SKS needs money now, diversification may help later

SKS needs money now, diversification may help later
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First Published: Fri, Dec 09 2011. 01 02 AM IST

The SKS Microfinance Ltd logo is displayed at the company’s head office in Hyderabad. Photo: Bloomberg
The SKS Microfinance Ltd logo is displayed at the company’s head office in Hyderabad. Photo: Bloomberg
Updated: Fri, Dec 09 2011. 01 02 AM IST
It is the typical response of any firm with its back pushed to the wall: diversification. SKS Microfinance Ltd, which has seen its microlending business ravaged by regulation and defaults from borrowers, is now planning to change its business model. It will sell insurance, finance mobile phone purchases and advance loans against gold and so on. Investors have seemingly cheered the decision. The stock was up 5% each on Wednesday and Thursday.
But SKS and indeed the microfinance industry don’t have much choice. The microfinance regulation has been particularly volatile, with state governments and local politicians wading in and queering the pitch. For now, though, the Reserve Bank of India (RBI) has stepped in and notified regulations for non-banking financial companies under the microlender category.
The SKS Microfinance Ltd logo is displayed at the company’s head office in Hyderabad. Photo: Bloomberg
The new businesses will see SKS position itself as a rural financial services company. Financial services in an under-banked, under-insured country are an obvious pot of gold for companies, but things haven’t been going too well for recent private sector entrants. While SKS clearly has skills engaging with the rural population, it remains to be seen how well it can proceed with this business.
SKS has also smartly decided to spin off its non-microfinance business so that it meets RBI regulations, which demand that 85% of assets fall within the microlending category. The Associated Press quotes chief financial officer S. Dilli Raj as saying that the company hopes the non-microfinance business will expand to 10% of assets, generating 20% of revenue and 30% of earnings. But that is in the future and will take at least a year to materialize.
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For now, SKS’ problems aren’t going to vanish. It has talked about capping the return on assets at 3%, but that is making a virtue out of a necessity. It is very hard to make that much of returns anyway under the new laws capping interest rates.
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Mint’s Dinesh Unnikrishnan says SKS Microfinance has capped its return on assets from microlending at 3% and plans to hive off non-core operations.
Not only is it facing ruin in Andhra Pradesh (AP), where borrowers are increasingly reluctant to pay back loans, its collection rates in other states such as West Bengal have begun to deteriorate as well. Its loan book had shrunk to some Rs 2,500 crore by the end of September compared with Rs 3,300 crore a quarter ago. Brokerage JPMorgan India Pvt. Ltd said in a recent note that “the (Rs 860 crore) outstanding in AP is likely to see 90-95% being written off in the coming quarters”. It further adds, “We believe the company could face going-concern issues, though insolvency is still not our base case.”
Of course, infusion of funds could change the scenario and SKS has got board approval for raising money. But that is going to be difficult, given the present state of the market.
Graphics by Ahmed Raza Khan / Mint.
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First Published: Fri, Dec 09 2011. 01 02 AM IST