 "SKS Microfinance regains investor confidence")
At a time when most micro-lenders in Andhra Pradesh are struggling to survive, SKS Microfinance appears to have weathered the crisis. The Hyderabad-based microfinance institution has turned profitable, written-off its loan portfolio in Andhra Pradesh and is growing its businesses outside the state.
Investors seem impressed. The company stock gained about 150 per cent in the last one and a half years. And, analysts expect the stock to appreciate further. “We think the first stage of recovery is almost complete and now, the company can build from this position to grow the loan book and profitability over the next couple of years. Therefore, we still feel the stock can further re-rate from here and there are chances of further upgrades,” Santosh Singh and Nidesh Jain, analysts with Espirito Santo Securities, said in a note to clients.
Credit supply
In October 2010, the Andhra Pradesh government decided to curb micro-lending activities of private players in the state. This followed allegations they charged poor borrowers exorbitant rates of interest and used coercive ways to recover loans. The move made banks reluctant to offer fresh credit to micro-lenders, as they feared the loans would turn non-performing. This further hit microfinance companies, as they didn’t have funds to offer fresh loans to sustain operations.
Probably, SKS was the only exception. The company raised Rs 1,400 crore in 2011-12 and an additional Rs 2,800 crore in 2012-13 through a combination of term loans and sale of securitised loans. It also raised Rs 263 crore through a qualified institutional placement and preferential allotment of shares.
“I believe our decision to opt out of the CDR (corporate debt restructuring) programme helped. We did not ask our lenders to reschedule our loan repayment. This probably gave them confidence to offer more loans. Our equity investors realised our performance was affected largely because of external factors. We also demonstrated the company was making serious efforts to revive its operations,” S Dilliraj, chief financial officer at SKS, told Business Standard.
While seven micro-lenders decided to restructure their debt after the crisis, SKS had repaid Rs 5,800 crore of loans to banks. The company managed to repay the loans by recovering money from its loan portfolios outside Andhra Pradesh. During the crisis, about 70 per cent of the company’s credit assets were outside Andhra Pradesh. “We now have a comfortable capital adequacy ratio. But as a growing financial services entity, we will keep evaluating all funding options, both debt and equity, from time to time,” Dilliraj said.
To cut costs, SKS optimised its distribution network and headcount. Since the crisis, the company almost halved its branch count to 1,256 and reduced its workforce by about a third to 9,173. This allowed SKS to cut operating expenses and staff costs by about 50 per cent.
The strategy seems to be working. SKS has recorded profits in the past four quarters, after seven quarters of losses. “At least for the next six-12 months, we would like to increase our assets under management without adding to the existing infrastructure of branches and personnel,” Dilliraj said.
Diversification
The company’s decision to diversify its business outside Andhra Pradesh and expand its product suite beyond micro-loans helped the company survive the crisis. As of December-end 2013, nearly the whole of SKS Microfinance’s loan book of Rs 2,029 crore was accounted for by states other than Andhra Pradesh. The company has now shifted its registered office to Mumbai and started offering loans to micro-borrowers to buy mobile phones. It also lends against gold jewellery.
Dilliraj, however, clarified micro-lending would continue to remain the company’s primary business, adding the new products were introduced to complement its core business. In the medium term, SKS expects microfinance to contribute 90 per cent to its credit assets, 85 per cent to its revenues and 25 per cent to its earnings.
Investors seem impressed. The company stock gained about 150 per cent in the last one and a half years. And, analysts expect the stock to appreciate further. “We think the first stage of recovery is almost complete and now, the company can build from this position to grow the loan book and profitability over the next couple of years. Therefore, we still feel the stock can further re-rate from here and there are chances of further upgrades,” Santosh Singh and Nidesh Jain, analysts with Espirito Santo Securities, said in a note to clients.
Credit supply
In October 2010, the Andhra Pradesh government decided to curb micro-lending activities of private players in the state. This followed allegations they charged poor borrowers exorbitant rates of interest and used coercive ways to recover loans. The move made banks reluctant to offer fresh credit to micro-lenders, as they feared the loans would turn non-performing. This further hit microfinance companies, as they didn’t have funds to offer fresh loans to sustain operations.
Probably, SKS was the only exception. The company raised Rs 1,400 crore in 2011-12 and an additional Rs 2,800 crore in 2012-13 through a combination of term loans and sale of securitised loans. It also raised Rs 263 crore through a qualified institutional placement and preferential allotment of shares.
“I believe our decision to opt out of the CDR (corporate debt restructuring) programme helped. We did not ask our lenders to reschedule our loan repayment. This probably gave them confidence to offer more loans. Our equity investors realised our performance was affected largely because of external factors. We also demonstrated the company was making serious efforts to revive its operations,” S Dilliraj, chief financial officer at SKS, told Business Standard.
While seven micro-lenders decided to restructure their debt after the crisis, SKS had repaid Rs 5,800 crore of loans to banks. The company managed to repay the loans by recovering money from its loan portfolios outside Andhra Pradesh. During the crisis, about 70 per cent of the company’s credit assets were outside Andhra Pradesh. “We now have a comfortable capital adequacy ratio. But as a growing financial services entity, we will keep evaluating all funding options, both debt and equity, from time to time,” Dilliraj said.
To cut costs, SKS optimised its distribution network and headcount. Since the crisis, the company almost halved its branch count to 1,256 and reduced its workforce by about a third to 9,173. This allowed SKS to cut operating expenses and staff costs by about 50 per cent.
The strategy seems to be working. SKS has recorded profits in the past four quarters, after seven quarters of losses. “At least for the next six-12 months, we would like to increase our assets under management without adding to the existing infrastructure of branches and personnel,” Dilliraj said.
Diversification
The company’s decision to diversify its business outside Andhra Pradesh and expand its product suite beyond micro-loans helped the company survive the crisis. As of December-end 2013, nearly the whole of SKS Microfinance’s loan book of Rs 2,029 crore was accounted for by states other than Andhra Pradesh. The company has now shifted its registered office to Mumbai and started offering loans to micro-borrowers to buy mobile phones. It also lends against gold jewellery.
Dilliraj, however, clarified micro-lending would continue to remain the company’s primary business, adding the new products were introduced to complement its core business. In the medium term, SKS expects microfinance to contribute 90 per cent to its credit assets, 85 per cent to its revenues and 25 per cent to its earnings.