Microlender Sees Reprieve in New Law: Corporate India

By Anto Antony - May 16, 2012

SKS Microfinance Ltd. (SKSM), India’s largest publicly traded lender to the poor, says proposed legislation will spur a revival by easing loan recovery just as mounting losses force it to curtail operations.

The draft law would let microcredit companies improve debt collection and may also help raise funds, Chief Financial Officer S. Dilli Raj said in an interview. The Hyderabad-based lender’s loss last quarter widened almost fivefold, prompting it to cut jobs and shut branches. The stock is down 94 percent from a September 2010 peak.

SKS, backed by Sequoia Capital (SEQUX), forecasts relief from a bill approved by Prime Minister Manmohan Singh’s cabinet last week that would enable the Reserve Bank of India to regulate the industry. SKS has reported five consecutive quarters of losses after the southern state of Andhra Pradesh curtailed debt recovery, capped interest rates and waived loans to arrest a spate of suicides by farmers unable to make payments.

“The long-term clarity on the regulatory environment will have an immediate impact on the balance sheet,” Raj said. “We are confident of bridging the widening gulf between demand and supply” in small loans, he said.

The bill, if approved by parliament, will override provincial rules that differ from state to state and help improve the flow of credit to the poor and farmers left out by lenders including State Bank of India and ICICI Bank Ltd. (ICICIBC), the nation’s two biggest by assets.
Cap on Rates

The central bank, as the sole regulator, would cap interest rates and fees levied by microfinance companies under the new law, and also stipulate rules for debt collection. The Micro Finance Institutions (Development and Regulation) Bill will require all microlenders to register with the RBI, create a reserve fund from profits and audit their financial performance annually. In December, the RBI proposed an upper limit of 26 percent for annual interest rates on loans to individuals.

Prime Minister Singh, seeking to revive an economy expanding at the slowest pace in three years, is turning to microcredit companies to provide financing to the almost 43 percent of the nation’s 1.2 billion people who don’t have a bank account. Less than 5 percent of the country’s 600,000 villages have banks, data provided by the Reserve Bank show.

Non-urban consumers account for almost 8 percent of gross domestic product in India, where the World Bank says almost 70 percent of the population lives on less than $2 a day.

More than 70 people ended their lives in Andhra Pradesh between March 1, 2010, and Nov. 30, 2010, to escape coercive tactics used by microlenders in the state, according to data provided by the government-run Society for Elimination of Rural Poverty.
State Crackdown

The crackdown that ensued in the state left SKS saddled with losses after it failed to recover as much as 12 billion rupees ($221 million) of loans, or almost 24 percent of its total loans in the year ended December 2010, a filing to the exchanges shows.

“Any improvement in collection of loans from this state that accounts for as much as 40 percent of the loan book of the industry will improve the investor and banker sentiment toward the sector,” said Santosh Singh, a Mumbai-based financial services analyst at Espirito Santo Securities who has a buy rating on SKS. “If the Andhra loans were to be written off, many large microfinance companies will become insolvent.”

SKS plans to fire 1,200 employees, or 35 percent of its workforce, and shut down 78 of its 180 branches across the state, it said in a statement on May 10. The decision was announced two days after the lender reported a loss of 3.3 billion rupees for the three months ended March 31, compared with 698 million rupees a year earlier.
‘Painful Decision’

“Cutting down branches and reducing headcount are extremely painful decisions for us, but these have become urgent in view of the present financial situation,” Chief Executive Officer M.R. Rao said in the statement.

It’s far from certain that the measure will become law. Singh’s ruling coalition is dependent on the support of allies including Mamata Banerjee, who has stymied his efforts to allow foreign investment. Such opposition, for instance, forced Singh to scrap his cabinet’s decision in December to permit Wal-Mart Stores Inc. and Carrefour SA to open stores in the country.

“The Indian parliament has a history of rejecting many proposals already cleared by the cabinet,” said Nitin Kumar, a Mumbai-based banking analyst at Quant Broking Ltd. “We can only hope that this bill doesn’t face the same fate.”

The bill is scheduled to be introduced in the current session that ends on May 22.
Stock Slump

SKS started operating in 1998 as a non-governmental organization led by Vikram Akula, an Indian-American with a Ph.D. in political science from the University of Chicago. Modeled after Nobel Laureate Muhammad Yunus’s Grameen Bank in Bangladesh, the company raised 16.3 billion rupees in August 2010 by selling 16.8 million shares at 985 rupees each.

Sequoia, which backed LinkedIn Corp. and Google Inc., owns 6.84 percent of SKS, according to data compiled by Bloomberg.

The stock has slumped 92 percent since it was sold to investors for 985 rupees apiece in August 2010, and is headed for its worst month since November, when founder Akula quit his position as chairman after failing to revive earnings. It fell 4.5 percent to 81.70 rupees in Mumbai yesterday.

The lender and some of its unlisted rivals including Spandana Sphoorty Financial Ltd. are seeking to diversify into other financial services such as lending against gold to boost earnings. SKS said gold loans will account for 10 percent of its assets and as much as 25 percent of its profit in the coming quarters.

With a new law in place, SKS will focus on recovering written-off loans worth 12 billion rupees, CFO Raj said. As much as 85 percent of the lender’s total outstanding loans are outside the state of Andhra Pradesh now.

“My understanding is that the majority shareholders in the company and our creditors are happy about the new rule,” he said. “From here on we should be able to strengthen our position quarter after quarter.”

To contact the reporter on this story: Anto Antony in Mumbai at aantony1@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net
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