That SKS Microfinance Ltd will have to write off part of its Andhra Pradesh (AP) loan book is inescapable. If there is any difference of opinion among brokerages, it is just in the matter of degree. Some assume 40% of its AP advances will have to be forgone, while others paint a bleaker picture at 90%.
The fourth quarter (Q4) results of the firm make for grim reading, with falling net interest income, spreads and return on assets. Not only did SKS lose Rs 70 crore, its collection rates declined to 10.5% in AP, compared with at least 90% in other states. This was worse than the 43.5% collection in the December quarter.
The state, which accounts for one-third of the Rs 4,111 crore gross loan book of SKS at the end of March, passed an Act in October to stop microlenders to collect dues on a weekly basis and seek state approval for fresh advances.
SKS seems to recognize that the AP portfolio is in deeper trouble than it once thought. In Q4, it reversed Rs 81 crore of interest income—about one-third of the overall income—on its AP portfolio.
It also increased its overall provisioning six times from a year ago. Continued losses due to the deteriorating AP loan book can devastate the equity base of the firm and necessitate recapitalization.
The firm has sought to partly protect itself from that by tweaking the provisioning policy for this section of the loan book. Assets in the non-AP advances are recognized as non-performing in eight weeks, but it has decided to class loans given in AP as going bad after six months. Similarly, it has stretched the timeline for loss assets to two years in the AP book, compared with 25 weeks for other loans.
The disaster in AP has also had a knock-on effect on its other lending operations. SKS has pruned its balance sheet as it struggled to contain losses. Its gross loan portfolio shrunk 18% from a quarter ago. Disbursements fell an even sharper 51% from the December quarter.
Future gains in the stock and indeed, the firm’s fortunes, will depend on how much it will be able to grow this part of the loan book. Credit rater Crisil Ltd, for one, believes that the growth for microlenders will be tempered by operating challenges from the central bank’s new guidelines and the general difficulty in raising capital.
Sure, the Reserve Bank of India has changed the Malegam committee recommendations and given the industry some breathing space in terms of margins, but the restrictions on loan size and end-usage could still hamper growth in advances.
That again is a matter of degree, with forecasts ranging 10-15% growth. Needless to add, the view whether the correction in the stock has been overdone after a 38% decline in two days depends on the assumptions one makes on loan growth and the extent of write-offs.
At the moment, investors have little reason not to assume the worst.
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