Hyderabad: India’s only publicly traded microfinance institution (MFI), SKS Microfinance Ltd, said on Tuesday that it hopes to overcome in six months the crisis in Andhra Pradesh that caused it to post a fourth-quarter net loss.
The company’s stock, meanwhile, recouped some of the losses it suffered in a two-day sell-off by edgy investors.
“The pain will continue for a quarter or two; however, in the medium term we are very optimistic,” chief financial officer Dilli Raj told a news conference at the lender’s Hyderabad headquarters.
It was the first meeting of the SKS management with the media since the lender on Friday reported a loss of almost Rs 70 crore in the quarter ended March and a profit decline for the full fiscal, as defaults piled up and loan recoveries declined to as low as 10% in Andhra Pradesh, its home state, where the government has tightened regulations for MFIs.
Banks stopped funding MFIs after the state government in October passed an ordinance—which later became a law—mandating that microlenders specify their areas of operation, interest rates, recovery methods and operational practices. Loan applications were put under government scrutiny; MFIs were asked to stop doorstep lending and switch from a weekly to a monthly loan recovery system.
“With regulatory clarity emerging, uncertainty over PSL (priority sector lending) cleared, we hope banks will resume lending,” Dilli Raj said. “The credit demand remains robust and (the) MFI business model is still intact as we haven’t seen any alternative model emerging.”
Banks have to advance 40% of their loans to agriculture, exports and some other sectors as a priority. When they fall short, they can lend to MFIs to meet the target. The central bank has said this will remain in force until at least the next year.
SKS’ fourth quarter loss and investors’ fears that more pain could lie ahead caused the stock to drop 35% on Friday and Monday. On Tuesday, the stock gained Rs 27.05, or 9.99%, to Rs 297.85 as the Bombay Stock Exchange’s benchmark Sensex edged down 0.09% to 18,512.77 points.
SKS has Rs 1,285 crore of exposure to Andhra Pradesh, India’s biggest market for loans to the unbanked poor, out of total loans outstanding of Rs 4,111 crore.
“We are in constant dialogue with the state government. Our hope is that the state government makes the conditions to give new loans less onerous,” said SKS chairman Vikram Akula. “The Andhra Pradesh situation will be resolved if the new lending resumes.”
Out of 73,000 new loan applications received by SKS in Andhra Pradesh since regulations were tightened, only 1,600 were approved by the state government.
“In the 1,600 new loans we offered, we have seen significant increase in repayment rate,” Akula said.
The microlender is also turning its attention towards product diversification. It plans to lend money with gold as collateral, opening 50 branches devoted to the business in the current quarter and scaling the number up to 400 in the year to next March. Interest rates on gold loans could be in the range of 20-24%, company officials said.
“There are established players in the gold loan space, but there is also plenty of room for new players as well,” said Anurag Agrawal, vice-president, investment banking, at social sector advisory firm Intellecap.
RBI guidelines limit secured and asset-backed lending by MFIs to 15% of their total advances.
“For SKS, it opens up new lines of business,” said Agrawal.
“A gold loan is collateral-based, it improves their ratings, and scaling up will not be difficult as they have a huge customer base that has appetite for such loans,” he said.