MICROCAPITAL STORY: SKS Microfinance in India Plans to Launch Operations in China

SKS Microfinance, the largest microfinance provider in India in terms of assets, is planning to launch operations in China, in a move to expand its reach beyond India. According to a press release on The Economic Times, SKS reckons this would be the ideal time to enter the Chinese market. The export driven Chinese economy has been impacted by the global meltdown and several vocationally-trained rural employees in China have lost jobs. SKS plans to give credit to these unemployed groups in China and help them start their own ventures. In this regard, the release quoted the chief executive officer and managing director of SKS Microfinance, Mr. Suresh Gurumani as saying that SKS was looking to expand in China primarily because it was a ‘large country with a significant population that was poor’. Mr. Gurumani also stated that the expansion was a move to share SKS’ knowledge in the field of microfinance to benefit ‘a larger section of people’. SKS’ foray into China would make it the first overseas expansion for an Indian microfinance institution (MFI).

Subject to all regulatory approvals granted by both the governments, SKS plans to tie up with a China-based MFI to start operations in the country. As of now, no information on the Chinese MFI is publicly available. As per the release, SKS is currently evaluating regulatory issues that may have to be sorted out to set up a joint venture in China. Commenting on this, Mr. Gurumani said there were legal, compliance and cultural issues that SKS had to understand well before plunging into a detailed exercise. As of now, no timeframe has been set for the proposed venture.

The microfinance sector in China is primarily dominated by international organizations such as the UNDP, non-government organizations (NGOs) and government agencies including the Agricultural Bank of China and Rural Credit Cooperatives. NGOs within China operate on temporary licenses issued by the government. Although domestic credit programs started in China as early as 1989, formal microfinance originated in China only around the mid-1990s when the United Nations Development Program (UNDP) along with other large donors like the US Agency for International Development (USAID) founded approximately 300 microfinance projects throughout China. As per this 2008 report by the German based international cooperation enterprise for sustainable development GTZ, there are 25 thousand (p2) rural cooperative banks and rural commercial banks in China accounting for 7 percent of China’s total banking assets and over 1200 village banks, NGOs and pawn shops representing an unreported share of China’s banking assets.

China has a significant rural-urban divide with nearly 85 percent of its population living in rural areas with several rural employees facing severe job crunch. As per this January 2009 MicroCapital story, rural areas in China have experienced a decrease in financial services, with only a limited variety of formal financial institutions currently operating in rural areas and several credit branches being closed throughout the country. The GTZ also identifies the rural-urban divide in financial services offered by the Chinese banking sector as one of the main challenges to economic development in China. With the Chinese Government also encouraging rural financial institutions to aggressively expand their services, there is good scope for the growth of microfinance in rural China; a view also shared by Mr. Gurumani of SKS.

SKS Microfinance was launched in 1998 in India and currently has branches in 18 states across India. It has provided over USD 1.2 Billion in financing and has maintained loans outstanding of up to USD 427 Million in loans to nearly 3.9 million women in the poor regions of India. Borrowers may take loans for a range of income-generating activities, including: livestock, agriculture, trade (such as vegetable vending), production (from basket weaving to pottery), and new age businesses (from beauty parlors to photography). SKS also offers interest-free loans for emergencies, as well as life insurance to its members. SKS aims to reach 8 million members by 2010. According to the MIX Market, the microfinance information clearinghouse, in March, 2008 the bank reported total assets of 336.9 million, a debt to equity ratio of 5.36, return on assets of 2.0 percent and return on equity of 11.95 percent. SKS Microfinance charges a 26 percent interest on loans to the poor. Around 1.5 percent of the interest amount is invested in expansion into new areas.