Monday, December 6, 2010

Can SKS Microfinance buck the industry’s momentum to doom?

November 16th 2010.  Ever since the crisis broke out in Andhra Pradesh, MFIs have used every trick in the PR book to whip up sympathy, but instead found that their support base continuously dwindling even faster.  It is one thing for Vijay Mahajan, President of MFI association M-Fin to attempt to play the sympathy card and another for founder-Chairman of SKS Microfinance, Vikram Akula to do so. SKS being the only listed MFI Company in the sector the key difference between the two. So when Akula naively disclosed that collections have come in lower than normal post the Andhra Pradesh government ordinance, the effect was a virtual invitation to bears to hammer the stock. And the bears responded with glee.

November 17th 2010.   SKS share touched a historic low of Rs 601 in the National Stock Exchange (NSE) - a fall of 60% from its all time high of Rs 1,490  - trading stopped by triggering the 20% downward circuit breaker!

November 18th 2010.    Feeling the pinch, Akula and his CFO, Dilli Raj walks into CNBC-TV 18 Newsroom to give an interview in an attempt to stem the tide. The interview succeeded in arresting the decline of the stock, giving it a small bounce.
December   3rd 2010.    The stock closes at Rs 711.30, though it made a recent high of Rs 750 intra-day. In the last week, volumes thinned considerably except on Friday, which saw bulls trying to breakout out of range but the huge selling pressure brought back the share to Rs 711.

The question is whether SKS can hold on to its strong support between Rs 705-711 or would this range instead turn into a strong resistance level for that stock? To answer this we need to revisit Akula’s claims on November 18th to ascertain their veracity on the basis of new information now available to the market. Extracts of their verbatim CNBC interview is provided as given in


Akula: Let me start by emphasizing that while the ordinance has had an effect on some microfinance institutions, we are here, today, representing SKS Micro-finance and not the sector. In our case, we haven’t seen a significant impact as of yet... If you look at the attendance at our meeting, last week for example where we do have the data, the attendance at the meeting of our borrowers is 97%.It is true because of the ordinance, we weren’t able to conduct financial transactions but the fact that borrowers were coming to our meetings at the rate of 97% shows that there continues to be from the borrower level, customer confidence. 

Raj: To start with, our exposure to Andhra Pradesh it is a mere 20% of total portfolio mix. In hard number that is Rs 1,400 crore compared to an assets under management (AUM) of more than Rs 5,600 crore. In terms of your question on what is overdue, the ordinance came into effect from October 15, with a monthly periodicity so collection it started November 15 onwards. It is just three days, which is too early to talk about what is overdue....There could be some minor impact on FY11 earnings guidance that we have given but we have just three days data, so it is near impossible to define the impact in a week’s time.

At the beginning of the crisis, Akula put SKS exposure in Andhra as high as 38%. By Nov 18th, his CFO now says it is a measly 20% in an attempt to play down Andhra’s criticality in affecting the bottom line performance of SKS Micro-finance. Akula further totally retracts his statement made a few days earlier that his collections are affected in Andhra. His CFO further skirted the question by resorting to technicalities claiming since the periodicity of collections from weekly to monthly basis has been changed, it is too early to comment on overdues.   4th Dec

The ordinance has led to massive defaults by borrowers in AP, forcing the industry to stop issuing fresh advances, Mahajan said, adding that the industry is now worried the trend will spread to other states. Mahajan said over 90 per cent of borrowers in the South Indian state have not been paying their EMIs for over a month now... Already, 90-95% of the Rs.8,000 crore outstanding MFI loans in Andhra Pradesh are overdue.

In the villages, news spread fast and since we have stopped fresh lending, people have come to believe that we are in crisis and so why to pay up?," Mahajan said, adding that this has aggravated industry's troubles.” 

So just three weeks after the Akula-Raj CNBC-TV18 interview, according to M-Fin Chair, MFIs are experiencing in Andhra a default rate of over 90%.

