Hyderabad/ Mumbai: SKS Microfinance Ltd, India’s lone listed microlender, on Wednesday said it will cap the return on assets (RoA) from its main business at 3%, settling for nearly half the profit growth it enjoyed before hitting the capital market in 2010.
However, even this is higher than the average earnings growth of India’s Rs 20,000 crore microfinance industry, which has been roiled since Andhra Pradesh in October 2010 passed a law tightening regulation of microlenders.
Resetting goals: SKS managing director M.R. Rao (left) and chief financial officer S. Dilli Raj in Hyderabad. By Mohammed Aleemuddin/Mint
RoA is a measure of how profitable a company is relative to its assets; it reflects both the profit margin and the efficiency of a lender.
SKS also plans to hive off its gold loan business into a separate subsidiary and expand its non-microfinance business. Currently, the company is piloting a gold loan business in 50 centres across India.
Wiser after the recent crisis that has hit the industry, the microfinance institution (MFI) said it will appoint a “social sector veteran” as its ombudsman by the end of December to ensure customer protection.
MFIs are firms that lend small loans to low-income borrowers at 24-36% after sourcing money from banks at far cheaper rates. The Andhra Pradesh law banned MFIs from making weekly loan collections and made government approval mandatory for every second loan given to the same borrower. The move was aimed at ending coercive recovery practices some microlenders allegedly adopted.
After the law took effect, MFIs in Andhra Pradesh saw their loan recovery rates falling to 5-10%. MFIs also stopped giving fresh loans to borrowers after commercial banks stopped lending to them.
SKS, which did most of its business in the state, was severely hit by the crisis and saw its net worth eroding by 34% as it had to write off many loans.
Its net worth slipped to Rs 1,181 crore in September from Rs 1,780.82 crore in March. Total provisions and write-offs by SKS rose 21 times to Rs 353.34 crore in the September quarter from Rs 17.3 crore in the year-ago quarter.
SKS’ RoA is now negative on account of the losses it suffered because of provisioning and write-offs of bad loans. RoA, which was 5.5% at its peak in 2008-09, fell to 4% for the year ended 31 March 2010.
“Historically, what we have been doing is in states like Andhra Pradesh, Karnataka, Orissa, West Bengal and Bihar, when we reached a critical mass of customers, we drop down interest rates,” said M.R. Rao, SKS’ managing director and chief executive officer (CEO).
“The minute we cross over the RoA threshold of 3% on account of operational efficiency, we will pass on the interest rate benefit to the clients,” he added.
According to senior industry officials, the Indian microlending industry had an average RoA in the range of 1.5-2%.
“Before the AP ordinance came into effect, the average RoA of the microfinance sector ranged from 1.5-2%, but there were aberrations; there are MFIs that had an RoA of around 5%,” said Alok Prasad, CEO of Microfinance Institutions Network (MFIN), an association of MFIs.
“RoA of 1.5-2% is considered very attractive for investors,” Prasad said. He refused to comment on SKS specifically.
Experts are not too optimistic about SKS reaching an RoA of 3% in the immediate future.
“SKS is very far from imposing a 3% cap on its RoA; currently, its RoA is negative and going to be negative for some more time to come and it is just a signal it wants give to the markets,” Anurag Agrawal, vice-president (investment banking) at social sector advisory firm Intellecap, said.
Currently, larger MFIs such as Kolkata-based Bandhan Financial Services Pvt. Ltd that are based outside Andhra Pradesh have an RoA of above 3%, but most microlenders based in the state have seen their RoAs go into negative territory on account of the adverse market scenario.
The Reserve Bank of India (RBI), based on the recommendations of a panel, had recently notified regulations for MFIs. According to the regulations, for-profit MFIs should not have more than a 12% margin and must cap interest rates at 26%. Also, the total indebtedness of a borrower cannot be more than Rs 50,000, it said.
Senior industry officials said the RoA of MFIs, in any case, will come down to below 3% while complying with the new RBI regulations and interest rate cap.
“If you comply with the RBI norms, that itself will take care of the RoA and it will be below 3%,” Kishore Kumar Puli, managing director and chief executive officer of Hyderbad-based Trident Microfin Pvt. Ltd, said. The firm has a loan book of Rs 135 crore.
Hit by the crisis, SKS posted a loss of Rs 384.54 crore in the three months ended 30 September compared with a loss of Rs 218.74 crore in the preceding quarter.
“We will be returning to the path of profitability in FY13,” S. Dilli Raj, chief financial officer at SKS, said in a press conference.
SKS said it is looking to raise Rs 500 crore through a qualified institutional placement by 31 March. Also, it is planning to increase the non-Andha Pradesh asset portfolio from Rs 1,850 crore to Rs 3,000 crore by end of fiscal 2013. The microlender said nearly 40 employees have left the company as part of an agreement that SKS entered with its former chairman and founder Vikram Akula, who recently stepped down from its board.