. .Volume III Issue I February 2009

In a world that is questioning the credentials of the banking and financial sector it is critical that corporates especially financial institutions behave in a responsible manner. The latest focus at SKS is on whether the organization is fit enough to take on the next phase of growth.

Our aim is to reach out to 15 million members and increase our staff strength to 39,000 by March 2012. We are conscious that this growth will bring with it fresh challenges. A detailed fitness assessment exercise internally has revealed that while SKS is moderately people and process fit, our IT systems, Information management and controls need special attention.

While major IT and MIS gaps will be bridged by mid-2009, we would continue to face a few challenges due to infrastructure limitations that exist in a few of the remote areas we operate in. An exhaustive risk library has been developed and controls identified. The same will be implemented in the coming months at the operational and strategic management levels across the organization.

With operations already spanning across geographies and the influence of different cultures within our system, we are a richly diverse organization. What binds us together at SKS is a unique culture that is strongly embedded in the core values that we nurture and live in our everyday work life. In order to ensure these values are not diluted or compromised as we grow, we have recently rolled out a core set of values that emphasize on our rich legacy of Right Focus on our members, Right Means of being ethical in all our dealings, and Right Way of diligently following standardized processes and quality standards.

CEO MESSAGE

FINANCE UPDATE

Member Base :

Branches : 1,373

Cumulative Disbursement : INR 5,788 crore (US $ 1.2 billion)

Amount Outstanding : INR 2,097 crore (US $ 431 million)

YTD Disbursement : INR 3,546 crore (US $ 728 million)(April '08 - Jan '09)

Average Loan Size (Rural) - IGL : INR 9,087 (US $ 186)

Average Loan Size (Urban) - IGL : INR 9,175 (US $ 188)

Average Loan Size - ILP : INR 27,530 (US $ 565)(As on August 2008)

3,618,302

MEMBER SERVICES

Statistics

SKS services have reached out to 3,618,302 women members, across the country. The Company has disbursed collateral free loans worth Rs 5,788 crore (US $ 1.2 billion) in India covering 308 districts.

Milestones

Karnataka has crossed a membership base of 600,000. The Company began its operations in Bidar in June 2005. It presently operates in 25 districts through 165 branches in the state. Collateral free loans worth Rs 58.32 crore (US $ 12 million) have been disbursed in January and outstanding amounts to Rs 370.4 crore (US $ 76 million).

Secunderabad Urban is now serving 51,236 members through 14 branches. The operations began in East Marredpally in September 2006 and collateral free loans worth Rs 81 crore (US $ 15.6 million) have been disbursed and loan outstanding amounts to Rs 32 crore (US $ 6 million). Around 32,556 members have enrolled for Retail Insurance.

Kolkata Urban is presently serving 31,397 members through 12 branches. The operations began in Kolkata City in Beliaghata branch in September 2007. Collateral free loans worth Rs 28.29 crore (US $ 5.8 million) have been disbursed and loan outstanding amounts to Rs 19.7 crore (US $ 4 million). Almost 50% of members have enrolled for Retail Insurance in just one month.

SWAYAM SHAKTI SURAKSHA

The Retail Insurance team has enrolled one million members accounting for a collected premium of Rs 50 crore (US $ 10 million). This outstanding achievement was possible with a dynamic and dedicated team of about 10,000, under the leadership of 400 supervisors across the country and ably supported by the Bajaj Allianz team. The product is rolled out in 744 branches of several Indian states. Around 108 death claims have been settled and around 103 death cases are pending for settlement due to documentation.

INTERNAL AUDIT

Staff strength

The Internal Audit staff strength has increased to 350 forming separate audit teams for Branches, Head Office, Individual Loan Product, Health Insurance, Retail Insurance, Internal Audit training, Quality Assurance (ISO Audits) and Risk Management improving the efficiency in audit processes.

Internal audit initiatives

The team has initiated and achieved the standardization and user friendly audit report formats, automated grading, report with help option, every month time bound grading release. KPMG has been appointed for Internal Audit Process Review and also to suggest improvements.

Auditing has been executed in all branches including the branches where Individual Loan Product (ILP) is implemented ensuring 100% coverage. The branches with Retail Insurance have been audited to 50% till October 2008. 'Tulip Connectivity Audit', a special auditing assignment has been conducted for 304 branches without any change in the quality and schedule of the regular audit.

COMMUNICATIONS

The team is planning to roll out the Core Values: Right focus - Customer First, Right Means - Ethics Always, Right Way - Consistent Quality, that has been defined by the Company recently. Communications team will spearhead this effort to reach out to all employees across the branches.

The survey conducted during the Sangam Leader Meetings is being compiled into a formal report. The survey is focused on the needs of our members and feedback on our services. Once compiled, this would be the most elaborate and geographically widespread feedback exercise ever done in the financial sector.

SLM Impact

Sangam Leader Meetings have created major impact on our members.

