Castrate the for-profit MFIs to Recast the Sector!

The die has been cast with the introduction of the Andhra Pradesh Micro-Finance Regulatory Bill in the State Assembly yesterday. The Bill to replace the ordinance passed by the government in October 15th is scheduled to be discussed this coming Tuesday and passed as an Act by Wednesday, tightening the noose around MFIs.  Before its introduction, the Micro Finance Institutions Network (MFIN), demanded radical amendments to the Bill. [MFIN is an association of 50 for-profit micro lenders among its members, which account for more than 85% of the microfinance market in India.] According to the Indian Express:

“MFIN president, Vijay Mahajan said:  If those modifications are not made, there would be major repercussions not only for access to finance but also for the banking system.”

The bill, copies of which were circulated Friday, proposed no amendments to the ordinance, as demanded by microfinance institutions (MFIs) who say if their concerns if not addressed, may force them to shut operations in the state. Mahajan told MoneyControl.com: “If beyond a point the model is rendered unviable due to an act of law or something beyond the court of law, then basically one would have to reconsider the whole thing."

The Economic Times further quoted Mahajan to give an insight to this crisis as the industry like the public to see it: “According to Vijay Mahajan, president, MFIN, their business activity came to a grinding halt and collection rate dropped to 20% from 95% after the state government passed the ordinance. `This can have far reaching implications on the entire credit system as MFIs borrow money from banks to lend it to their customers, said Mahajan. He pointed out that during the last 45 days 12 lakh loans worth Rs 1,200 crore could not be disbursed due to the hostile conditions. We are unable to collect Rs 7,400 crore from our borrowers. If it continues it will affect the entire Rs 24,000 crore given to MFIs by banks. Besides, it is also demoralizing our 2 lakh staff, he said.”

It is apparent that the stock of MFI credibility and influence, both within the country and internationally, seems to have fallen to such low ebb that their demands for change in the bill have literally fallen on deaf ears. India’s Reserve Bank further indirectly accused Mahajan of resorting to gross exaggeration when RBI Deputy Governor Subir Gokarn said the sector was only under some amount of stress, but there was no threat to their survival.

That the industry is living in a state of denial is illustrated by Mahajan in another interview to CNBC-TV18 suggesting that the MF industry was depending on the outcome of their writ petition in the High Court to bail them out. He further conceded that rather than the ordinance it was politicians who encouraged people to default on overdues which proved the main obstacle for normalcy of operations:

“Our writ petition at the high court which was against the ordinance remains absolutely alive, and that's equally valid for the bill if it gets passed into an act because it is the same language. So that’s the first recourse. Right now what is stopping us is not the ordinance. It is the statements of various political leaders such as Mr Chandrababu Naidu saying that loan of MFIs should not be repaid. We think this is highly irresponsible because it foments credit indiscipline.”

If the MFIs are looking at the High Court for ultimate relief, then it is analogous to a drowning man clutching at straws. In India, litigation may stretch several years and time is exactly not what this heavily leveraged industry has on its side. Further, even if the judiciary upholds the industry’s contention, all it needs for the government to give a policy shock is to give a directive to public sector banks to avoid credit to MFIs by treating the whole sector as one asset class. Besides, a judicial win for MFIs does not wish away the grim reality that politicians of different shades would not be willing to play ball, in letting normalcy to prevail.

As for repercussions on the banking sector in the event of the MF sector collapsing, this is totally blown out of proportion by the MF industry, used as a scare tactic in the hope of getting leniency from the system. Banks have a collective exposure of about Rs 24,000 crore to MFIs.  In Andhra Pradesh the total outstanding loans amount of MFIs is Rs 8,000 crore, of which, Rs 5,000 crore is funded by banks. Yet for public sector banks, their total MFI exposure as a percentage of their total lending in the country is just a small fraction of 1%. Accordingly, repercussions if any in the event of a MF sector collapse would be no more than a ripple in an ocean. 

The powerful All-India Bank Employees' Association (AIBEA) could be another obstacle in the way of MFIs. "RBI should not accept it ... Banks should not give loans to MFIs under priority sector category," said AIBEA general secretary, C.H. Venkatachalam. "PSBs should (instead) go for large-scale micro lending through more number of rural branches."

Besides, the issue of financial inclusion is reflected in a national goal to provide banking services to 100 per cent of citizens living in villages with a population of more than 2,000 by March, 2012. The progress on this goal may not be much to talk about at present. But, in the next two years, we should see the UPA government giving more impetus to realization of this national goal which in turn reduces MFIs strategic importance in promotion of financial inclusion.

So all things considered, portends are that the MFI industry may have no options but be forced to enact their threat to close shop in Andhra Pradesh.  In 2006, during the Krishna crisis wherein MFIs faced a similar situation, they wriggled out of confrontation with the government by promising to adopt a Code of Conduct, which we now know that they had practically no intention of adhering to. This time round too, they are promising to turn a new leaf by the series of steps they claim to have undertaken including interest rate reduction; uploading credit data of borrowers in two RBI licensed credit bureaus; conciliatory meetings with government, commissioned a study on suicide and sensitivity trainings of their staff against coercive collection practices.

The MFI industry for some time now has been blaming rogue members within its own fraternity as being responsible for the present crisis. In his latest statement, Mahajan has once again resurrected this bogey but he is not telling just who these rogues are.

So why cast a shroud over the identity of these rogue MFIs we can ask?

In our archive post, we found that it is most likely that the Akulas (SKS) and Mahajans (BASIX) are resorting to this tactic in order to deflect blame from their own organizations to those smaller in size within the industry. We then asked, what kind of MFIs attracts higher plausibility to go rogue? Logically it points to MFIs with mind boggling, mushrooming growth and profitability. So just who are they likely to be? We found it was most likely the six biggest MFIs in the country who control 94% of the market share that meet these criteria.  Among these six are SKS of Vikram Akula and Basix of Mahajan. Rogue MFIs accordingly could then well be a euphemism for these six MF biggies in the country.

The blog Candid Unheard Voice of Indian Microfinance gives additional data of such burgeoning growth facilitated by large scale equity infusion:

"- 6 MFIs added US $ 2.18 billion during 24 months (April 2007 to March 2009).

- Equivalent to Per Month Addition of Portfolio of US $ 90.81 Million (or Rs 4177 Million for all 6 MFIs.

- Equivalent to each MFI adding a portfolio of US 15.135 Million (or Rs 696.25 Million) every month, this is certainly a lot of money.

Contrast this with their growth during the period April 2005 to March 2007 when they added just over US $ 1/2 a billion (0.504 billion US $ to be exact) and this is about 18.79% of the total portfolio added during the period April 2005 – March 2009.

- Adding 1/2 billion US $ over 24 months is equivalent to these MFIs adding portfolio worth US $ 21 million (or Rs 966.15 Million) every month for 24 months. That is about 1/4th of the monthly portfolio addition done by the same MFIs during April 2007 – 2009”

The table and figure are rather self-explanatory…Equity investments from April 2007 onwards until July 2010 (A whopping US $ 646.97 Million) are almost 20 times the size of equity investments prior to April 2007 (which are a miniscule US $ 32.51 Million). In many ways, April 2007 appears to be a watershed…with regard to equity investments.