"But the current crisis is roiling the entire industry,” says Matthew Titus, executive director of Sa-Dhan, a Delhi-based association that groups over 260 nonprofit, self-help, and commercial lenders. “It’s not only the bad boys that will get hit. Everyone will get hit. People can’t differentiate between who are the good boys and who are the bad boys”.

Both MFI associations (M-Fin and S-a-Dhan) assessments of negative impact radically differ from those Akula tries to paint. Akula claims SKS is immune to any significant impact flowing from the ordinance, while MFI trade associations’ assessment clearly think on the contrary - that its impact will be cross the board, sparing none!

Akula: If you look at the non-AP portfolio, which is close to three quarters of our overall portfolio, there we continue to have 99% repayment rates. So there are absolutely no issues in 18 states where we work.   

“While Mr. Akula’s booster dose of confidence may provide temporary relief for investors, concerns still linger, as J.P. Morgan’s Seshadri Sen said in a recent report. We believe that the Andhra Pradesh book would be impacted significantly and credit behavior in other states would also be materially impacted.”   4 Dec

Mahajan: It is only a matter of time before the news spreads to other parts of the country. Already, we have seen some things happening in Madhya Pradesh, where a municipal councillor after losing an election urged borrowers not to pay back MFIs. Chandrababu Naidu is doing it on a much larger scale in Andhra Pradesh, he said, calling Naidu’s campaign “irresponsible”.
Three weeks from the CNBC interview, there are strong indications that MF repayment rates are starting to decline as credit behaviour in non-Andhra states starts to change.


Akula:  No banks have withdrawn from them. “ICICI Bank, Axis, SBI, PNB Have supported us. We do not need any liquidity support from anyone” 

Raj: As of date we are in complete compliance with a self-imposed financial discipline. We hold sufficient liquidity, we thank eight banks who have leased Rs 367 crore to us in the last 15 days and we are sitting on a sanction pipeline of Rs 2,500 crore and we disbursed Rs 1,050 crore 

Times of India  4 Dec 

“Microfinance lending activities across the country will be "dead, absolutely" by January 1 unless banks release fresh credit to the cash-strapped sector, an umbrella body representing MFIs said today.

If the current severe credit crunch continues till the end of December, "There will be no microfinance in 2011... Come first January, we are dead, absolutely... it will be finished," the President of the M-Fin Network, Vijay Mahajan, told reporters here today on the sidelines of the annual Bancon 2010 banking conference.”   4 Dec  

"Some institutions that have sanctioned lines of credit are not disbursing money. But we have to explore all options,” said S.V. Raja Vaidyanathan, chairman and managing director of Chennai-based Asirvad Microfinance Pvt. Ltd.

Our (MFIs) total outstanding with banks is Rs 24,000 crore and we pay them about Rs 1,000 crore monthly. A substantial part of this is from AP and as of now, we are diverting the money from the rest of the country to repay their debt," Mahajan said.

Business Standard    26 Nov  

“Investors are shying away from securitised loans of micro-finance institutions (MFIs), as the ordinance issued by the Andhra Pradesh government has slowed recoveries, creating uncertainty around the underlying portfolio. 

Securitisation is the process through which MFIs pool the receivables from loans given to their customers and sell these to third parties like banks, insurance companies and mutual funds. Unlike the traditional loan portfolio sale or assignment, in this process the MFI portfolio is rated and converted into standardised securities, which can be traded more easily. Securitised loan products of MFIs were emerging as a good investment option, as they offered returns of 9-12 per cent per annum. The size of this market was pegged at a little over Rs 1,000 crore.” 

The downgrade significantly constrains MFIs ability to raise external funding. Further access to fresh loans from banks and financial institutions has dropped materially, which is probably due to attempts by banks to reduce their exposure to the sector. MFIs are now being double squeezed in terms of liquidity. On one hand, sanctioned credit lines have been effectively radically cut. On the other hand there are no takers for their securitization products. The net effect affects MFIs ability to service debt and limits their fresh disbursements, which can have a cascading effect on their growth and asset quality in the near term.


