Denial of small bank licence won't hurt SKS Microfinance

SKS Microfinance not receiving a small finance bank licence will not weaken its competitive position as the micro lender enjoys a 300-400 bps funding cost benefit over smaller MFIs, says a report.

"SKS probably enjoys 300-400 bps (basis points) funding cost benefit over the smaller MFIs that have won the small bank licence. We believe the benefits from bank conversion for MFIs, if at all, are not immediate but accrue over the long term (5 years plus in most cases)," Credit Suisse said in a research note.

The RBI, on September 16, granted in-principle approval to 10 entities for setting up small finance banks to provide basic banking services to groups like small farmers and micro industries.

SKS Microfinance was left out, making it the only micro finance institution (MFI) among the top five in the country, that will not be converted into a bank.

Credit Suisse said SKS Microfinance's conversion into a bank would have led to a 36% dilution ($260 million issue) in order to meet foreign ownership requirement, which would have been an immediate negative on the stock.

However, it said that if SKS was granted a small bank licence, the political risk on the company would have reduced.

"This was one of the strongest arguments put forth by SKS management itself (when it applied for licence).

"However, our belief is that post the introduction of NBFC-MF category in 2011 along with various safeguards, the uncertainty on regulations had ended and political risk was no longer a major issue for the sector," said the research note.

Credit Suisse said it sees a clear near-term negative from the bank's conversion due to a potential 36% dilution in order to meet foreign ownership requirements for the licence.

"With the recent willingness to increase loan ticket sizes... SKS here starts from among the lowest ticket sizes across leading MFIs, and hence has a good upside, in our view," Credit Suisse added.