In fact, the burgeoning equity investment in Indian micro-finance has prompted experts like Mr N Srinivasan (Author of The State of The Sector Report) to suggest that perhaps ‘micro-finance was the preferred sub-sector of choice in the financial sector for investment bankers.

During the period April 2007 – March 2009, the top 14 Indian MFIs (with 6 AP Headquartered MFIs) added almost 75% of their total portfolio of 2009. In numerical terms, this is approximately US $ 2.799 Billion, which is huge by any standards.

During the same period, the Big 6 AP Headquartered MFIs also increased their gross loan portfolio by almost US $ 2.077 Billion during this period {in other words AP headquartered MFIs accounted for almost 74.19% of the total portfolio (US $ 2.799 Billion) increase during April 2007 – March 2009}.

The period, April 2009 – March 2010, which succeeds the fastest growth period (of April 2007 – March 2009) as of now shows the highest equity investment in Indian micro-finance (US $ 390.72 Million)?”

Significantly the explosion in equity infusion came during a period where globally the financial sector was experiencing the sub-prime crisis, with many banks and companies going bust or needed to be bailed out by their governments to prevent insolvency.  Presumably, many Private Equity (PE) and Venture Capitalist (VC) investors had either burnt their fingers in this crisis, sitting with huge losses and/or found avenues within the financial sector for investing highly contracted. The unregulated MF industry in India thus became their natural destination where they looked to recoup their losses or as an alternate investment avenue within the financial sector. For MFIs this increased PE/VC interest came as manna from heaven as after the Krishna crisis (2006), commercial banks in the country were slightly reluctant to lend to them.

If it takes two to tango, the offspring was the AP crisis! Once PE and VC investors burst into the scene, the MFI promoters found themselves no more in complete control of their companies. The Akulas and Mahajans became more and more the front of their companies. It was these investor stakeholders with no social equity commitment that literally slave drove these MFIs to achieve stupendous growth targets through charging usurious interest rates, multiple lending to already overburdened customers instead of seeking new ones and coercive recovery practices.

The fact is that while the normal portfolio investments of PEs and VCs gave them hardly 20% return, it was the micro-finance sector in India that gave them mind boggling returns between 50-500%. So no wonder  the sector became the "preferred sub-sector of choice in the financial sector for investment bankers” as accurately observed by N Srinivasan (Author of The State of The Sector Report). This situation perhaps prompted Xavier Reille of CGAP in his paper Are MFIs in India overvalued?, to comment:

“Overvaluation might be driven by excess capital flows.  A significant share of equity investment in India comes from investors whose objective is to realize profits by floating or otherwise exiting their investments in a relatively short time frame. In many cases in the past this type of capital has produced overvaluation of equity prices in the short term and disappointment in the long term. After all, India is the only microfinance market that has attracted large private equity funds.”

So when the Akulas (SKS) and Mahajans (BASIX) blame rogue MFIs for the AP crisis, to use the old adage, they are probably the wolves in sheep clothing. It is these six for-profit MFI biggies that look most plausible to be the rogues than the rest of the industry. Put another way, it is most likely for the misdeeds of these six biggies that the entire MF industry now faces a sectoral backlash that threatens their very existence.

In terms of lobbying, MF sector apparently found only support from Montek Singh Ahluwalia, Deputy Chairman of Planning Commission. According to a WSJ-Livemint report, Montek wrote to the Prime Minister Manmohan Singh and sought intervention of the Reserve Bank of India (RBI) to save the microfinance sector in Andhra Pradesh from falling apart. Commenting on the microfinance ordinance Ahluwalia said, “If implemented as it stands, it will lead to the collapse of the MFI sector”.

But Montek’s clout within the government and the ruling Congress Party is extremely low and latter is more likely to listen to the likes of YV Reddy, ex-RBI Governor. Y V Reddy likened MFIs to moneylenders, stating that most MFIs are either registered or unregistered NBFCs, he said they are following a flawed business model by lending to consumption-related spends. YV Reddy called for the total recast of the industry.

Meanwhile, in his latest book Fault Lines: How Hidden Fractures Still Threaten the World Economy, Raghuram Rajan, former chief economist of the International Monetary Fund and an economic adviser to India’s Prime Minister, said, “Although microcredit has a promise on a small scale, history suggests that when scaled up, and especially when used as an instrument of government policy, it will likely create significant problems.” So Raghuram Rajan, another influential economic adviser to the government takes a more neutral stance.

The fact that the ruling Congress high command permitted their state unit to introduce the Andhra Pradesh Micro-Finance Bill is an indication which way the wind is blowing. It does suggest that the Central Government is in the mood of “recasting” the micro-finance industry, suggesting the YV Reddy line has prevailed.  The RBI had in fact finalised in a July-August report, which recommended withdrawal of priority sector status to microfinance institutions (MFIs) for public sector bank loans. But before the regulator could act on the report, the sector was mired in crisis. Meanwhile RBI appears also concerned about PE funds investing in Microfinance Companies.

“RBI officials told CNBC-TV18 in an interview that they are yet to take a view on how to treat private equity investments in Microfinance Institutions. For decades microfinance in India was always seen as a not for profit function with a social purpose  but this has changed drastically in the last few years with many foreign based private equity funds pouring money into this sector. The central bank has said it views microfinance as a key part of its drive for financial inclusion, and clarified that while it was not contemplating a cap on interest rates charged by microfinance institutions (MFIs), there was a need to regulate the rates.”

Recast is simply a euphemism for the restructure of the industry. Winds of change that are blowing suggest that future policy environment would castrate the growth of the for-profit MFIs, particular the six biggies by depriving them of priority lending status; clamp down on PE investments in the sector and control of interest rates indirectly by  leveraging the power of discretion in sanctioning credit to the sector. At the same time, government policy would focus to reduce MFI strategic significance in promotion of financial inclusion by expanding bank coverage, giving a fillip to SHG-Bank linkages by NGO or government initiatives and encouraging public sector banks to directly enter micro-finance activities.

SKS Micro-Finance Drifting into a firm Bear Grip

As expected, bears hammered the SKS script from Rs 992 levels at the start of the week to Rs 919.85 closing this week. When we started this campaign, SKS traded around the Rs 1010 range. Accordingly, if 100 SKS shares were sold at the time of our first posting, this would have realized a profit of a cool Rs 90,000 by now. 

Technicals however show a mixed signal, suggesting that the script maybe range bound in price movement this week. However, being a new script with little price movement history, reading too much into technicals may not be advisable. Last Monday and Thursday saw bulls trying to break out on double the daily average volumes. Despite this, if SKS entered up losing over net 7% during the week indicates huge selling pressure, suggesting the share increasingly falling under a firm bear’s grip. The very fact that the bull charge was not sustained uniformly throughout the week is perhaps yet another indicator  - bulls left to marshal their resources for a charge in sporadic spells. 

