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Has SKS moved on from the Andhra crisis?

Has emerged leaner, wiser and more efficient

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After two tumultuous years, SKS Microfinance, the only microfinance institution (MFI) in the country that is listed on the stock market, is all set to come out of the red. “The worst is over. The growth momentum is back,” says Chief Financial Officer S Dilli Raj. The company, he says, will break even this quarter and start reporting profits from the next one. It had incurred a loss of Rs 1,360 crore in 2011-12. As on September 30, the company had accumulated losses of Rs 1,600 crore on its books. However, the company has a net worth of Rs 386 crore after adjusting that loss.

SKS, along with other in Andhra Pradesh, had plunged into crisis after the state promulgated the Andhra Pradesh Micro Finance Institution (Regulation of Money Lending) Ordinance in October 2010 that restricted lending by microlenders in the state. The ordinance, enacted by the state legislature two months later, was aimed at protecting poor borrowers from coercive recovery practices of MFIs. It mandated MFIs to be registered with the district authority to collect instalments at the Panchayat office and restricted fresh lending without the prior approval of the authority.

The immediate impact of the ordinance, according to Raj, was to cripple SKS’s loan disbursement in Andhra Pradesh, which, at that time, accounted for 30 per cent of its total asset portfolio. Collection of receivables fell from 99 per cent to 11.5 per cent. “We had to write off Rs 1,300 crore. Consequently, our market cap came down by a billion dollars,” says he. The SKS stock indeed got badly mauled. It lost almost 96 per cent of its value within days of the ordinance, as price fell from a high of Rs 1,400 to Rs 54.4. It has since recovered to Rs 151.4 on the Bombay Stock Exchange, though that’s less than a sixth of the Rs 985 at which it had listed on the market in August 2010.

In the year that followed the ordinance, SKS’s iconic founder stepped down as the executive chairman. At that time, Raj had said Akula’s resignation was “voluntary”. Even now, he would not dwell into the circumstances leading to Akula's exit, stating that “the issue is now behind us”. SKS suffered in other ways too after the ordinance. Banks stopped lending to the MFI sector. SKS’s business in other states had to be shrunk in order to generate money for bank repayments. “The Rs 5,900 crore repaid to the banks came from our collections from our non-Andhra Pradesh portfolio,” says Raj.

Path to recovery
SKS has been trying to build its business again. Its strategy has been to rationalise costs, improve cash flow management and raise fresh capital. In the past quarter, July to September 2012-13, SKS reduced its Andhra Pradesh portfolio to nil from a high of Rs 1,491 crore at the start of the crisis by making a provision of Rs 233 crore. The second measure was to optimise its cost structure. As a part of this, the company closed some of its branches and slashed its headcount by 45 per cent. It now has 1,300 branches against 2,400 earlier, while its staff strength has fallen from 25,730 to 11,480. (In Andhra Pradesh, SKS has cut the number of branches from 566 to 121 and headcount from 6,203 to 1,489 in the hope that the business will one day revive.) This has brought down personnel cost by 47 per cent from Rs 89 crore to Rs 47 crore in July-September 2012-13 from the year-ago quarter, and operational expenditure by 45 per cent to Rs 28 crore. Besides Andhra Pradesh, SKS operates in 17 states.

With regard to cash flow management, the company met all financial obligations in a timely manner. It opted out of corporate debt restructuring to “protect shareholder value.” The fourth measure undertaken was to recapitalise the company as the bulk of its net worth was used to tide over its Andhra Pradesh exposure. In July, it raised Rs 230 crore by way of qualified institutional placement and another Rs 33.5 crore through preferential issue.

There are signs SKS is making some headway. On a quarter to quarter basis, in July-September 2012-13, the company’s loan disbursements in non-Andhra Pradesh markets rose by 25 per cent to Rs 690 crore, portfolio outstanding grew 12 per cent to Rs 1,372 crore and core interest increased 7 per cent to Rs 68 crore. Collection efficiency (loan recovery) in these states reverted to the pre-crisis level of 99.2 per cent. As on September 30, 2012, SKS’s capital adequacy ratio stood at 37.1 per cent, against the prescribed norm of 15 per cent. The company has cash and bank balances of Rs 358 crore. In addition, the unavailed deferred tax benefit stands at Rs 557 crore and will be available to offset tax on future taxable income. “Our assessment is that we don’t need to further dilute our equity, we have the growth capital for the next three years,” Raj said.

The Andhra Pradesh crisis has led to some positive developments in the microfinance sector. There is now clarity on various aspects. According to Raj, it is now clear that the Reserve Bank of India will be the sole regulator of microfinance and its priority sector status will continue. Besides, the crisis had no contagion effect with 97 per cent of the borrowers repaying the loans in the other states. As many as 1.9 million borrowers in these states have repaid loans without receiving any incremental credit from SKS in the last two years. Also, the validity of the business model of the MFIs had been established with no alternative microcredit delivery model gaining currency. “Two years back, nobody could dream that there could be a functional credit bureau for microfinance involving millions of borrowers. Today, we have two credit bureaus which have all the data of MFI borrowers. Now, we are running checks from credit bureaus on our customers,” Raj says, adding this had resulted in rejection of 14 per cent of SKS customers on grounds such as default on payments or resorting to multiple borrowings, among other things.

Finding solutions
The Andhra Pradesh legislation also forced a rethink among microlenders on their methods of recovery and disbursement, the issues that were at the root of the crisis. On its part, SKS appointed an external ombudsman as part of its client protection measures. It also set up a customer grievance cell and capped the return on equity on core microfinance at 3 per cent. The company also changed its incentive structure for its field force. Now, the field staff is being incentivised for cross-checking and coming out with a proof that a customer had taken a loan for income generation and not for personal consumption. The field staff has also been asked not to resort to harsh recovery practices. If there is a recovery issue, they should discuss it with the group members and try to find an amicable solution to the problem.

While SKS’s future plan is to expand its non-Andhra Pradesh portfolio, Raj does not rule out the company regaining its lost position in the state. “Why not? In fact, the Andhra Pradesh crisis has demonstrated that there is no substitute for microfinance to funnel collateral-free loans to the rural poor,” Raj says. Meanwhile, SKS is awaiting the adoption of the MFI Bill by Parliament. The key provision of the proposed legislation is that it will give the necessary legislative and constitutional competence for the Reserve Bank of India to be the sole regulator of MFIs. “That will answer all our prayers. It will override the Andhra Pradesh MFI Act so that we can go back to lending and collecting in the state. This is one of the reasons why we are still maintaining a small footprint in Andhra Pradesh,” he adds.

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