Page 42 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 3: Financial Institutions

interest rates. These funds offered (savers) investors the benefits of both liquidity and a Notes
rate of interest higher than they could earn on bank deposits. Commercial banks, very
early on, saw money market funds as a key competitor and over the course of many years
have developed many deposit products which seek to provide depositors the same
flexibility which money market funds provide. This therefore was an innovation which
triggered greater efficiency in the intermediation of savings and investments in the financial
system, though its initial impact was to modify the characteristics of the deposit base of
the banking system.

Case Study Yes Bank Subscribes to Non-convertible
Debentures of SKS Microfinance

es Bank, one of India's leading private sector banks, announced in March 2009 that
it has subscribed to 250 millions of rated Non-convertible Debentures (NCD)
Yissued by SKS Microfinance, India's largest and the world's fastest growing Micro-
finance Institution (MFI). The bond has a tenor of one year from the date of allotment with
a coupon rate of 10.50% per annum. Yes Bank thus became the lead manager to the issue a
first of its kind issuance of rated paper by an Indian micro-finance institution.
Microfinance has been recognized as an efficient poverty alleviation tool, its expansion in
India is significantly impeded by its relatively limited access to capital markets resulting
in MFIs continuing to face challenges of high cost of funds. On successful completion of the
transaction, Suresh Gurumani, MD and CEO of SKS Microfinance said, "SKS is the only
MFI in the country to raise funds through non-convertible debenture. The funds will be
utilised to provide financial services to a larger section of the poor." Somak Ghosh, group
president, corporate finance and development banking, YES Bank, on fully subscribing to
the issue said, "Yes Bank’s microfinance initiatives/approach/focus is centred on using
structured capital market products to provide MFIs access to a broader base of investors
and lenders thus reducing cost of funds and lowering transaction costs for the sector. The
successful closure of SKS’s rated bond issue is the fruition of such efforts at Yes Bank and
SKS Microfinance and will help the MFI tap sophisticated capital market investors opening
up additional, cost-effective sources of funds." Announcing this landmark transaction, S.
Dilli Raj, CFO of SKS Microfinance said, "SKS becomes the first Indian MFI to issue a rated
bond. This showcases SKS’s structuring and financial innovation skills. The fact that the
Bond is a stand alone issuance with no credit enhancement in the form of any 3rd party
guarantee or collateral speaks volumes of SKS’s Balance Sheet strength".
Questions

1. How do you think has the move helped Yes bank?
2. What other innovative tools do you think Yes Bank could have employed to yield
similar results?

Source: Myiris.com

3.7 Assets and Liabilities Management by Commercial Banks

Banks face several risks such as the liquidity risk, interest rate risk, credit risk and operational
risk. A bank with mismatched assets and liabilities can be badly hurt by unexpected interest rate
changes.

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