SKS Microfinance Ltd may be mired in many controversies, but its financial results for the quarter ended September have been excellent. The microfinance firm has posted a 77% increase in its operating income over the same period last year to 367 crore and an even steeper 116% increase in net profit to 80.5 crore.

A 69% increase in the gross loan portfolio and a slower pace of growth in costs (provisions and write-offs, interest and finance expenses) have led to the admirable results. Diluted earnings per share, which were at 10.04 for the June quarter, increased to 10.99 in the September quarter.

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What’s more, the sizzling pace of growth hasn’t been accompanied by a higher proportion of bad loans. The company’s gross non-performing assets fell to 0.2% of total loans from 0.29% in September 2009 and 0.23% at the end of June 2010. There has, though, been a sharp rise in provisions and write-offs in the September quarter, compared with the June quarter.

That didn’t make much of a difference to the bottom-line, though. Return on average assets was 6.5% during the September quarter, while net margins were as high as 22%. Loans outstanding as on 30 September were 1.9 times net worth, not very high leverage for the business.

Growth will inevitably lose some momentum as the business expands and recent events in Andhra Pradesh, where the company is being blamed for suicides among some of its borrowers, could also slow the frenetic pace of expansion. For instance, year-on-year growth was much higher in the June quarter, when total operating income nearly doubled to 306.5 crore and net profit rose by 265% to 67 crore.

The stock has been pummelled recently because of the Andhra Pradesh government ordinance, the attempt to force down interest rates at which microfinance companies lend, and a power struggle within the company. Currently, the stock trades at 1,054, lower than the closing price of 1,088 on its listing day. The company’s rate of growth so far has more than justified its high valuations.

The company’s outstanding results, though, have raised several questions. Microfinance companies have long contended that they are forced to charge high rates of interest because the business is risky and servicing these small loan amounts is expensive. But SKS Microfinance’s results show that the proportion of bad loans is very low. While that may be due to aggressive write-offs, neither that nor the supposedly high expenses seemed to have had much of an impact on margins, which are very high.

The trouble is that microfinance is perceived to be not just a business but also a social service. The sooner it sheds its halo and people accept that microfinance helps people by providing loans to them at a price they wouldn’t otherwise get, the better for the business.

Graphic by Yogesh Kumar/Mint

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