Bulls perhaps realize that they are badly trapped in this script and hoping to exit at higher levels. However, from Rs 910 downwards, we are entering the first of the series stop loss zones. Accordingly, bear’s are in with an opportunity this week to create panic selling that could see high volumes. As and when these stop loss points are triggered, we could witness a blood bath for bulls. The flow of bad news doesn’t seem to stop for micro-finance companies, This not only put a big question on their future earnings but also financial solvency as a going business.  

The latest news flows are as follows:

1.  Micro-finance companies, including SKS are running scared, so much that they have closed down their websites. Official website of one of the largest microfinance institution in India, Spandana Spoorthy Financial Limited has been “out of order”  for the last few weeks. The website of Share Microfin Limited was also ”down” this week. Both these institutions are based out of the Indian state of Andhra Pradesh, which has come under severe stress since the issue of microfinance ordinance, by the state government. The official website of SKS Society, a sister concern of SKS Micro-finance, was also hacked prior to its initial public offering in the month of April this year. (Read more here) 

2.  SKS Micro-finance is playing down its identity and going into preservation mode. At its modest office in a residential colony in Warangal district, India’s largest microfinance company has taken down its board. At its head office in upmarket Begumpet in Hyderabad, it hung a cloth mesh in front of its plush, six-storey glass building, ostensibly to protect it from the public ire over suicides. (Read more here)

3.  TV5 News a regional Telugu news channel has broadcast a news report yesterday alleging that more microfinance clients have committed suicides and that the ordinance has been ineffective in reigning in micro finance institutions. (Read more here). This may provoke the High Court to be less lenient towards the stay plea of MFIs against the Andhra Ordinance. Even worse, as long as Telegu TV and print media keep the focus on suicides and MFIs, repayment prospects of loans will suffer. As this situation extends weeks and month, it can lead to cash flow problems that could lead to MFIs being unable to pay staff salaries and layoffs, which in turn can accentuate collection of loan amounts.

4.  For the first time, Naxals have thrown their hats into the ring and kidnapped field staff of micro-finance companies. (Read more here). From now on micro-finance tycoons like Vikram Akula (SKS), Uday Kumar (Share) comes immediately under the radar of Naxals and we could expect from now on see their likes moving with AK47 armed security cordon. It would be sensational if Naxals manage to kidnap one of these MFI tycoons and in Al Qaeda style make them confess their crimes against public on tape. Vikram Akula in his book Fistful of Rice had admitted that he faced death threats from Naxals. Accordingly, the Naxal threat is no empty threat to be taken lightly and as long as it persists, MFI staff will be hesitant to visit villages and use strong arm tactics that affect loan repayment again. 

5.  The Microfinance Institutions Network, a self-regulatory body of a clutch of 44 NBFC MFIs, has asked Rs 1,000 crore in the form of business continuity facility, a euphemism for emergency money, to ensure survival. Rumours are circulating that some MFIs are so cash strapped that they soon would not be able to pay staff. (Read more here).This news in particular can’t be good for bulls. Even if a tier-III MFI files for bankruptcy, the news can trigger bear hammering of SKS script to Rs 300 levels. MFIN said liquidity with MFIs had almost dried up, with collections during the past month having fallen a dramatic 50-90 per cent. MFIN felt this could be addressed if banks set up a Rs 1,000-crore liquidity easing channel. "Obviously, banks will price their loans based on the risk assessment," said Alok Prasad, chief executive officer of MFIN. He said an increase in bank rates would put a spanner in the plans of MFIs to reduce rates for borrowers. MFIs also seem wary of approaching the banks for new loans. "There are no requests for new loans from the MFIs," said the managing director of State Bank of Hyderabad, Renu Challu. No new microfinance loans were being given in Andhra Pradesh, which accounts for a third of the total outstanding of about Rs 30,000 crore. Read more here. Pinched by bank funding drying up, leading microfinance firm Basix has cut its advances to a third in the past month. In the past month, Basix has disbursed only Rs 100 crore against the up to Rs 300 crore it would have otherwise done. Read more here.

6.  The State government’s decision to review the operations of micro finance institutions has opened quite a can of worms as it exposed them, including SKS of charging usurious rates.  Contrary to what MFIs say, they are in fact charging very high interest. Most companies impose an interest rate of 30 per cent on a population that is largely poor. Countering criticism of their high interest rates, MFIs had claimed that the interest was 24 per cent, but the affidavits they have had to provide at the time of registration have exposed this as a lie. Interest rates are as high as 36 per cent and more. (Read more here). 

7.  The Micro-finance Bill, which was ready, is now to be re-formulated again, taking into account the recent developments in Andhra Pradesh. Within the Congress, there is a strong move to cut MFIs to size and instead promote NGO-SHG-bank linkage as the flagship development programme of UPA II (NREGA being the flagship development programme of UPA I). If this is accompanied by the withdrawal of priority lending status to MFIs, this will sound the death bells for MFIs in this country. 

To what extent MFIs are pushed to the walls is indicated by the fact that these MFIs are registering themselves in the districts despite their public opposition to the Andhra Ordinance.  The ordinance issued by the AP government halted all MFI operations until they register with the district authorities. In our archive post, Vijay Mahajan, the high priest of micro-finance admitted that days of business as usual is over and the need for MFIs to adopt a new business model if they want to exist. Read more here  

UPDATE: 18/11: JP MORGAN OUTLOOK

• We believe that the headwinds for SKS and the MFI industry are still not over – we cut our estimates by ~25-35% for FY11-13 and reduce our PT by 30% to Rs 700. The stock is still expensive at 1yr fwd PB of 2.6x, and we think the issues with the sector are quite deep. Despite Tuesday`s 12% correction and the possibility of a technical bounce notwithstanding, we maintain our (still) contrarian UW, and don’t believe that it’s too late to exit the stock.

• Deep earnings cut, by 25-35%. Our key earnings changes capture the AP situation on multiple fronts: a) a drying up of disbursements in the state b) margin pressures from rising fund costs, lower yields and negligible securitization, c) higher credit costs from one-time losses in AP and d) lower opex as we see inevitable cost cutting in AP.

• Non-AP issues still not significant. We have not captured any issues outside AP. Media reports (ET, 14 Nov) suggest that MFIs are cutting rates in West Bengal (SKS’ second biggest state), but we think it’s a bit early to start capturing that in our earnings. Government intervention in states outside AP, however, remains a risk to our earnings forecasts.

• Too early to write off business model. The microfinance business model is being challenged in public debates on multiple fronts – efficacy in poverty alleviation, impact of high interest rates on borrowers, existence of over-leverage among borrowers, to name a few. We think MFIs could continue to exist, and profitably so, though aggressive overregulation is a risk to that assumption.

• Cut TP, retain UW, still too expensive. Our new Dec-11 PT (Sep-11 earlier) share is based on a 3-stage Gordon Growth Model and implies a PT of Rs700 vs Rs1000 earlier. We think SKS is still very expensive at 2.6x 1-yr fwd PB–we think the risk reward still favours the private banks given better scalability and earnings visibility. Maintain UW. 

