SKS Microfinance: High risk game

The stock will look up only if there is a reversal of the low interest rate regime and liquidity eases.

For a long time, entrepreneurs did not wake up to business opportunities at the bottom of the pyramid. Companies that wish to cater to this segment will have to learn to create a virtuous cycle of growth. Any attempt to profiteer will turn the opportunity into a threat, as microfinance institutions (MFIs) in Andhra Pradesh have learnt. MFIs have been lending heavily in Andhra Pradesh — a dominant state for MFI loans (accounting for 28 per cent of the sector) and the most penetrated, with over Rs 62,000 loans outstanding for every poor household. Clearly, the increase in penetration has not come from lending to new borrowers, but to the same set of people. And, outstanding loans of Rs 62,000 per poor household are clearly high, and well above the Rs 25,000-cap recommended by the Malegam committee report.

It is not surprising that the growth in the number of clients slowed sharply in financial year 2009-2010, much before the Andhra Pradesh MFI Act was introduced in October last year. Data on number of clients suggest that while outstanding MFI loan accounts increased 18 per cent for the industry (in FY10), adjusted for overlap (with SHG accounts), the number of individual borrowers increased by only one per cent during the previous year (from 70 million in FY09 to 71 million in FY10).

According to a leading foreign brokerage house, it reflects the increased competitive intensity in the industry and concerns over multiple lending to the same set of borrowers, rather than a meaningful increase in the number of clients. For SKS, the leading listed player in the MFI segment, the third quarter was tough, as profits fell 38 per cent year-on-year, loans fell seven per cent on a quarterly basis and credit costs were up sharply. In its report, the brokerage house says, “We rate SKS shares as medium risk though our quantitative risk — rating system that tracks 260-day historical share price volatility — suggests high risk. We believe SKS’ more geographically-diversified lending portfolio, leading market position and low leverage levels moderate its risk profile.”