 "Microfinance will continue to be our core business: M R Rao & S Dilli Raj")
SKS Microfinance Limited, the only listed microfinance institution (MFI) in the country, has been bogged down with one problem or the other for the past three years. It plunged into a crisis after the Andhra Pradesh (AP) government came out with a law in 2010, regulating the lending and recovery practices of microfinance institutions. The very next year, SKS founder Vikram Akula was forced to step down from his role as executive chairman. At present, the company is engaged in a fight with its original promoters, SKS Trust Advisors Private Limited, who want Akula back on the board of directors. SKS chief financial officer S Dilli Raj earlier refused to comment on Akula's comeback bid, stating the matter was sub judice. Nevertheless, Raj and SKS managing director and chief executive officer M R Rao inform Prashanth Chintala that it is now possible for SKS to grow at 50 per cent on an annualised basis. Edited excerpts:
How did SKS manage to survive the Andhra Pradesh crisis?
The key building blocks of SKS Microfinance Limited’s well-executed turnaround strategy are: Fully providing for the Andhra Pradesh exposure, managing the supply side shock, optimising the cost structure, insulating the non-Andhra Pradesh portfolio from contagion, recapitalisation and return to profitability.
On account of the turnaround strategy, SKS Microfinance had four consecutive quarters of profit -- a profit after tax (PAT) of Rs 1.2 crore in Q3-FY13, Rs 2.7 crore in Q4-FY13, Rs 5 crore in Q1-FY14 and Rs 16.3 crore in Q2-FY14.
What are the lessons you learnt from the crisis?
a) Stay well-capitalised;
b) Remain liquid;
c) Contain the concentration risk;
d) Strengthen the institutional infrastructure (eg Credit Bureau);
d) Clients protect those who protect them.
There had been three genuine concerns about the industry, namely interest rates charged by certain MFIs, over-leveraging of borrowers and questionable recovery practices by a few MFIs.
The RBI stepped in quickly, and laid out a comprehensive regulatory framework that addresses all the three concerns.
There has been a greater focus on globally aligned customer protection practices among companies like SKS Microfinance Limited. SKS has appointed an ombudsman, revamped its customer grievance redressal system and capped return on asset in the core microfinance business at three per cent.
The microfinance situation in AP had also established beyond doubt that there is really no substitute for microfinance in channelling credit to rural India in a collateral-free format.
We have made the necessary disclosures following the March 18, 2013 order of the Supreme Court that the interim orders issued by the High Court of Andhra Pradesh (dated October 22, 2010) as modified by the order (dated October 29, 2010), shall continue pending further orders of the Supreme Court. SKS Microfinance Limited is unable to share further updates in this regard as the matter is sub judice.
SKS is the only MFI among the top ones in the state that did not go for coporate debt restructuring (CDR)? How did you achieve this?
Avoiding the CDR route was a difficult choice for SKS Microfinance Limited and the company has pursued a well-executed turnaround strategy as stated earlier. Also, it is noteworthy that SKS Microfinance repaid Rs 5,800 crore to the banking system without any rescheduling or deferral or haircut.
Why did you go in for mobile financing and insurance distribution?
It is an acknowledged fact that the economically weaker sections require a basket of services, not just credit. According to A Guide to Regulation and Supervision of Microfinance, ‘In contrast to the situation a decade ago, most policy makers, donors, and private investors involved in microfinance now appreciate that poor and low-income people, like the rest of us, need a variety of basic financial services, not just credit.’
While doing this, SKS Microfinance has been trying to creatively disturb the asset-revenue earning mix. The non-MFI business will be just 10 per cent of the company’s assets, but it could contribute 15 per cent to the revenue and 25 per cent to the profit. Insurance distribution, that is, retail insurance relaunch is yet to be done.
Why did you exit from Gujarat and Tamil Nadu?
SKS Microfinance Limited has been implementing its geographical de-risking strategy in the last few quarters, which saw reduction in exposure in the high concentration states like Karnataka and West Bengal, while exiting Gujarat and Tamil Nadu. This is just a portfolio strategy, which gets revised all the time. Tamil Nadu and Gujarat are well industrialised and progressive states.
SKS had a dream run from 1997 till 2010. Apart from the AP legislation, what other aspects were responsible for turbulence thereafter?
The Andhra Pradesh microfinance crisis was triggered by the new AP microfinance law.
What are the circumstances that led to the exit of SKS founder Vikram Akula?
Dr Akula left the company on November 23, 2011. SKS Microfinance Limited made the necessary disclosures in this regard immediately after his departure.
Is their any deviation from the basic mandate of the SKS over a period of time?
Microfinance continues to be our core business. Microfinance will constitute a minimum of 90 per cent of our credit assets.
What is the outlook for the MFI?