Key risks: Court ruling against AP ordinance (it’s still in court) or that AP ordinance does not convert into law from Centre.

Centre.

For Micro-Finance survival, they need to muzzle their Spin Doctors and listen more to their High Priest

 

 Spin-doctor, a expression that became a part of our lexicon in the 1980s,  is commonly used to describe PR experts as well as political or corporate representatives whose job it is to put a 'positive spin' on events or situations. Sometimes companies give them a more sophisticated designation - image transformation strategists that are often synonymous with re-branding functions. Described often as Goebbels children, they are adept at the art of controlling the direction of an event or issue through which they cherry pick sides of it they want to show while not shedding light on the rest. In practical terms, spin is manifested as dissimulation, lying, deceiving, vexing and confounding with the intention of deflecting attention, foiling or pre-emptive blocking.

A string of suicides in Andhra Pradesh that put micro-finance under the spotlight, triggered a backlash because of which, MFIs found themselves reduced to fighting for their basic survival. No surprise here to find a variety of spin-doctors functioning as their apologists, fending off and neutralising any criticism that the industry faces currently, almost oblivion to the fact their support is to a slow sinking Titanic. Two of the industry’s most high profiled spin-doctors are Vineet Rai and Sasi Thumulurai. This is how they profile themselves as authors of their articles:

Vineet Rai,  Founder and Chairman of Intellecap.  He is also founder of Aavishkaar, an investor in commercially viable enterprises that also have a social impact, which recently won a G20 award.

Sasi Thumuluri, employed with Habitat for Humanity International as Global Business Strategy Manager, based in Washington DC. He is microfinance professional with over a decade of experience in India and abroad. He follows the sector and keeps particular interest in India story. He is also a director of Trident Micro-finance. He has studied the business of microfinance in over 30 countries and has a good grasp of its details.

Two of the most significant spins in this debate are those related to suicides and interest rate. In this post, we bust these spins.

SUICIDES

Vineet Rai (Read more here) 

“How come farmers in Vidharbha were committing suicide when no Microfinance was taking place? Or why do people who have no debt commit suicide (10.8 Indians per lakh )...The government has complained that too many poor borrowers find themselves subject to coercive collection practices by MFIs. It knows that its SHG members sometimes "double-dip" by taking on additional loans from the commercial lenders, and it sees that they tend to repay MFIs faster. However, there are explanations other than coercion that might explain that. MFI loans are more expensive than SHG loans, so a customer with two loans outstanding might reasonably choose to repay the MFI loan first.”

 Sasi Thumuluri (Read more here, here & here)

“True, it is not possible to judge from here the merits of the links between microfinance and reported suicide cases. One simple thought – how can 30-40 people from 30-40 completely distinct locations take such an extreme step all at once in a span of 2-3 weeks when everything seems fine since last 15 years that microfinance existed in the state and more of the same practices and competition existed for more than 3 years now?

It is hard to fathom how these organizations might have turned into goons and killers overnight! Media and politics are traditionally linked in India, so does in many countries, and it is not surprising that both sing the same song around such monsoon weddings!”

“It is hard to believe that someone would end his/her life for less than Rs. 100 ($2). Even for someone with 5 loans of similar nature total interest obligation does not seem worth one’s life......It is certainly plausible though that some of the bereaved families have borrowed large sums from informal sources too and the total obligation of payments exceeded their capacity.

Most MFIs conduct business with groups of women who meet in weekly intervals for making repayments and applying for new loans. Such meetings are usually held in open places in the presence of 20-40 women, and often men and children watch over. In a scenario like this the scope for applying strong-arm tactics seems like a remote possibility. As noted above since many households in the state have access to about 2 or more MFIs it is unlikely that a client would put up with any such coercive actions exhibited of an “x” MFI, nor could “x” MFI resort to such practices openly, else they lose business to competition. So, it sounds like a distant likelihood that anyone would have to resort to suicide as a respite from MFIs. In rare occasions though peer pressure could lead to someone resorting to such extreme end.”

“While it is difficult to pin-point how much of this is the result of MFIs’ own doing, one would be tempted to wonder at this juncture – what exactly is the purpose of MFIN’s and Sa-Dhan’s being? ...Why has there been no representation from these bodies with the government of AP to present its side of the story before such a harsh action was taken? Why did no one come out to challenge the allegations and protect the sector?"

From these extracts, it is obvious both Vineet and Sasi admit the reality that often the poor borrow from multiple sources exceeding their repayment capacity. The Centre for Micro Finance at IFMR Research, with funding from the Banker’s Institute for Rural Development at NABARD, conducted a household survey of 1,920 households in rural Andhra Pradesh to understand their access to and use of financial services. They found 28% of households with an MFI loan outstanding had multiple MFI loans outstanding, and 82% had at least one more loan from a formal source.

Vineet goes on to acknowledge that these borrowers tend to repay MFIs faster but rules out coercion as a reason for this by rather cleverly floating the argument that there could be other explanations such as the interest rates of MFI being more expensive and as such these loans accorded more priority by borrowers. But the problem with this type of argument is that if  there is  good reason to suspect over-indebtedness exists and it is getting worse, and that sufficient client protection are not in place, logically we would have expected plausibility of MFI coercive pressure to be rather high. Dr. M S Sriram, perhaps one of the best known researchers of this industry confirms this may be the case when in an article in May 5 2010 prophetically warns:

“Is there a bubble being created? Are most microfinance institutions chasing the same customer? Are we pushing the customer — the poor woman — into a debt trap? Would this lead to suicides? We have to realise that these are not issues of today, but issues of yore.”

Vineet’s strategy may appear equally clever when he asks, “How come farmers in Vidharbha were committing suicide when no Microfinance was taking place? Or why do people who have no debt commit suicide (10.8 Indians per lakh)”

But the fact is that though the country have witnessed before farmer suicides as in Vidharbha, this time it appears  that it is by mostly by traders and women, the primary target of MFIs, that makes the latter the natural suspects.

With such overwhelming high plausibility, why would the likes of Vineet and Sasi still pursue their line of spin denying suicides? We need to know their background to know where they are coming from.

Vineet's company Aishkaar’s microfinance fund has investments in five MFIs, of which Chennai-based Equitas Microfinance earned it an IRR (internal rate of return) of 160 per cent on exit this September! Sasi belongs to and have financial interests in the MF industry.

Obviously, their intent is just to cast enough doubts to make the claim of MFI induced suicides appear less credible. The micro-finance industry grew at a tremendous rate on the back of their carefully crafted image as Messiahs of the Poor. Take this away and gone is their growth, and the industry reduced to fighting for their basic existence, as they are at present.

Sasi on the other hand, incredibly tries to create an impression that it is as if it the first time the  micro-finance industry faces such charges of inducing suicides. Incredible because he profiles himself as one who follows the sector, keeps particular interest in the India story, a director of Trident Micro-finance that operates in India and having a good grasp of its details. However, that’s exactly what he does.With such a profile, can Sasi actually feign ignorance about Krishna (Andhra Pradesh), Nizamabad (Andhra Pradesh), Kolar (Karnataka) and Idukki (Kerala)? These crises signaled that everything is not well with the models pursued by MFIs in the country.