Hemantha Kumar, Unit Manager of LB Nagar, Hyderabad, Andhra Pradesh shares his views on impact of Sangam Leader Meetings in his area. “SLMs have truly helped the members to know about the various products and services offered by the Company for improving their living standards. The members, who were interacting only with the field staff, never knew that a hierarchy exists in the Company. Now, they have a

broader prospective about the Company and believe that it’s a big family working together for a good cause. SLMs served as a platform to all of them to know that there are other centers in their area and for which there are many center leaders who have come all the way to attend the meeting. I find that responsibility and commitment of the members are slowly replacing the attendance and repayment issues in the centers like Nandanavanam, Singareni Colony, Saroornagar and Karmanghat.”

For more on SLMs: http://www.sksindia.com/videoslm.htm

ULTRA POOR PROGRAM

Barefoot Doctor Training

First aid health care awareness program has been organized through center meetings, films and magic shows. One member from each ultra poor village has been selected to work as a Ba re foo t Doc to r i n villages to create health awareness among the other members. Ms Umamaheswari, Health

Manager, conducted the first level training to make the selected members understand various health problems, preventive measures and herbal remedies that are available in their villages. The trained members have improved their health standards, thereby providing support to other ultra poor members and their families.

Visit to the Ultra Poor Centers

A team from Ujjivan, a Bangalore based microfinance organization - Ms Addavail, Ms Nidhi, and Mr Abhishek, visited an ultra poor center to learn the program as Ujjivan is also planning to start urban based Ultra Poor Program targeting the poorest population.

Mr Susheel Sabu, Vice President and Quality Leader, Finance and Accounting, and Mr Kamal, Manager (Quality Accounting), from GENPACT visited Ultra Poor Program. Their learnings will help SKS in process mapping, improving and standardizing house hold progress index.

'Annapoorna' - Rice Bank

The team has launched a Rice Bank Program – 'Annapoorna' in 10 ultra poor centers. For the ultra poor, food security is critical and the bank serves as food grain buffer for food shortage days, not uncommon in ultra poor households. The members save fistful of rice every time they prepare food and deposit in the grain bank during the center meetings. Members can borrow rice from the granary on an emergency at home and return it within one month, exceeding which a nominal interest is charged in the form of grains based on the amount of rice borrowed.

Residential Bridge Camp

The fourth round of Residential Bridge Camp (RBC) for the school dropouts (girls) aged between 10-14 years has started. SKS has collaborated with Sarva Shiksha Abhiyan, a flagship program of the Indian Government to start RBCs in January 2005 for the universalization of elementary education. These camps help the school dropouts and never enrolled children to reconnect and relay them to the mainstream Government Welfare Schools befitting their age and learning levels.

This year, around 65 girls from five mandals, viz., Narayankhed, Manoor, Kalher, Regode, Kangti of Medak district, Andhra Pradesh have been motivated to join RBC, where the maximum intake capacity is 100. All girls are provided with quality food, accommodation, education and health care during their stay in the camps which usually lasts for eight to ten months. Non-members of SKS are also motivated and recruited. So far, more than 300 children have been mainstreamed with the help of these camps.

STATES OUTREACH

Active Clients

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Bihar

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garh

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at

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Him

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sa

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Punjab

Kerala

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Delhi

1000000

1200000

400000

800000

200000

0

600000

Member base as on January 31, 2009

©2009 SKS Microfinance

For more on SKS, please visit www.sksindia.com or contact us at communications@sksindia.comFor media enquires please contact media@sksindia.com

Enterprise: Incense-Stick Rolling Unit

Place: Yellapur Oni, Hubli, Karnataka

Entrepreneurs: 25 members of SKS

Yellapur Oni, a small village near Hubli, Karnataka would be soon known for its group of young and confident women with their amazing entrepreneurial spirit. Their remarkable achievement in setting up an incense-stick rolling unit in a vacant land of their slum drives many other aspiring women to fulfill their dreams. SKS Microfinance has given financial impetus to these women of Yellapur Oni, for their successful enterprise.

Earlier, these women worked as daily wagers in an incense-stick rolling unit in a neighboring area. The meager wages were not sufficient to sustain their family needs. When SKS entered Yellapur Oni offering loans for income generation, these women became members; formed a group of 25 and availed income generating loans. They pooled all their loans together and started a joint enterprise of incense-stick rolling with their initial experience. Their skill in the processes helped the production unit pick pace within short time. They bought raw material of atta, jigit, sticks and dust powder in wholesale from Hubli.

This group earmarked a small portion of vacant land as their work area and gather there every morning at 10 AM to roll out the incense sticks till 5 PM. By evening the work area has literally a huge mountain of incense sticks piled up. They purchase 1,125 kg of raw material per week and roll out 22,500,000 sticks from it. The rolled sticks are then sold to the agents at Rs 150 (US $ 3) per kg. In total, they earn around Rs 168,750 (US $ 3,466) per week. Half of the earned amount is invested back into the business and the remaining half is shared as profits amongst these women; each of whom gets a share of Rs 3,375 (US $ 69) per week. The agents who purchase the rolled sticks from these women add fragrance to the sticks and sell them in the market.

