SKS threatens exit from Andhra

Akula urges RBI intervention, says difficult to continue if restrictive law remains.

SKS Microfinance may consider pulling out of Andhra Pradesh if the state government does not revoke its recent restrictive legislation on microfinance institutions (MFIs) by April 1.

“Until RBI (Reserve Bank of India) steps in and does something on the AP Act, we are going to see some uncertainty. The committee (Malegam panel, which recently gave a report on the issue to RBI) has given seven reasons why the state government should not have its Act. The committee has also said April 1 is when it would like to see these recommendations in place,” said Vikram Akula, chairman of SKS Microfinance.

“However, in case the situation does not get resolved, we may have to severely downsize our exposure in Andhra Pradesh or even, in the worst-case scenario, consider pulling out of the state,” he added.

Andhra Pradesh accounts for 24.5 per cent of the portfolio of SKS Microfinance, which was around Rs 5,000 crore as on December 31, 2010. Since the controversy over high rates charged by MFIs and the new law broke out late last year, the recovery rate of SKS in the state has dived to 42 per cent as against the rest of the country’s average of 98 per cent. The state also accounted for 70 per cent write-offs and provisions. For Andhra, the latter totalled Rs 58 crore as on December 31, he said.

“Even considering the worst-case scenario (pulling out from Andhra Pradesh), where there were significant losses, we would still be left with a strong and well-capitalised balance sheet. We still have strong operations in 18 states,” Akula said. “We have no cash flow issues. Despite the turmoil, we have been able to make all repayments to banks. On Thursday, the Reserve Bank of India, because of certain allowances on provisioning norms, has encouraged banks to continue to lend. We see continued support from our bankers.”

Last year, the Andhra Pradesh Assembly, in a bid to regulate MFIs, approved an ordinance that curbed operations of MFIs. It took effect in October 2010 as the AP Micro Finance Institutions (Regulation of Money Lending) Act and imposed stringent regulations in response to complaints over high interest rates and dodgy loan recovery practices.

Additionally, it curtailed the activities of MFIs in the state, which has been their largest single market in India.