Apparently,  Sasi pretends ignorance of  the APMAS document - Voice of People on the Lending Practices of Microfinance Institutions of Krishna and Guntur Districts of Andhra Pradesh that firmly indicts microfinance institutions in a series of charges, including inducing suicides. Read more here. Various Telugu daily newspapers and electronic media have in the past several years, highlighted the negative implications of MFIs, including the suicides they induce.  A few months back the NDTV showed news clipping of the cremation of a farmer who committed suicide unable to stand the continuous harassment at the hands of micro-finance goons. NDTV had carried a Bhubaneshwar dateline story on March 19, 2010, "Orissa: Loan driving farmers to suicides". The report reported:

"In 2009, 43 farmers in Orissa committed suicide. It was a year that saw a massive farm loan waiver by the UPA government and also a record investment of over Rs 1400 crore in farm credit by the state government. But they were all small farmers who couldn't access institutional loan and had to borrow from microfinance NGOs at an exorbitant rate of interest. Many, even the state government, suspect it's this exploitative loan network that may have driven loan farmers to commit suicide.” 

 

The allegation of media-political conspiracy by Sasi is simply yet another example of a well thought rhetorical tactic of diverting attention away from the embarrassing association of MFIs to suicides. Why is it a red herring? Politicians instinctively can sense public mood and this is the reason why across the political spectrum there exists a consensus that MFIs need to be reined in. If media such as Wall Street Journal, CNN-IBN, TimesNow etc have reversed their perception of MFIs it is because they have done their own investigations. If they are giving increasing coverage space, it is because of their practice of a recursive feedback loop i.e. if a story gets traction it produces more stories that in turn drive more traction.

The State Human Rights Commission is shortly expected to publish its reports and many NGO and human rights activists are trying to investigate these suicides. As and when these are published, there would be more embarrassment for the MFI industry. The Gender Unit of SERP (Society for Elimination of Rural Poverty) has already come out with a report listing the victims of microfinance institutions in Andhra Pradesh. Out of the 123 alleged cases of harassment that the report lists out, there are 54 death cases. Read more here.  And as for Sasi's puzzled indignation on why MF’s association such as MFIN and Sa-Dhan’s were muted in their defence of the industry, it is most probably that they saw no purpose to defend the indefensible. The knowledge of MFI suicides is common knowledge to all those who follow Andhra development.

[Note at the time of writing, Channel 9 broke the news that MFI suicides are continuing and that the Naxalites have joined the backlash against MFIs by kidnapping their field staff.]

INTEREST RATES

Vineet Rai (Read more here)

 “When we discuss profits in micro-finance it seems to me that making profits is very easy - "Charge interest and make profits".  Here are some facts that may clear that myth – The ROE for SKS was negative till 3 years back ( after 8 year of Operations) and Basix ROE was sub 10% till two years back. Most other MFI use to dream of breaking even.... The margin between all costs and defaults and lending cost is such that bottom line would continue to increase ... initially faster compared to the asset growth (efficiency of scale) and over time in line with asset growth. Final interest would come down ( as has happened but the investors coming late is assuming that the company is large enough and safe enough to give me a lower but safe return)”.

 

The table providing the RoE of various micro-finance institutions in the country illustrates why microfinance is the envy of commercial banks and the reason more and more players are rushing into the sector just as bees are attracted to honey. It also clearly illustrates why Vineet may not be telling us the whole story. It is left to Vijay Mahajan, described as the father of micro-finance in India, to complete the story as he did in an interview to Forbes:

 “It is largely due to exuberant growth with exorbitant profits and no reduction of interest rates that regulators and society [are] taking such an adverse view of this sector. All these years, we have told everyone that as we cut costs through scale and efficiency, we will pass on the benefits to the consumers. The regulators tolerated our interest rates on that promise. We let them down because we did the first, but we’re not doing the latter. Instead we have made extra normal profits."

Sasi Thumuluri (Read more here)

“The truth is MFIs do charge higher rates than banks and very few, if any, charge more than 36%, all inclusive...Now, let us assume that MFIs reduce the interest rates to 7.5% flat (half of the original rate) which translates into approx. 15% effective rate, close to commercial bank lending rates. The interest obligation ends up to be Rs. 62.5 ($1.25) per month or Rs. 15 ($0.38) per week. So, it sounds like the argument is essentially about the difference of Rs. 62.5 ($1.25) per month or Rs. 15 ($0.38) per week per average MFI loan. It is hard to believe that someone would end his/her life for less than Rs. 100 ($2). Even for someone with 5 loans of similar nature total interest obligation does not seem worth one’s life. Based on this logic the real problem seems to lie somewhere else, certainly not in interest rates per se."

The State Review of MFIs makes nonsense of Sasi’s spin of interest rates as reported by Deccan Chronicle on the basis of individual MFI affidavits filed with the government:

“L&T has given loans to 5,903 people in Adilabad district to the tune of Rs 185.10 crore, at an interest rate of 59.53 per cent. Spandana lent Rs 50.30 crore in Anantapur district with an interest rate of 31 to 34.42 per cent and Fulltron charged 36 per cent interest. The MFI giant, SKS, is still charging 31 per cent interest on old loans while it has reduced it by two per cent for new loans. In East Godavari, the Mahila Adarsh Seva Society charged 38 per cent and GP Mass Finance Ltd. also charged 38 per cent interest on loans. In Kadapa, Trident Microfin and Bharathiya Samudradhi Finance charged 32 per cent interest, and Share Microfin charged 30 per cent. Basix charged 34.40 per cent interest on Rs 31.66 crore worth of loans that it disbursed.

There are so many variations in the interest collected by the MFIs. There is no uniformity, said Mr R. Subramanyam, principal secretary, rural development department. Insurance premium, processing charges and administrative charges are added on to the cost of the original loan and in some cases these additions make up 20 to 30 per cent of the loan. ...When borrowers fail to pay one EMI, the additional interest is calculated at double or triple the interest rate. The interest continues to remain the same until the principal amount is paid off. More often than not, the final interest rate works to nearly 50 per cent”

Interest rates accordingly could be actually anywhere between 50-100% or more and not as Sasi painted at a benign 15% effective rate. The Indian Express in their article, "Andhra’s Small Debt Trap"  further makes mincemeat of Sasi’s claim that even a five-loan interest obligation seems illogical for borrower’s to end their lives through publishing an investigative case study. Extracts of this are provided below: 

“On October 4, unable to pay back the five loans she had taken, 23-year-old Bandaru Padma jumped into the village well along with her two children. The total outstanding against her name was Rs 79,000. She had taken loans from Share Microfin, Spandana, SKS, Basix and L&T,” says Padma's father Balaiya. But none of the villagers knew of the interest they were being charged. 