Akula: Given our scale and our efficiencies in terms of economies of scale, even at 24% there is a margin one continues to have that will allow for continued profitability. Maybe not the same profitability we once had but certainly a healthy profitability going forward. The specific numbers we are not in a position to comment on as of yet because we need to wait and see how monthly versus weekly evolves. 23 Nov 

“Ratings agency Crisil has put 12 microfinance institutions (MFIs) – including the country’s largest, SKS Microfinance, and Spandana Sphoorty Financial – having bulk of exposure in Andhra Pradesh on a rating watch with negative implications... The implementation of the Andhra Pradesh (Andhra) ordinance has triggered a chain of events that can permanently damage the business models of MFIs by impairing their growth, asset quality, profitability and capital-raising ability," the rating major said on Monday.

Last week, Fitch India had said the securitised paper floated by Indian MFIs was unlikely to receive the highest long– or short–term ratings as a consequence of the unique risks they faced. The limited historical asset performance and evolving regulatory and legal framework would also prevent highest rating for MFI securitised paper, according Fitch India.”
Together with MFIs forced to reduce their interest rates, the downgrade by rating agencies like CRISIL and Fitch would imply that their own cost of borrowings would now be higher, lowering margins even further. 

“Microfinance institutions (MFIs) in West Bengal witnessed almost 50 per cent drop in monthly disbursements over the last two months on account of a liquidity crunch in the system. The cash crunch is primarily because of banks' hesitation to lend to MFIs after the recent Ordinance promulgated by the Andhra Pradesh Government making recovery from borrowers difficult for these institutions.

Disbursements have dropped from about Rs 100 crore a month till about two months ago to just about Rs 50 crore at present, according to Mr Shubhankar Sengupta, Managing Director – Arohan Financial Services and Member – Microfinance Institutions Network (MFIN). Commercial banks that account for almost 80 per cent of our source of funds have now gone slow on lending after the Andhra Pradesh Ordinance. These banks have a big exposure to the MFIs in that State and as repayment, there has taken a hit they have adopted a wait-and-watch policy and are unresponsive to MFIs in other parts of the country as well, he said.”

West Bengal is the second biggest market for SKS Micro-finance and the M-Fin claims that bank disbursement for the entire industry there is reported to have dropped above 50%. We further learn from Mahajan that though MFIs are able to recover advances in non-AP states, they have disbanded altogether or drastically cut down loan advances in these states to tide over liquidity problems. Accordingly we may infer MFI loan disbursements have overall contracted drastically in the country which in turn should have high material impact of the performance of the sector MFI which start reflecting itself in their third quarter results and we can have an insight to their full impact from the fourth quarter results. 


Raj: This is a transitory, temporary issue and we don’t see any material impact of that on our net worth or our FY12 earnings.
Raj’s statement is typical of one being in denial. The current problem may be transitory or temporary but the question is how short or long drawn out will be such a phase? The MF Bill was supposed to be introduced in Parliament this month but it has been withdrawn to be re-drafted to reflect the experience of Andhra. At the very earliest, the bill can be expected now to be introduced during the Budget session in March and bill could take as much as end of next year to be passed. As and until the Act is passed, this crisis will not go away.

The current buzz within government circles is to let things drift and permit a few MFIs to go bust to drive MFIs to a level of desperation that they would accept even an Act that put them under tight leash in order to prevent repetition of AP behaviour. But the MFIs are already in such a heightened state of desperation that they are willing to even accept public sector banks mulling the prospect of getting their shares at par in exchange of defaults as seen in these media reports: 

Indian Express  5 Dec 

“Public sector lenders have come out with a proposal to salvage troubled microfinance industries (MFIs) —conversion of loans into equity in the company in case of any default. State-run Corporation Bank is the first bank which has come with the idea to safeguard its risk through this route.

