If SKS’s small-finance bank is granted a licence, we believe it will provide a banking platform for its microfinance loans, raise micro deposits...
If SKS’s small-finance bank is granted a licence, we believe it will provide a banking platform for its microfinance loans, raise micro deposits and distribute third-party products aided by a local touch points/BCs.
Large equity infusion and costs of local touch points will temper SKS’s profitability in the initial years; however, improvement in sales-force productivity will drive ~20% RoE for SKS’s bank over time.
We discuss the bank’s prospects, challenges and forecasts, retain our estimates, and roll over the price target to R460 (from R440).
To comply with the shareholding requirements, SKS will need to raise large domestic capital (2.5 times its FY2015E net worth) for its small finance bank. SKS Bank is likely to migrate loan disbursements to the banking format, i.e., loans will be credited to borrowers’ bank accounts.
The banking platform will also permit SKS to mobilise savings at the bottom of the pyramid (though not very significantly) into retail deposits.
However, its microfinance model entails limited branches; so it will need support from local touch points/ banking correspondents to convert the loans/bank deposits to cash and/or collect weekly cash installments.
SKS’s ability to improve the productivity of its sales force (through which cash handling will be lower) and managing efficiency of local touch points will drive its profitability.
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