All I know is I have to pay a weekly amount of Rs 250 for 50 weeks on a loan of Rs 10,000, says Satyamma. She’s not sure which MFI she has borrowed from.  Villagers say they have been hit by a series of crop failures since 2001 and so took loans from the MFIs since their procedures are easier than those of other agencies. Of the 150 families in the village, 147 have taken loans. What’s surprising is that all these 147 families have taken multiple loans—six or seven from four or five MFIs. The small Chennaipally village now faces a debt of over Rs 40 lakh.  

We have had SHGs in the village for several years now and it started with simple chit funds. Then people from SKS Micro-finance came and offered us loans of Rs 5,000. All we had to do was furnish a photocopy of our ration card. Even before that loan was cleared, Share Microfin MFI came and offered Rs 10,000 as loan. They were followed by L&T, Spandana Sphoorti and Basix. Within a year or two, all the 147 families had taken multiple loans amounting to nearly Rs 1 lakh or more says village sarpanch Siddhiramulu. A majority of the villagers took the second loan from the same MFI to clear the first loan and make a few household purchases. Then they took the third loan from another MFI to clear the second loan”

To make their arguments look superficially convincing, spin-doctors like Sasi, to buttress their case, accordingly take to logical simplification in order to prevent understanding of the actual ground situation complexity. The excellent blog posting “Andhra Pradesh’s Animal Farm: Debt traps, life insurance and death bonuses” provides a list of factors for the poor falling into microfinance debt traps, that makes it evident that the issue is not as simple as the industry’s spin doctors like to portray: 

• Prior indebtedness: if the poor are already in debt before they come to an MFI, which is likely, the new loan will be an additional burden unless interest rates are sufficiently low (which in AP they weren’t).
• Business failure: (assuming a client actually use their MFI loan for business purposes) micro businesses fail regularly. MFIs’ clients operate in highly volatile economic environments, which are usually already saturated at the lower end, creating a high risk of entrepreneurial failure and thus deeper debt.
• Consumption borrowing needs borrowing: some borrowers make unwise decisions, but many are so poor that they must use loan funds to cover the costs of immediate survival needs, such as rent, food or medical assistance. The interest paid on their loan can effectively increase the cost of those bills by 1.5 to 2 or more. 
• Unsustainable, excessive or dishonest interest rates – there comes a point where, no matter how profitably a loan is used, the interest becomes too large to be covered by business proceeds; lower rates would mean more profits retained by the poor and less debt burden. High rates may be “sustainable” for MFIs but unsustainable for borrowers. Additionally, MFIs often hide the real interest cost by quoting flat interest rates or charging hidden fees (see Times of India on this).
• Graduated lending: offering a larger loan to a borrower at the end of a completed loan cycle is not bad per se. But in many cases MFIs require borrowers to take larger loans, leaving the poor with the only choice of taking on greater debt or exiting the programme.
• Skewed repayment cycles: in some cases, MFIs such as Grameen operate repayment modalities for their loans, which require large lump-sum payments (for instance loan fees) at the end of the loan cycle. This creates a bottleneck in borrowers’ finances, which often leads them to borrow at higher interest rates from other sources and use the next MFI loan to repay the temporary loan, which in turn must be repaid with fees, and so on.
• Multiple borrowing and multiple lending: most overindebted poor are indebted to more than one creditor and must balance the repayments to all creditors. While a client may be ‘performing’ well on one loan, she or he may be in arrears on another, making her or him subject to higher interest rates as a punishment and harassment from that lender’s agents.

WHIFF OF FRESH AIR: HONESTY AND PRAGMATISM BY THE HIGH PRIEST OF MFI

"I believe in Schumpeterian creative destruction. Its time has come. The present MFI model has to go.... It wasn't just about giving loans. It was also about creating livelihood mechanisms, which would build capacity among the poor to repay their loans easily, and leave them better off than before" 

This is Economic Times quoting Vijay Mahajan, considered the high priest of Indian microfinance. The paper noted that this statement was ironic for a man also presiding over the Micro-finance Institutions Network (MFIN), an industry coalition, and is currently engaged in dousing the fire in Indian microfinance - cajoling bankers, assuaging governments, building confidence and seeking a shift in stratagems.  The article continues:

“The starting point of the Basix model is risk-mitigation. The usual risk-mitigation tools aren't accessible to the poor," explains Mohammed Riaz, head of the north Indian operations of Basix. Breadwinners of the family or cattle die. Crops fail. Nature ravages. Sickness debilitates. One stray incident can wipe out the net worth of a family.

Basix, along with insurer Aviva, pioneered micro-insurance in India, in 2002. Riaz, an old Aviva hand, joined Basix three months ago. Basix has also implemented the complex weather index-based crop insurance, in which claims are triggered by an adverse weather event and settled over a geographic area. Today, over 3.5 million of Basix customers hold policies covering life, health, crop and livestock, among others. The livelihood triad, therefore, engenders a type of engagement that builds skills and capacities of individual households. It also strengthens entire communities, rural or urban, through institution and local infrastructure building.”

Support for the Mahajan line for the re-structure of the industry according to Economic Times struck a chord at a recent Mumbai conclave of MFI practitioners. The paper quoted Sundara Rao, country head of Oiko Credit, a global microfinance fund:

“In the next decade, tier-II and tier-III MFIs will have to focus on livelihood mechanisms and then weave microfinance around it”

It is significant that Sundara Rao confines expectations of such a restructure to only tier-II and tier-III MFIs, suggesting perhaps the Mahajan line lacks support of tier-I MFIs. But for these MFIs looking for a new growth path, they have the advantage of looking to a readymade model in Basix, a tier-I MFI:

“The triad rationale: microcredit by itself is of use only to the more enterprising of the poor and to those who live in areas that have a certain threshold of economic activity. For the less enterprising, they have to first learn to cope with risks, through savings, insurance and acquisition of skills. In backward areas, the poor require considerable handholding: input supply, training, technical support, market linkages. Services like Ag/LEDS cannot be delivered to individuals, which mean the people Basix works with have to necessarily coalesce into informal or formal groups, cooperatives, or producer companies. 

The formation and nurturing of such groups require IDS. Basix, therefore, through a bouquet of companies - Bhartiya Samrudhi Finance, the Krishna Bhima Samrudhi Local Area Bank, Indian Grameen Services, the Livelihood School, and the Basix Academy for Building Lifelong Employability (B-ABLE ) - has evolved an entire livelihood ecosystem in its areas of operation. Though rooted in microfinance, it is a completely different play from the neighbourhood MFI.”

Though the Basix model may not be exactly an embodiment of perfection, it is apparently the best that we have and presents a foundation, which could be further build upon. It is a break away from micro lending extended as a standalone function but returns to the appreciation that micro lending is just one mechanism in the toolkit of global poverty alleviation. More significantly, if such a restructure happens, it would signal the return of micro-finance operations with a soul. It’s only with a soul that micro lending can make life easier for the poor. Without it, it becomes a curse for the poor as we are seeing today. For all this to happen, the MFI industry needs to muzzle their spin-doctors and listen to their high priest.