Other lenders like State Bank of India, Bank of India, Indian Overseas Bank, Punjab National Bank and SIDBI — which have maximum exposure in the sector — are also said to be toying with this idea, said a banking source. “The microfinance industry is a very lucrative sector and we consider it very good from the investor perspective. From now on, we will be putting a clause in our loan contracts through which we will get an equity stake in the MFI in case of a default,” Corporation Bank chairman and managing director Ramnath Pradeep said.

No lending has yet been done under the equity-in-case-of-default clause. This applies to the newer ones which we will be giving,” Pradeep said. “The equity-for-loan clause mentions that the stake will have to be given to the bank at par or at the face value of every share, which can result in a windfall to a bank,” Pradeep said, adding “MFI shares are still strong. The share's market value can be Rs 700 but I will get it for Rs 10 as the face value.”   4 Dec 

Mahajan: Already, 90-95% of the Rs.8,000 crore outstanding MFI loans in Andhra Pradesh are overdue. Right now companies are just collecting from other states and disbursing it in Andhra (Pradesh), but this cannot continue for long because some of the other states have not seen disbursals in the last two-three-four weeks and the borrowers there are wondering as to why companies are only collecting dues and not giving out loans,” he said.

Mahajan added that if this continues the same way for a few more days, then defaults will start in other parts of the country too, because a lack of disbursements will push borrowers towards defaults.

MFIN’s Mahajan said equity is only one of the few things MFIs have to give as collateral “because our only assets are the credit we have given, and we own very few fixed assets”. 

So if non-Andhra states are still giving healthy repayment rates to MFIs, then Mahajan does not expect this to continue as “a lack of disbursements will push borrowers towards defaults”. The longer this crisis lingers on, the higher the chances of MF industry going bust as the crisis expands country wide in impact. 

The MFI sector is besides looking to the neo-liberals within the government and bureaucracy to ensure that the MF Act in its final form will be compassionate to their interests. This expectation too is devoid of reality. The government is of course under considerable pressure from the World Bank to integrate MF within their existing development schemes such as NREGA. While the government is open to this suggestion, they want to ensure MF to be gentler to the interests of the poor as compared to the barbaric streak the latter displayed in Andhra. While the central government pressure succeeded in getting MFIs to reduce their interest rates to 24%, they would be more at ease if this is around 18% while state governments will like to see them in single digits. Besides, the Andhra crisis have whipped up so much controversy that opposition parties will aggressively oppose any Bill that leaves MF to pursue a business as usual operation. 

So even if the neo-liberals have their way, it is highly unlikely that such a bill will attract adequate political consensus to pass it as an Act. Accordingly, within the expected future policy environment, it is highly unlikely that the MF sector will be as lucrative and high growth as it was in the past. This means that the MF as a sector need to drastically re-rated in valuations as compared to current valuations. The indications to this effect are reflected in the following media report: 02 Dec 

“Private equity companies may struggle to recoup almost $565 million in investments in India’s microfinance industry since 2006 after a regulatory backlash led at least two firms to delay initial public offerings.

Temasek Holdings Pte, billionaire George Soros and Sequoia Capital are among investors who’ve put money into the world’s largest market for micro-loans as lending and profits swelled. The boom culminated with the IPO of Sequoia-backed SKS Microfinance Ltd., which raised 16.3 billion rupees ($357 million) in August.

I don’t think private equity investors will recover their money at the rates they thought they would,” said Sanjay Sinha, managing director of Gurgaon, India-based Micro-Credit Ratings International Ltd. “The market is not as wonderful or as large as the investors made it out to be, and they paid far too high prices for their stakes.

Valuations for Indian microfinance companies, which focus on providing loans in areas largely shut out from traditional banking services, are three times the global median, based on private equity investments, the Consultative Group to Assist the Poor, a Washington-based policy and research canter that aims to help increase financial access, said in a report in March.”