It will remain as a business of the future in the coming decade given the huge unmet demand. With regulatory clarity emerging due to the RBI’s efforts, the sector is back at the threshold of growth.
What are the financial projections for the next couple of years?
SKS Microfinance plans fresh loan disbursals of Rs 4,500-4,800 crore during FY14, up from Rs 3,200 crore of disbursals during FY13. It is quite possible for one to grow 50 per cent on an annualised basis from here.
How did SKS manage to survive the Andhra Pradesh crisis?
The key building blocks of SKS Microfinance Limited’s well-executed turnaround strategy are: Fully providing for the Andhra Pradesh exposure, managing the supply side shock, optimising the cost structure, insulating the non-Andhra Pradesh portfolio from contagion, recapitalisation and return to profitability.
On account of the turnaround strategy, SKS Microfinance had four consecutive quarters of profit -- a profit after tax (PAT) of Rs 1.2 crore in Q3-FY13, Rs 2.7 crore in Q4-FY13, Rs 5 crore in Q1-FY14 and Rs 16.3 crore in Q2-FY14.
What are the lessons you learnt from the crisis?
a) Stay well-capitalised;
b) Remain liquid;
c) Contain the concentration risk;
d) Strengthen the institutional infrastructure (eg Credit Bureau);
d) Clients protect those who protect them.
There had been three genuine concerns about the industry, namely interest rates charged by certain MFIs, over-leveraging of borrowers and questionable recovery practices by a few MFIs.
The RBI stepped in quickly, and laid out a comprehensive regulatory framework that addresses all the three concerns.
There has been a greater focus on globally aligned customer protection practices among companies like SKS Microfinance Limited. SKS has appointed an ombudsman, revamped its customer grievance redressal system and capped return on asset in the core microfinance business at three per cent.
The microfinance situation in AP had also established beyond doubt that there is really no substitute for microfinance in channelling credit to rural India in a collateral-free format.
M R Rao
We have made the necessary disclosures following the March 18, 2013 order of the Supreme Court that the interim orders issued by the High Court of Andhra Pradesh (dated October 22, 2010) as modified by the order (dated October 29, 2010), shall continue pending further orders of the Supreme Court. SKS Microfinance Limited is unable to share further updates in this regard as the matter is sub judice.
SKS is the only MFI among the top ones in the state that did not go for coporate debt restructuring (CDR)? How did you achieve this?
Avoiding the CDR route was a difficult choice for SKS Microfinance Limited and the company has pursued a well-executed turnaround strategy as stated earlier. Also, it is noteworthy that SKS Microfinance repaid Rs 5,800 crore to the banking system without any rescheduling or deferral or haircut.
Why did you go in for mobile financing and insurance distribution?
It is an acknowledged fact that the economically weaker sections require a basket of services, not just credit. According to A Guide to Regulation and Supervision of Microfinance, ‘In contrast to the situation a decade ago, most policy makers, donors, and private investors involved in microfinance now appreciate that poor and low-income people, like the rest of us, need a variety of basic financial services, not just credit.’
While doing this, SKS Microfinance has been trying to creatively disturb the asset-revenue earning mix. The non-MFI business will be just 10 per cent of the company’s assets, but it could contribute 15 per cent to the revenue and 25 per cent to the profit. Insurance distribution, that is, retail insurance relaunch is yet to be done.
Why did you exit from Gujarat and Tamil Nadu?
SKS Microfinance Limited has been implementing its geographical de-risking strategy in the last few quarters, which saw reduction in exposure in the high concentration states like Karnataka and West Bengal, while exiting Gujarat and Tamil Nadu. This is just a portfolio strategy, which gets revised all the time. Tamil Nadu and Gujarat are well industrialised and progressive states.
SKS had a dream run from 1997 till 2010. Apart from the AP legislation, what other aspects were responsible for turbulence thereafter?
The Andhra Pradesh microfinance crisis was triggered by the new AP microfinance law.
What are the circumstances that led to the exit of SKS founder Vikram Akula?
Dr Akula left the company on November 23, 2011. SKS Microfinance Limited made the necessary disclosures in this regard immediately after his departure.
Is their any deviation from the basic mandate of the SKS over a period of time?
Microfinance continues to be our core business. Microfinance will constitute a minimum of 90 per cent of our credit assets.
What is the outlook for the MFI?
It will remain as a business of the future in the coming decade given the huge unmet demand. With regulatory clarity emerging due to the RBI’s efforts, the sector is back at the threshold of growth.
What are the financial projections for the next couple of years?
SKS Microfinance plans fresh loan disbursals of Rs 4,500-4,800 crore during FY14, up from Rs 3,200 crore of disbursals during FY13. It is quite possible for one to grow 50 per cent on an annualised basis from here.