The ability to make higher profits and owning an enterprise instills greater confidence in the women. Says Bibi Hanifa, the center leader of Yellapur Oni, “..Working in our unit motivates us a lot. We are proud that we are able to run an enterprise on our own. We contribute to the welfare of our families and are able to give decent education to our children. We hope to expand our business and involve more people into it.”

The group plans to raise another loan soon to create shelter for storing raw material and protecting it in extreme weather conditions. From the days of financial instability, these women brought a sense of economic security and self-reliance into their families. This is great triumph for these women who have been able to realize their ambitions with proper financial support. SKS salutes such spirit of determination in Indian women and is equally determined to extend all possible financial support in their future endeavors.

CURRENT OUTREACH

Growth Chart - Total Members

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BUSINESS ANALYSIS

Cash Management project

The project, initiated together with Unitus, is aimed at improving the branch level cash management thereby reducing the cost of idle cash for the Company. The Business Analysis team collected and collated the data on a regular basis by interacting with the branch staff. This would help in devising strategies to bring down the idle cash and enhance the branch operational efficiency. Data collection phase of the project is completed and analysis of the same is being undertaken together with finance team and Unitus.

BI tools

The team has initiated a project with 'Decision Studio' to introduce Business Intelligence tools in order to meet the data challenges from the reports generated on a monthly basis. Retrieving data from these huge data sets is often a difficult task, so once these tools are in place, many important reports would not only be automated but also provide the team with an extra edge in data hosting, data management and data mining.

The first phase of the project has begun and the initial analytical capabilities are expected to be ready in next three months. The project will be linked with the current Portfolio Tracker MS Access databases to generate analytical reports from it. Eventually, the same will be replaced with SKS online database center and then the analytical reports would be available on a real time basis. The project also aims to develop an internet portal for easy access of monthly performance updates by the field. User access rights will be defined for a better user experience.

AC Nielsen study

This study is a demand estimation study aimed at understanding member needs - financial and non financial products. This would provide a deep insight into member aspirations and needs. The inputs would play an important role to design and develop new products. The inferences drawn from this study are being used by various departments for further upscale of operations.

IMRB Study

The first phase of the Indian Market Research Bureau (IMRB) study is completed. The second phase of this study has started which aims at understanding the member dropout phenomena with a larger sample size.

BUSINESS DEVELOPMENT

Sangam stores

The team has developed sangam stores rural distribution model to provide working capital and dedicated vendor to meet the needs of our members owning kirana stores. An MoU will be signed with the vendor - Metro Cash & Carry. A suitable credit product, processes and MIS has been developed for a pilot in Sangareddy and Amberpet branches, of Andhra Pradesh in January.

Solar lights

The solar light pilot in Orissa has concluded. The team is now conducting a survey to learn the member's experience with the pilot and the product. Around 1,719 members picked up the solar light across the four pilot branches, Soro, Udala, Rairangapur and Baripada.

Water

The pilot in Warangal district, Andhra Pradesh has successfully come to an end and members have shown significant interest in the product with approximately 1,600 members enrolling for the loan product in nine weeks. The team is currently gathering feedback from members through surveys and beginning to discuss a longer term partnership with Hindustan Unilever.

Gold loans

The team is exploring to provide finance for the purchase of pure gold coins for the members with a long track record, in partnership with a gold supplier. This is a complex product but one that has seen high interest from our members. The team has started discussing with the gold suppliers and has plans to launch a pilot across several branches in March 2009.

Mobile banking

The team is currently discussing with various banks, technology providers and the SKS Foundation about opening savings accounts for SKS members and automating our loan transactions to/from these accounts using a mobile technology platform. The team plans to launch a pilot to test the technology platform in April 2009.

Cattle insurance

The team is designing a livestock insurance product and a process for marketing, animal tagging and claims processing. They have identified potential locations in Karnataka for a pilot and are working with potential insurance partners.

Chinese team at SKS

A delegation from China Foundation for Poverty Alleviation (CFPA), the largest NGO MFI in China, had a three day visit to SKS’s field operations and Head Office in Hyderabad, Andhra Pradesh. The CFPA team met the senior management at the Head Office and spent time in the field observing a center meeting in Yadagiripalli and interacting with members. At Bhongiri, the team witnessed our branch operations as well as MIS system. CFPA came to learn more about our operations and how they can apply our learnings to their operations in China. The visit is part of SKS ongoing efforts to understand how our work can help other areas in developing their microfinance industries.

(L to R): Li Zhen - Finance Manager, Li Qi, Resource Development Manager, Li Hongmei, Director of Finance Department, Liu Dongwen, MF Director along with the Team SKS

3Sita, a member along with her son Gopi from SRR Thota center in Warangal A branch, Andhra Pradesh during the pilot of the Hindustan Unilever's Pureit water purifier