyond just loans?

One interesting thing which is still in the discussion stages is savings on the value of gold. The model is simple: our clients keep depositing weekly savings of Rs 10-15 weekly against the value of a gold coin which has been fixed. Once the value has been reached, he gets a certificate at the market price of gold which he can later monetise or takes possession of the gold coin. We are talking to MCX to be the depository of this project. A pilot project will soon be on.

Are you going to leverage your large rural distribution chain?

We are planning to launch an FMCG pilot project this fiscal, in which we will be able to offer our clients FMCG products at cheaper rates. Our field staff will take bulk orders of products like soaps, food perishables and toiletries from our clients and take the orders to the companies. We are already talking to big retailers and companies directly who will be able to provide us discounted prices as we are giving them bulk orders. The huge client base of 17 lakh of people becomes a bargaining strength. In return for this service, we will charge a kind of service fee from companies. The project, if successful, will make us a large retailer.

Will this help give cheaper loans?

Yes, once the retail FMCG part as well as selling of insurance products (including endowment) reach certain volumes, we will be able to reduce our overall costs as we will use the same distribution channel. The costs will be spread over more products that we sell to our clients. We would target interest rates of around 21 per cent at that time.

Are you getting into education?

The project will, in all probability, be taken up by three parties, one (SKS) which finances the education loans, an education provider who provides the technical know-how and syllabus, and a company which provides the infrastructure. Under the programme, we plan to set up a total of 300 low-cost schools, starting with 20-30 schools this May. We are looking at schools which charge a monthly fee of around Rs 250, which could be as much as 40 per cent cheaper than other private schools. We are also looking at imparting vocational training.

How do you plan to scale up your microfinance business?

We have targeted a client base of 20 lakh by March 2008 and 40 lakh by March 2009. We need to increase our equity by another Rs 1,000 crore in the next three years to finance our expansion plans.

Doesn’t this recurring need for large sums of capital pose a problem in how it is to be serviced?

We have looked at becoming a bank, but then we lose our flexibility as an NBFC. However, I think our requirement for equity infusion will come down dramatically as we add in new products which will help us in getting better and more retail earnings. However, due to the increasing awareness of the market for microfinance, financial investors now have no hesitation in investing in our company. The latest investments came from Silicon Valley Bank and Columbia Ventures. Our portfolio outstanding for March 2008 would stand at close to Rs 942 crore and will expand to Rs 3,000 crore by March 2009.

Is your model replicable?

We have been approached by a bank in China and we think we can replicate the model in China. The advantage of our program is that a lot of it is standardised and can be quickly replicated to scale up.