India's microfinance posterboy Akula steps down, where do SKS investors stand?

It is finally official. Vikram Akula, the face of microfinance in India, has resigned from SKS Microfinance, a company he set up in 1998, media reports said. PH Ravikumar, an independent director has been appointed as non-executive chairman, till the new chairman is decided upon.

SKS began as an NGO in 1998 and turned into a non-banking financial company (NBFC) in 2005. Even after it became a for-profit organisation, it remained the fastest-growing microfinance institution (MFI) of the world till 2009.

It was also the first Indian MFI to be listed on the stock exchanges. Subscribed 14 times, it even boasted investors like Narayan Murthy and billionaire George Soros.

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But the rise of the company was as grand as its fall. The stock that touched Rs 1,491 in September last year is now a shadow of its former self at Rs 110.

The decree by the Andhra Pradesh (AP) government that stopped all MFIs from collecting payments by force or even disbursing loans without permission has hit the industry hard.

SKS reported a net loss of Rs 384 crore for the second quarter of the current financial year, against a profit of Rs 80 crore in the same period last year.

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Spandana, another MFI, reported a loss of Rs 9 crore for the year. Between April and September 2010, MFIs in AP disbursed Rs 5,000 crore, which plummeted to a paltry Rs 8.5 crore in the second half, according to a report in Business Standard. Recoveries dropped from 100 percent to less than 5 percent in the past one year.

In the face of this turmoil, Akula has decided that he needs to step down.

It’s essential to clarify one point here: the loss of the company did not exactly translate into losses for the promoter. He, along with other members of the senior management like Gurumani, had cashed out during the IPO. In fact, some experts had even raised questions about the move during the listing of the company. After all, why should ordinary investors put money in a company when the promoter himself is cashing out?

What impact will Akula’s resignation have on the company? The company plans to launch a rights issue in the market worth Rs 900 crore. With Akula gone, who will be the face of the company? And how easily will investors be able to entrust the company with so much money?

While Akula’s resignation has been talked about for some time now, the rights issue will offer the real test for the actual impact.

Still, nothing will structurally change for the company. SKS will probably continue to write off its Andhra Pradesh portfolio given that collections are still dismal.

Growth will have to come from non-AP regions. Disbursals and collections can go back to normal levels only once a strong microfinance Act is passed.Only the act is likely to shore up the financial fortunes of SKS Microfinance and its peers.