SKS Microfinance: The inside story13 min read . Updated: 08 Feb 2013, 12:21 AM IST
SKS Microfinance’s S. Dilli Raj and M.R. Rao talk about what went wrong with the company
Mumbai: India’s lone listed microfiance company SKS Microfinance Ltd has seen a 91% erosion of its share value from its peak on 28 September 2010 till date and a 72% slump on its loan book after a state law in Andhra Pradesh (AP) forced it to exit the southern state that made up close to 30% of its business. Collection levels in AP dropped to 5%, forcing SKS to shrink its loan book in other states and use the money to provide for the AP bad loans.
In a rare interview, the company’s CEO and managing director M.R. Rao and chief financial officer S. Dilli Raj said on Thursday that the worst is over for SKS and things can only get better. They admitted that the for-profit organization made the mistake of staking larger-than-life claims of empowering the poor and eradicating poverty. They also conceded that intense competition in the sector did not lead to a price war that would have benefited tiny borrowers and instead diluted the process of sanctioning loans. Edited excerpts:
Raj : Yes, absolutely and this turnaround is real and sustainable. The first and foremost reason for losses in the last seven quarters is primarily the credit cost on AP portfolio. When the crisis broke out in October 2010, we had ₹ 1,430 crore exposure in AP. We collected some ₹ 129 crore. So we had to provide for about ₹ 1,300 crore. We did that over seven quarters so that it doesn’t ignite a crisis of confidence. Also, since we went through a credit shock, bank funding dried up. So, we had to reduce the outstanding loan portfolio in other states and find cash to repay the banks. Because of high credit cost on AP loans and the portfolio was dwindling, we were operating below the optimal size. These have been corrected now and we have ₹ 1,496 crore of non-AP portfolio.
We raised ₹ 50 crore from Bajaj Alianz Life Insurance in August 2009 and at the same price— ₹ 300 per share. The CCPS were converted into shares at same price in December 2009 and N.R. Narayana Murthy’s private equity fund Catamaran invested ₹ 28.12 crore in January 2010, just one month later, at the same price.
SKS had not differentiated between its investors and it charged the same price to all— ₹ 300. However, in just two months, on 31 March 2010, a secondary sale was done by a set of people at ₹ 600 plus a share. How could the price double in two months? We had filed the draft prospectus for our IPO (initial public offering) on 25 March 2010 and the market view was that IPO is a certainty and everyone was expecting it to perform.
Raj: This is wrong. Let me set the record straight. The advisory council was indeed formed. It consisted of (Narayana) Murthy and (then SKS chairperson) Vikram (Akula). It had several meetings but there was no formal structure. (Narayana) Murthy was extremely generous and kind to us in giving his time. Let me confess and take responsibility on behalf of the executive management of SKS—this instrument has not been utilized to its fullest potential.
Raj: Vikram is the founder— a visionary and a social entrepreneur who created scale and sustainability for the sector as whole and let me use the phrase—a founder is a founder. He stepped down on 23 November 2011. He has converted a part of his ESOPS—900,000 shares, a little less than 1% stake in the company. He has another 1.7 million ESOPs but that’s under water now (given at ₹ 300 and the current stock price of SKS is roughly half of that). He has no operational role in the company.
Raj: Absolutely not. Every single operator converted themselves to for-profit model and each one of them continued with the positioning of eradication of poverty. Let me repeat, everyone was in the bar and all were drinking. It’s a matter of second guessing and no individual could have been any wiser.
Raj: On the contrary, but for the IPO, this company would not have continued as an operating entity. We accessed capital in August 2010 and the crisis broke out in October. At the time of the crisis, our net worth was ₹ 1,781 crore and the AP exposure was ₹ 1,496 crore. This was possible because we raised money from the public. Had that not been the case, our net worth would have been wiped out. In a financial services business, you are sitting on a mountain of credit risk and all that you do is remain well-capitalized and adequately liquid.
Raj: The credit discipline in AP has been wiped out and the biggest task is to bring it back. We have to start incrementally lending to those who are willing to repay. This will also motivate others to bring back the credit discipline. Many studies have shown that women borrowers in AP are starving for credit and want MFIs back in business.