Backlash of Andhra Suicide spreads: Now Bangladesh Caps Micro-credit Interest rates

Dhaka-Micro-finance lending pioneer Bangladesh plans to cap the industry's interest rates amid criticism that for-profit groups are demanding excessive payments from poor borrowers, an official said Tuesday.

Muhammad Yunus, who created the microfinance concept and built up specialist lender Grameen Bank, won a Nobel prize for his work but the sector has since grown into an unregulated, multi-billion-dollar commercial industry. The government's Micro-credit Regulatory Authority (MRA) has approved new rules banning microfinance lenders from charging more than 27 percent interest on loans, MRA director Sazzad Hossain said.

"Many micro-lenders have earned a bad name for charging high interest rates. There are also isolated incidents in which lenders have used force to compel borrowers to repay loans," Hossain told AFP. One out of every five of Bangladesh's 146 million citizens is a micro-credit borrower, relying on one of more than 1,200 micro-finance institutions whose interest rates vary from 20 percent to 51 percent, according to the MRA.

"We oppose the interest rate cap. It will be hard for micro-lenders to stay afloat charging just 27 percent interest," said Mosharraf Hossain, head of the Credit Development Forum, a microfinance industry association. Hossain said local microfinance institutions have high costs as many borrow money from private banks at around 13 percent interest, then lend the money on, adding that there are extra costs when operating in remote, rural areas. "We also write off huge amount of loans during natural disasters such as cyclones, floods," he said, warning that if the sector collapsed due to caps on interest rates, it would hit the poor hardest.

The MRA move comes after India's Andhra Pradesh state, the hub of Indian small loan activity, cracked down on micro-financiers following accusations that high interest rates and aggressive debt collectors had led to over 30 suicides. Bangladesh's new regulations, to come into force in July 2011, also ban unofficial deductions by lenders for so-called saving schemes, limit charges for administration fees and set a 15-day mandatory grace period for repayment.

Courtesy Bangladesh-web.com

 Courtesy Bangladesh-web.com

Micro-Finance To Face Slow Painful Death. SKS Share to enter Free Fall. Sell, Sell, Sell!

SKS, the Indian micro-finance giant’s IPO was supposed to signal the coming of age of  micro-finance (MF). Instead, it contained the seed for the destruction of the entire industry. Their Rs 10 share on listing attracted a premium of Rs 975 and such was the investor confidence, it touched a high of Rs 1,490 in a matter of days.

Then hell broke loose with the industry hit by charges of them profiteering and causing farmer suicides. Its reverberations were so strong that it had been felt by the industry all over the world. The stock plunged to Rs 890 before recovering to be a tad over its listing price and hovering around this range for the last one week.

Much water has flown under the bridge since. The script is presently very weak both technically and fundamentally.

Technicals

 

The upper chart illustrates that the predominant trend is steeply down and the probability of the share crossing Rs 1,000 again is likely to be nil. The lower chart compares SKS price movement with those of the Mumbai Sensex. Even when the Sensex trend shows a firmly bullish trend, those of the SKS script is clearly moving in the reverse direction. Both charts show a classical bearish pattern of the SKS share. So bearish, that even when penny stocks gained during the Diwali trading session, SKS still ended up in the negative. Candlestick analysis has similarly given a clear bearish confirmation and all technical indicators give a sell signal.

Since it’s a new stock without a price history, it is difficult to guess what its next support level is. Its historic low is Rs 890 though this cannot be considered a firm support level since the script was hammered there from levels of 1,490, its historic high, a fall of 33%.  By then bears made a killing and covered their shorts as the market tentatively greeted favourably SKS decision to cut back their peak interest rates by 2% and with Narayana Murthy, founder of Infosys, rushing for a hastily convened Board Meeting to firefight the situation. As on 5th November, SKS closed at Rs 992, giving it a P/E of 36.8. Trading volumes have become thin and therefore not a reliable indicator of its actual value.

 

As seen from the table, SKS has been steadily losing its value over the last one month after the MFI was tainted with allegations of being linked to borrower suicides and problems related to governance became public. During the last week, it began to move increasingly within a narrow band and we should be expecting a swift and sharp downward breakout very shortly.

So what could be its next price support level? An informed guess could be Rs 637 - the price Vikram Akula sold part of his holdings to Tree Line Asia, the Singapore Hedge Fund. Assuming annualised earnings per share (EPS) of 30 on an expanded equity base and price-earnings ratio of 20, this places the share value around Rs 600. So most probably, it is within the range Rs 600-630 which the script is most likely to move next. But depending on the import and quantum of bad news flow, even this support level may look very weak.

While there is no disagreement that the script is a bear’s delight, what queers the pitch is the falling volume, which limits freedom to exit.  In the last trading session, just 12,527 shares changed hands, mostly delivery selling. This is just 4% of the 28,738,066 shares with non-institutional shareholding of SKS and a fraction of 1% of total shareholding.  Compare this figure with the brisk trading of  the share in its first hour of trade - 97.71 lakh shares or approximately 58% of the IPO size has been traded! That's how illiquid level it has fallen.

From its listed price of Rs 985, the share skyrocketed 1,490 on large volumes suggesting retail investors who bought the share post listing are sitting tight with huge losses and haven’t made up their mind yet whether they want to dump it or wait for a miracle trend reversal giving them an exit opportunity to avoid losses.

But as MF industry stumbles from one crisis to another, almost everybody would have by now reconciled to the fact they are holding on to a dud share. Now, if they are not allowed to exit, then investor anger builds up. This does not augur well for any future IPOs that the industry plans to follow. On the other hand, panic selling can open the floodgates and then we can see a free fall for the share.

 

Fundamentals

1.  Fund flow affected: Private equity firms feel that the flow of funds to the MF sector would be affected. Vikram Utamsingh, executive director & head of the private equity group at KPMG India, said private equity investors would be very wary about putting money in an industry where business ethics have been questioned. Read more here. 

2.  Poor Governance: Just 6 weeks after the successful debut, the man in charge, CEO & Managing Director Suresh Gurumani was given the boot by the company’s board. “I think we are seeing for the first time a listed company acting like a privately held fiefdom”.  Read more here. Gurumani went to court and got a stay, until an extra ordinary general body of shareholders ratifies the Board of Governor’s decision. Read more here. SKS is likely to announce this week the timing of this EGM. As and when this is held, this would be messy and dirty linen washed in public that further reinforce SKS poor governance public perception.

3.  Crisil to re-rate the sector downwards: "But the biggest micro-finance irony came from rating agencies like CRISIL, which informed the market that they are re-assessing the generous credit rating they had given to many MFIs. Though CRISIL, a Standard & Poor’s company, deserves some credit for always keeping some reservations about the socio-political risks the MFIs faced, the moot point is what kind of an expertise is involved in re-evaluating the ratings much after even the smallest investors have re-evaluated companies like SKS Microfinance. Now, the real paradox is whether Indian rating agencies themselves will get regulated and re-rated due to the MFI rating fiasco, much like how the US rating biggies like S&P, Moody’s, & Fitch came under scrutiny for indirectly causing the sub-prime housing finance crisis. The Indian agencies were already facing some potential regulatory heat before the MFI house of cards started tumbling." Read more here.

