SKS, MFIs, continue to pay heavily for their Andhra sins

One year after the rise and fall of SKS Microfinance, darling of the bourses for a few weeks in 2010, the main lesson that everyone is still digesting is this basic one: the folly of putting all your eggs in one basket.

But for things going wrong in that basket - Andhra Pradesh - the microfinance sector would have been making money hand over fist even now. In October last year, the Andhra Pradesh government introduced a new law to ban unfair debt collection practices and prevent borrower suicides and trauma ( See details here).

That’s it. After that it has been all downhill and last month SKS announced a Rs 218 crore loss in the first quarter of 2011-12 - its second continuous quarter of hefty losses - largely due to the collapse of repayments in Andhra.

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[caption id=“attachment_62156” align=“alignleft” width=“380” caption=“SKS Microfinance, the only listed MFI, is now quoting at a fourth of its peak value of Rs 1,490 a share. Lucas Jackson/Reuters”]  [/caption]

According to a research report by Credit Suisse, SKS’s loan recoveries in Andhra are as low as 12 percent, and its bad loans are as high as 39 percent (against 2.5 percent two quarters ago). Worse, the company may have to write off another Rs 1,100 crore of bad loans over the next two years.

Last week, The Economic Times reported that the bad news from Andhra Pradesh was so bad that it was driving some microfinance companies to merge and keep their heads above water.

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According to the report, three microfinance institutions - Spandana Spoorthy Financial Services, Share Microfin and Asmitha Microfin - have requested the banks which financed them to allow them to merge. If the banks nod their approval, the trio will be larger than SKS with a loan book in excess of Rs 6,600 crore (against SKS’s Rs 4,300 crore).

The urge to merge emanates from the same basic fear: falling loan recoveries from Andhra. While SKS has reported loan recoveries of only 12 percent, the average for the industry is about 22 percent - which makes the business in Andhra simply unviable and capable of destroying all balance-sheets.

Little wonder, the newspaper now reports that the SKS board may be planning some kind of soft coup against Dr Vikram Akula, the power behind SKS’s rise over the last few years. The board, which backed Akula last year when he fell out with his CEO Suresh Gurumani, is now planning to sideline him by persuading him to give up his executive powers.

That may or may not happen, given Akula’s reputation as the man who built SKS into a microfinance powerhouse over the last decade, but either way it is clear that the Andhra debacle is going to take its toll not only on SKS but the rest of the industry, too.

What did Andhra do that it has sent every microfinance institution (MFI) scurrying for cover and scapegoats?

As _Firstpost_ noted earlier, Andhra Pradesh, among other things, proposed “a registering authority for microfinance institutions (MFIs), capped the total interest payable at two times the initial loan, forced MFIs to give monthly lists of borrowers detailing the sums lent and interest charged, and banned them from giving second loans to borrowers - often the mainstay in microfinance.”

However, before the state government clouted them on the head with a blunt instrument, the industry was busy shooting itself in the foot by overgrazing in one area.

As one expert told Firstpost when the crisis broke last year: “Andhra Pradesh is now second only to Bangladesh as the most microfinance saturated place on earth, with a full 17 percent of the population in possession of a microloan account. …”. But that was the least of it. “The number of multiple loans was already a huge 82 percent in 2006, and it’s known to have risen even further since then…”.

When too much money is chasing the poor, is it any surprise that they took it even when they couldn’t repay?

It’s now clear what needs to be done. All MFIs need to downsize their operations in Andhra and find resources to write off most of the bad loans in the state. SKS has proposed an equity issuance of Rs 900 crore, and some others are looking to merge operations to strengthen their balance-sheets against further depredations in the state.

The YH Malegam committee constituted to look into the industry’s problems after the Andhra debacle had proposed making the Reserve Bank the sole regulator for MFIs and imposing interest rate caps.

But while MFIs have welcomed the idea, Andhra has not. It has said its law to regulate microfinance will stay, Malegam or no Malegam. Andhra, clearly, will have to be written off the MFI map for now.

The share market is telling the same story. SKS Microfinance, the only listed MFI, is now quoting at a fourth of its peak value of Rs 1,490 a share.

At the current market price of Rs 317, Andhra has swallowed up over Rs 1,174 from the value of each SKS share.