The glory days are over for micro lenders in India. Nowhere is it clearer than the December quarter results of SKS Microfinance Ltd. The company reported a third quarter profit of Rs38.15 crore, down 38% from a year ago, as it had to increase provisioning some six-and-a-half times.
More than a quarter of its Rs5,000 crore loans are given to customers in Andhra Pradesh, which passed an act to stop micro lenders collecting dues from a weekly basis to once a month and seek state approval for fresh advances.
As a result, SKS’ collection rates have declined to 43.6% in Andhra compared with at least 95% in other states. The lender had to spend Rs58.74 crore in provisioning just for its Andhra Pradesh portfolio. What’s more, its loan book has shrunk by 7.5% from the September quarter, adding to woes.
True, the company has pre-emptively provided Rs27 crore provisioning based on the recommendations of the Malegam committee on the microfinance sector, which are yet to become law.
But even adjusting for that, its profit growth would have come in at just 10%. That’s a 36% decline sequentially and a far cry from the threefold jump in net profit seen in the past.
In the December 2009 quarter, SKS has returned a yield of 6.5% on its average asset books and had return on equity (RoE) rates of close to 23%. But in the third quarter of the current fiscal, its return on average assets declined to 2.4% and RoE to 7.5%.
These are signs of things to come. The Malegam panel has recommended that micro-lenders cap margins at 10% and proposed an interest rate ceiling of 24%, among other things.
An illustration provided by SKS in its website says that return on its average gross loans will fall to 4.3% if these recommendations are implemented. Also, interest rates are rising and many rating agencies are sharpening their knives.
In other words, financial costs will go up. Moreover, leverage also is falling and could further squeeze margins and profit growth.
The SKS scrip has reflected these developments, falling 45% since mid-October when the Andhra Pradesh rule came into force. Now it is trading at 2.8 times current book value.
But the book value itself remains suspect. How confident is the company of recovering its dues of nearly Rs1,500 crore from Andhra Pradesh? Will future earnings be sufficient to cover provisioning for these loans? The fact remains that these new norms cap revenue growth, profit gains and margins. These will continue to weigh on the stock.
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