Raj: What are going to supplement that profitability are scalability and productivity gains. Our operating cost has come down from 12.7% to 10.4%. If you look at it, at the end of the day it’s separating men from the boys. The company with the strongest balance sheet, best management, best practices, adequate capital on the balance sheet and liquidity and also customer centricity is actually going to gain out of it.

The claim of SKS of having best governance practices in public eyes is plain bluster after the company sacked their CEO, Gurumani arbitrarily. So is the claim of customer centricity with charges of alleged suicides due to their coercive recovery practices. Besides customer centricity is best provided by smaller MFs than a nationally scaled one.

This leaves the strongest balance sheet, capital reserves and liquidity as seemingly sound arguments that validate SKS claims that these are what separate men (them) with boys (others). Now scalability is a two way sword. As long as there is growth, then all these SKS claims maybe probably true. But what if a MF of a size like SKS actually experience rapid negative growth? It is obvious that it can just as easily slip into bankruptcy in lightening speed. Particularly so as Mahajan points out that the only assets MFIs have are current (loans they disburse) with very little capital assets.

One of the major reasons why operational costs to delivery of credit are high is due to the high overheads of MFIs like SKS. The sacked CEO of SKS Microfinance, Suresh Gurumani, received an annual salary of Rs1.5 crore and gross remuneration of Rs2.45 crore in 2009-10 in addition to perks and benefits much more than this amount. In contrast the chairman of SBI, India’s largest bank receives just Rs 26.5 lakhs, the RBI Governor, a paltry  Rs 15 lakhs while his deputies - a relatively pittance amount of Rs 13 lakhs. This gives a glimpse of why all claims of operational cost cutting by SKS are just bunk. It is because it is all bunk; scalability in an environment of rapid negative growth rate can easily turn a curse. This would give SKS an equal probability of getting bankrupt as compared to any small sized MFI.

The vulnerability of MF as a sector is not only because of its highly skewed geographic concentration in Andhra Pradesh but also its high dependence on the government funds for its operational lending activities via public sector banks. This dependence is estimated at over 80% of all their lending and in the case of SKS, slightly lower. As a reaction to the crisis MFI’s first looked to infusion of Private Equity (PE) funds, even in exchange of equity. By first week of December, PEs though offering initial interest, expressed their unwillingness: 2 Dec 

“No logical person would invest in microfinance right now, because there is no microfinance right now,” said Vineet Rai, founder of Mumbai-based investment company Aavishkaar Venture Management Services Pvt. “If all the big guys are facing the risk of not being around, you have to be very courageous or mad to invest. Aavishkaar’s funds invested $18 million in seven Indian micro-lenders including Spandana Sphoorty Financial Ltd.”

With PEs willing in spirit but not in mind to invest further, MFIs survival revolves entirely around government’s mercy. Unfortunately for them, none has been forthcoming todate!

So we ask again. Logically, can SKS Microfinance buck the industry’s momentum to doom? You decide and re-rate SKS stock accordingly.


  1. Temasek Holdings Pte is one of the investor? Intelligent Indian nationals chipped in to contribute to the country's excellent growth.
    Too hard to ignore booming Indian economy.

    To give or to take - our heart
    To share or to hoard - play our part

    I ask again, where will this be leading?

  2. Yes Temasek Holdings is one such investor in SKS.

    Where is it leading?

    We are "recasting" MFIs. We are destroying to create again MFs who are more benign to the poor and our economic needs. I suggest you read:

    India Rocked By Micro-finance Crisis

    "Mr. MAHAJAN: Well, the worst case scenario is pretty horrible, because India now has a very large micro finance sector, bigger than Bangladesh. Most of it is financed by large banks. It's not through savings. And therefore, you know, if banks get a knock in one state, they're simply going to declare this whole (unintelligible) class as unreliable, unworthy of lending to. So it's going to be a huge setback."