SKS: Shrinking of books catches traction

The microfinance lender’s future hinges on its ability to raise more funds.

The promise at the bottom of the pyramid is beginning to haunt SKS Microfinance. The poster boy of the microfinance industry posted a net loss of Rs 380 crore in the September quarter, thanks to a Rs 350-crore loan write-off. However, the problems faced by SKS are not restricted to its Andhra Pradesh portfolio alone. The company’s expenses are up and loan book is shrinking. While the quarterly run-rate of net interest income and other income is Rs 80 crore, expenses stand at Rs 100 crore. Clearly, either the income has to rise in the coming quarters or the expenses have to decline, analysts say.

Sequentially, disbursements declined from Rs 900 crore in the first quarter to Rs 800 crore in the second. The loan book also saw a decline. Analysts say the company’s loan book at the end of September stood at Rs 2,650 crore (Rs 3,000 crore before the write-offs), compared to Rs 3,450 crore in June and Rs 4,110 crore in March. They expect it to grow by Rs 600-700 crore over the next two quarters, provided bank lending to the sector resumes.

In the first quarter, the company’s entire Andhra Pradesh loan portfolio of Rs 1,100 crore was categorised as non-performing loans. Subsequently, SKS made a provision of Rs 110 crore (at 10 per cent). In this quarter, it has written off Rs 350 crore of its Andhra portfolio, thereby bringing down the state’s loan book to Rs 800 crore. According to Kotak Institutional Equities Research, SKS has unrecognised net deferred tax assets (on account of provisions) of Rs 220 crore and this can be used against profits in the future. Thus, net of this buffer, the net Andhra exposure is about Rs 600 crore.

The management has conveyed to analysts that private sector banks have shown interest not just in lending to the company, but also in buying out loan pools. However, the bankers’ decision will largely be driven by the company’s fund-raising ability. Nischint Chawathe of Kotak Institutional Equities says: “SKS has proposed to raise equity capital of up to Rs 900 crore, which, if executed, will considerably boost the confidence of bankers. The traction from bank loans will clearly provide significant (positive or negative) sensitivity to our estimates.”