4.  Increased bureaucracy: Starting this week, Micro-finance Institutions (MFIs) in the state will be required to double check with this database and ensure that a potential borrower has repayment capability and does not get multiple loans. MFIs operating in other states will have to follow the database from January 1, according to the Microfinance Institutions Network (MFIN).  This increased bureaucracy practically cripples the growth rate of MFI.

5.  Ordinance: The Andhra Pradesh government has introduced a Bill making mandatory for MFIs to register before lending to borrowers. Alok Prasad, CEO, MFIN said, “The registration process was very onerous, that needs to be simplified and rather that doing it across each single district with the government authority it should be at the state capital level. It should not be on an annual basis and may be five years and a review after that. So firstly registration, second is vis-à-Vis the clients themselves where I think the government’s rules are very anti-client. For example repayments can happen only at the Gram Panchayat office which means the client has to walk long distance, loose whole day; wages may be in the process.” Read more here.

"While coercion will be a crime of sorts, leading to a punishment of up to three years, the MFIs will also have to disclose the interest collected to the authorities on a monthly basis. The government will also set up fast track courts to try the violations of the MFIs.  This means no more usurious rates and mega profits. Repayment rates will drastically come down, affecting net profits”. Read more here. A worse nightmare, the governments of Karnataka and Orissa have announced to bring similar bills and this is likely to tempt more state governments to follow suit. Read here and here. 

6.  Repayment Plunges: On an average, the Hyderabad-based SKS collects dues of Rs 28 crore a week, and around 38 per cent of its business comes from the State. The company could neither collect dues nor disburse new loans in some regions, as its employees were not allowed into the villages. Read here. To make things worse the festival season is typically the peak season for micro-finance institutions (MFIs), as people buys things ranging from new clothes to crackers and small-scale manufacturing and trading activities need greater cash flow. Because of all controversy, MFIs were not able to capitalize as they did in previous years. Read more here. This rings the death knell for the micro-finance industry, as it will make the recovery of tiny loans very difficult.

7.  Human Rights Commission probe: The police have booked at least 70 cases across the state against representatives or affiliates of micro finance institutions, hardly a week after promulgation of AP Micro Finance Institutions (Regulation of money lending) Ordinance, 2010.) Read here. The State Human Rights Commission, on Tuesday, issued notices to 4 District Collectors and Superintendents of Police, directing them to submit a comprehensive report on the exploitation and harassment of microfinance institutions in tribal areas. According to sources, the Commission, taking Suo Motu notice against the exploitation of tribals and farmers and luring them into taking loans at hefty interest rates, directed district Collectors Superintendents of Warangal, Anantapur, Karimnagar and Rangareddy to submit a comprehensive report on the affairs of microfinance institutions (MFIs). Read more here. . This report should be ready by this week and as and when it is released could be a trigger for panic selling.

8.  Competitive Political bashing: Not only the government but the main opposition party has joined in MF bashing. Chandra Babu Naidu, ex-chief minister said "Don't repay your loans till the interest rate is brought down to three percent as promised by the government. If MFI agents harass you for repayment, tie them up in a room and call the TDP workers for support," addressing a public meeting at Uppal. The growing public ire against the rising incidents of suicides saw offices of SKS Microfinance being targeted by irate groups across the state. Read more here.  As politicians in other states realise that MF bashing is a vote winner, Naidu’s antics can be expected to be replicated all over the country!

9.  Net Margins to Be Double Squeezed: First a Working Committee recommended exclusion of bank loans to NBFCs from the Priority Sector Lending (PSL) category and then the Financial Services Secretary wrote a letter to banks urging them to “ensure that the rates of interest charged by the MFI to eventual beneficiaries are at reasonable level, say around 22-24% per annum”. The latest in this chain has been the exclusion of the Non Banking Financial Companies (NBFCs) from the list of entities to be engaged as Business Correspondents by Banks and deprive them of priority lending status. Read here.

10.  SKS not to get banking license: One of the reasons why SKS attracted a whooping P/E was the expectation that it could get a banking license. The Finance Minister sprung a surprise in his Budget speech when he announced that RBI is contemplating issuing additional banking licenses to private sector players.  All 10 top MFIs were eyeing for this licenses. It makes perfect sense for a Micro-finance Institution (MFI) to take a plunge into full service banking as it reduces the cost of capital by half. Currently, a Micro-finance Company musters capital at a cost of 11-13 per cent, but once transformed to a bank the cost would substantially reduce to 7-8 per cent. But with this scandal exploding, this dream has gone up in flames Read here. 

 We further encourage readers to visit two excellent postings by the blog Finance Mortem. In a post dated 9th April 2010 titled “Commercially Yours, SKS Micro-finance IPO”  and 24 December 2009 titled "SKS Microfinance IPO: A Zealot’s Dilemma". This makes the following conclusions:

• That the IPO is priced undeservingly high.
• That book building process has been manipulated by finance sharks in the board of SKS  to jack up valuations.
• That Vikram Akula is just a fall guy in this whole controversy - A group of four PE investors of SKS, replaced Mr Vikram Akula (founder of SKS), as promoter of the firm (reported on 11th March, 2010).
• The IPO has been brought about at the behest of the PE investors of SKS as a major chunk of the issue proceed is used to give exit to the PE investors at inflated levels.
• The IPO merely provides an exit route to existing investors, then the entire process will be a shareholders’ re-organisation exercise rather than being an alternative and meaningful fund-raising activity.
• The Government and the Regulator are in the process of finalizing the regulatory guideline for the sector.
• Many social investors believe that it is a profiteering mentality to rush for an IPO before the regulations come into effect. The prudential practice would have been to first prove that the company and its business model can withstand the regulatory environment and then come up with an IPO. The sheer credibility that regulation brings in will attract more investors to the IPO.

VCircle blog in their post of 11th November 2008 interviewed Vikram Akula and this is what he said: "SKS has raised funds from Sequoia Capital, Vinod Khosla, Odyssey Capital, Silicon Valley Bank and others. Talking about the exit route to the investors, Akula said its likely to be through an IPO. But they have other options like mergers and acquisitions on the table. Also the investors are likely to get a return of 20%"  

Here's the confirmation from the horse's mouth that such an exit for investors were being planned as far as two years ago. The investors did more than 20% return. They took more like 20 times multiples of their investment. This is valuable foreign exchange we are talking about.

The postings then paint a different picture of Soros, Narayana Murthy and Khosla. It appears pre-IPO PE investors wanted to exit at inflated prices and left this trio carrying the baby (dud share) meaning suckered them! Imagine the headlines of international media when they discover that old Soros had been suckered! Why the gang of 4 pre-IPO PE investors wanted to rapidly exit with inflated profits was because they wanted to beat the new MF regulations coming by December that would have capped their interest rates on one hand and deprived them of priority lending rates by public sector banks, the combined effect would virtually put them out of business.