SKS Microfinance was supposed to be finished, but it's still here

New Delhi: Less than six months into what must have been the worst phase for microfinance in India - after allegations of debtors committing suicide over usurious interest rates prompting Andhra Pradesh’s officials to introduce new regulations to control the industry - India’s only listed microfinance lender SKS Microfinance saw a new low.

In the quarter ended March 2011, the company recorded a net loss of Rs 70 crore. A company which had earlier seen an almost perfect payback rate began to stumble as a result of non-payment of dues by borrowers, egged on by local politicians.

Two years later, the company has come a full circle. It has erased much of its debts and reported a net profit of Rs 2.70 crore for the quarter ended March 2013. A small profit compared with the 2011 loss but a significant step in gaining market and investor faith and reestablishing itself.

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As on March 2013, the company also saw its foreign institutional investors soar to 36 percent , increasing their financial holding by more than 1.5 times over the previous financial year’s 13.41 percent and purchasing shares of Rs 380 crore.

Firstpost spoke to Nidhesh Jain, Analyst, Espirito Santo Securities, who told us what brought back the buoyancy to SKS and how it may have boosted investor confidence.

a) Provisioning on the Andhra Pradesh portfolio

SKS Microfinance had an exposure of Rs 1300-1400 crore in Andhra Pradesh in October 2010 but the company has brought this exposure down to zero on the loan book.

[caption id=“attachment_767979” align=“alignleft” width=“380”] SKS had an exposure of Rs 1300-1400 crore in Andhra Pradesh in October 2010 but the company has brought this exposure down to zero. Reuters[/caption]

“The company has been able to both grow their loan book and maintain good quality of loans as well,” Nidhesh Jain said. “They have maintained a collection efficiency of 99.8% in the last quarter and should be able to keep growing their loan book and maintain good quality,” he added.

b) Flow of funds after a funding drought

After the 2010 microfinance turmoil, funding to MFIs dried up with banks and financial institutions being overtly cautious about lending them any more money. The outlook then was so bleak that many thought microfinance companies would go bankrupt," said Jain, adding, “Due to the losses on the Andhra portfolio, the net worth of most MFIs eroded, with SKS also being badly hit with a huge decline in its net worth.”

The company also completed 12 securitisation transactions aggregating to Rs 1,207 crore during 2012-13 and through a qualified institution placement (QIP), raised almost Rs 300 crore from equity investors which provided some confidence to lenders," Jain said. He also said that post July 2012, the funding environment for SKS has improved dramatically.

c) Shrunken market and lesser competition

During and after the turmoil, many small MFIs withdrew from the market, resulting in a decrease in competition for SKS.

“This has enabled them to expand and spread their operations outside Andhra and also within the state to borrowers who were earlier with other MFIs. The expansion has been facilitated by the funding environment and no competition. And so we see that quarter they have grown their loan book by 35% and crossed Rs 2000 crore,” said Jain.