Hyderabad/Mumbai: India’s only publicly traded microlender, SKS Microfinance Ltd, posted a fourth- quarter (Q4) loss and full-year profit decline on Friday as it set aside more money to cover rising defaults in Andhra Pradesh, its home state and biggest market for loans to the unbanked poor, confirming the worst fears of investors who punished the stock by driving it to a record low even before the earnings were declared.
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More pain is foreseen in the current fiscal year for the Hyderabad-based institution, the posterchild of a once-prospering microfinance industry that has run into trouble after the Andhra Pradesh administration tightened regulations governing it. The southern state makes up more than a quarter of the loans in the Rs 22,500 crore industry, which lends to low-income borrowers at interest rates of 24-32%.
SKS posted a loss of Rs 69.7 crore in the three months ended 31 March, compared with a net profit of Rs 62.9 crore in the year-ago period, as it set aside more money to cover bad loans. Revenue fell to Rs 193.8 crore from Rs 304.5 crore in the same period.
For the year ended 31 March, net profit was Rs 111.6 crore compared with Rs 173.9 crore in the previous year, thanks to a robust first half. Full-year revenue increased to Rs 1,269.5 crore from Rs 958.5 crore.
Loans and advances reached Rs 3,653.5 crore at March-end, from Rs 3,015.7 crore in the year-ago period.
SKS set aside Rs 106.2 crore for provisions and write-offs in Q4 compared with Rs 14.8 crore a year earlier, saying it had adopted provisioning norms more stringent than that required by the Reserve Bank of India (RBI). For the full year, credit cost rose to Rs 317.7 crore from Rs 51 crore in the previous fiscal.
“We could have simply followed provisioning norms as per RBI prudential norms, which would have resulted in profit for Q4,” said S. Dilliraj, chief financial officer, in a statement. “However, we took a conscious decision to adopt more stringent provisioning norms, in pursuance of our sector leadership role.”
The lender said its financial foundations remained sound, with a net worth of Rs 1,781 crore, cash and balances of Rs 558 crore, and capital adequacy, expressed as a ratio of capital to risk-weighted assets, of 45% as of March-end.
Loan recoveries in Andhra Pradesh have declined to as low as 10-15% for SKS and other microfinance institutions (MFIs), and their business model has come under a cloud after the state government in October moved to address complaints that MFIs were charging excessive interest rates and adopting coercive practices to recover loans from overextended borrowers. MFIs were also blamed for a spate of suicides by debt-burdened customers.
On Friday, securities house JPMorgan Chase and Co. cut the SKS share price target by 63% to Rs 200 from Rs 550 in a report that preceded the after-market earnings announcement. Shares of SKS fell 19.8%, to Rs 331.30 on the Bombay Stock Exchange on a day the benchmark Sensex gained 1.7%, to 18,518.81 points.
“The sharp fall in shares is largely due to the fear among investors that there will be large-scale write-offs in SKS loan book moving ahead due to the prevailing situation,” Santosh Singh, an analyst at Mumbai-based financial services firm Espirito Santo Securities, said before the earnings were declared.
SKS is trading now at less than a quarter of its peak level (Rs 1,490.70 in September) and nearly one-third the offer price of Rs 985 in its August initial public offering, which was oversubscribed nearly 14 times.
“We think the Andhra Pradesh portfolio is seeing more losses and the business model has weakened elsewhere too,” JPMorgan analysts Seshadri K. Sen, Adarsh Parasrampuria and Sunil Garg wrote in the report. “We fear SKS may need more capital.”
JPMorgan predicted a Rs 700 crore loss for SKS in the fiscal year ending 31 March 2012, driven by loan write-offs in Andhra Pradesh.
“This is expected to shrink equity by 40%, bring equity/assets down to a precarious 22-23%, and probably entail a recap—unless SKS gets relief on NPL (non-performing loan) accounting,” Sen, Parasrampuria and Garg wrote in the report.
In October, the Andhra Pradesh government passed an ordinance—which later became a law—mandating that MFIs 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 to switch from a weekly to a monthly loan-recovery system. MFIs say the law has encouraged borrowers to default.
“There will be an adverse impact on the profitability of the companies with huge exposure to Andhra Pradesh,” said Alok Prasad, chief executive officer of the Microfinance Institutions Network, an industry body. “But the core business model of MFIs is very robust and serves the clients well, given a proper regulatory framework, which RBI is working on.”
On Tuesday, the central bank announced an interest rate cap of 26% on MFI loans. The cap set by RBI is two percentage points higher than that recommended by a panel headed by chartered accountant Y.H. Malegam. RBI, among other things, made it mandatory for MFIs to give a minimum two-year tenure for all loans above Rs 15,000, which some microlenders said will result in bad loans rising.
RBI also called for tighter due diligence by banks in lending to MFIs, which on-lend to their customers at higher rates. The central bank also said MFIs that do not comply with the new norms will not qualify for priority-sector lending with effect from 1 April. Banks have to extend 40% of loans to agriculture, exports and some other sectors as a priority. When they fall short, they can lend to MFIs to meet this target, making it easier for the latter to borrow.
“It is not possible to shift to comply with the new regulations from 1 April, as it requires a lot of ground-level work,” said Chandra Shekhar Ghosh, chairman and managing director of Kolkata-based Bandhan Financial Services Pvt. Ltd. “Banks will not encourage any fresh loan proposals from MFIs without producing the compliance certificates. MFIs will need at least one-two months’ time to comply with the rules.”
Bandhan has plans to approach the regulator to seek time till 1 June to migrate to the new regulatory regime
“Banks are very cautious about lending to the MFI sector. They want clarity in the regulatory framework,” said Shadab Rizvi, a Mumbai-based analyst at Darashaw and Co. Pvt. Ltd, noting that RBI still needs to address issues such as bad-loan provisioning norms.
“The priority-sector lending and pricing guidelines by RBI are positive for the sector, but final regulations still need to come out,” Rizvi said.
Banks had stopped lending to MFIs because of uncertainty created by the Andhra Pradesh law.
JPMorgan estimates SKS Microfinance’s collections in Andhra Pradesh in the current year to be 25%, meaning 75% of the loan book will turn bad. It predicted Rs 1,000 crore of provisions and write-offs on the lender’s Andhra loan book.
Outside Andhra Pradesh, credit charges are expected to rise, it said.
“High inflation is impacting borrowers’ finances, and our channel checks indicate that MFI loans are being diverted for consumption, which could have a significant impact on the non-AP (Andhra Pradesh) asset quality,” the report said.
Graphic by Sandeep Bhatnagar/Mint