SKS to decide on banking foray in May

SKS Microfinance, once the largest micro lender in the country, will decide on applying for a banking licence in its board meeting in May. The Hyderabad-based microfinance institution, which emerged out of the crisis relatively better than its rivals, is currently evaluating the pros and cons of entering the banking business. “We are yet to take a call. The board will discuss whether we should apply for a banking licence,” S Dilli Raj, chief financial officer of SKS, said.

“If we decide to enter the banking space, we will still have two months to prepare,” he added.

On Friday, the Reserve Bank of India (RBI) released the final guidelines on entry of new players in the banking sector. The new norms allow corporate groups, financial institutions and public sector entities to set up banks. The applications have to be submitted by July 1, 2013.

RBI will issue in-principle approval after a high level advisory committee scrutinises the applications and gives its recommendations. The in-principle approval will be valid for a year.

Vikram Akula formed SKS as a non-government organisation in December 1997, and the company started its operations the next year. It was converted to a non-banking finance company in 2005. According to the new norms, promoters of new banks need at least 10 years of a track record.

A few analysts expressed doubts if SKS would be allowed to open a bank, as its financial position had weakened following the crisis in the microfinance sector.

“RBI has indicated that it will be selective in offering new (banking) licences. Also, promoters need to be financially sound. While SKS has done well to recover from the crisis, the company’s financial position may not convince RBI to offer it a banking licence,” an analyst with a domestic brokerage said, requesting anonymity.

While SKS earned a net profit in October-December quarter, it had incurred losses in the previous seven quarters because of the crisis in Andhra Pradesh microfinance market. The company’s current capital base of Rs 388 crore is also lower than the minimum paid-up capital required to start a bank. RBI wants new banks to have a minimum capital of Rs 500 crore.

Dilli Raj, however, remains confident that raising funds will not be difficult for SKS. “Capital is probably the least of all the challenges. In the recent past, we have successfully demonstrated our ability to raise funds from the market. Having said that, we still need to cover grounds in certain areas. Our preparedness in terms of technology may not be adequate at this moment. But we don’t think these are insurmountable challenges,” he said.

He said SKS was also well positioned to drive financial inclusion, which is one of the primary objectives of new bank licensing programme.