After a battering it got over the past year, SKS Microfinance is struggling to rebuild its business in markets outside Andhra Pradesh. A recent capital infusion could help but will it do the trick?
After a series of setbacks, SKS Microfinance has got second wind. It raised Rs 230 crore from institutional investors last week, the largest capital raising exercise for SKS since its IPO.
S. Dilli Raj, Chief Financial Officer, SKS, says this qualified institutional placement (QIP) was over-subscribed and that it equips it to meet the credit requirements of its four million rural borrowers.
But today the valuations are a pale shadow of what SKS commanded during its IPO two years ago – Rs 75.4 a share in the QIP, compared to Rs 985 during the IPO.
The Rs 230-crore infusion, along with the Rs 34 crore raised from a preferential allotment to a promoter entity a little earlier, should come in handy. They will immediately bolster SKS’s networth from Rs 435 crore as of March 2012 to Rs 700 crore. And that may help SKS kick-start its stalled lending cycle.
As banks and financial institutions stopped lending to MFIs, SKS opted not to go in for the corporate debt restructuring package, availed by others such as Spandana and Share Microfin. It also repaid its Rs 3,800 crore debt without delay.
“This was appreciated by the creditors,” says Dilli Raj. It could get a sanction of an incremental debt of Rs 1,360 crore in the fourth quarter of the last fiscal.
At a peak
It was exactly two years ago that SKS’ fortunes were at their peak.
It had concluded a successful IPO which raised Rs 1,600 crore, enjoyed margins that were the envy of every finance company and was the poster-boy for the microfinance ‘opportunity’.
The company attracted well-known investors such as Sequoia Capital, Goldman Sachs, Sandstone Investment Partners, DSP Blackrock Equity Fund, as well as N.R. Narayana Murthy’s Catamaran and angel investor, Vinod Khosla.
The rapid rise, the high profile investors, a Board packed with luminaries; all came to nought within two months.
First, the entire MFI sector was engulfed in widespread allegations of harassment of clients by recovery agents and borrower suicides in AP. This led to an unusually harsh crackdown on the business by the Andhra Pradesh Government.
The Andhra Pradesh Microfinance (Regulation of Moneylending) Act 2010, placed checks on the interest rates at which MFIs may lend, prohibited overlapping loans and made prior local government approval mandatory for disbursal of loans.
As fresh lending became nearly impossible and the incidence of defaults in the state sky-rocketed, the sector plunged into a crisis.
SKS, meanwhile, got embroiled in its own boardroom battles, with its CEO, Suresh Gurumani, quitting the firm soon after the IPO. Differences within the management have since resulted in the exit of the founder, Vikram Akula too.
Following the QIP, the new management hopes to refocus on business growth in states other than Andhra Pradesh.
Consolidation of its customer base, cross-selling initiatives and diversification will be the key focus areas this year, says its CEO and Managing Director, M. R. Rao.
SKS also hopes to diversify its lending to include financing of small kiranas, loans for purchase of mobile handsets and gold loans. Microfinance is mainly a rural and semi-urban phenomenon.
The loans, on record at least, are given for productive purposes such as running a small business, shop, tailoring or rural crafts.
The results of this effort are already evident. The lending portfolio grew sequentially by 11 per cent to Rs 1,320 crore from the non-AP regions in the fourth quarter of 2011-12, with 95 per cent collections on an average.
The exposure to AP is down to Rs 236 crore or 15 per cent of the loan portfolio as of March 2012.
But challenges are still abound, particularly in the core market of AP.
The write-off spree in the State has been continuing with Rs 1,130 crore in loans written off as on March 31, 2012.
Nor is the atmosphere there conducive for a resurgence of the MFI business. Many microfinance borrowers Business Line spoke to were relieved’ that banks are now geared up to cater to meet the credit needs of the poor in AP.
Rani, a women’s group leader and a client of SKS, hailing from the suburbs of Warangal town, summarises the situation well, saying- “Loans from banks are always better because nobody will coerce us for repayment delays of one or two days and their interest too is lower. We lost more than what we gained in borrowing from them.”
The future of MFIs will also hinge on the action that RBI takes with respect to the sector. The new Microfinance Institutions (Development and Regulation) Bill 2012 was tabled in Parliament in May. The Bill proposes to make the Reserve Bank of India the sole regulator of the sector.
Deployment of capital raised in a profitable manner, at a time when the sector is not completely sure of the way ahead, is also a tough call.
SKS is, meanwhile, stuck in a legal tangle with the AP Government.
Apart from challenging the AP Act, the company is also battling a recent order cancelling its licence in Mahbubnagar district, again on the allegation of violation of recovery norms.
Finally, as admitted by CFO Dilli Raj recently, the crisis was largely driven by unbridled growth in lending. Given a second chance, will SKS be able to strike a balance between growth and profitability?