Mumbai: SKS Microfinance Ltd, 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 (CFO) 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% from a September 2010 peak.
SKS, backed by Sequoia Capital, forecasts relief from a Bill approved by Prime Minister Manmohan Singh’s cabinet last week that would enable the Reserve Bank of India (RBI) to regulate the industry.
Growth impetus: SKS Microfinance CFO S. Dilli Raj says the draft law would?let?microlenders?improve?debt collection and help them raise funds. Mohammed Aleemuddin/Mint
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, 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 RBI, create a reserve fund from profits and audit their financial performance annually.
In December, RBI proposed an upper limit of 26% 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% of the nation’s 1.2 billion people who don’t have a bank account. Less than 5% of the country’s 600,000 villages have banks, data provided by the Reserve Bank show.
Non-urban consumers account for almost 8% of the gross domestic product in India, where the World Bank says almost 70% of the population lives on less than $2 a day (Rs 109).
More than 70 people ended their lives in Andhra Pradesh between 1 March 2010 and 30 November 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.
The crackdown that ensued in the state left SKS saddled with losses after it failed to recover as much as Rs 1,200 crore of loans, or almost 24% 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% of the loan book of the industry will improve the investor and banker sentiment towards 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% of its workforce, and shut 78 of its 180 branches across the state, it said in a statement on 10 May. The decision was announced two days after the lender reported a loss of Rs 330 crore for the three months ended 31 March, compared with Rs 69.8 crore a year earlier.
“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 22 May.
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. Modelled after Nobel Laureate Muhammad Yunus’s Grameen Bank in Bangladesh, the company raised Rs 1,630 crore in August 2010 by selling 16.8 million shares at Rs 985 each.
Sequoia, which backed LinkedIn Corp. and Google Inc., owns 6.84% of SKS, according to data compiled by Bloomberg.
The stock has slumped 92% since it was sold to investors for Rs 985 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 rose 0.24% to Rs 81.90 on BSE on Thursday. The benchmark Sensex gained 0.25% to 16,040.78.
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% of its assets and as much as 25% of its profit in the coming quarters.
With a new law in place, SKS will focus on recovering written-off loans worth Rs 1,200 crore, CFO Raj said. As much as 85% 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.”
Sharang Limaye in Hyderabad contributed to this story.