Against a 4 per cent dip in the BSE Sensex, the scrip of SKS Microfinance, India’s largest microfinance institution (MFI), has gained nearly 2 per cent since January 19 — the day the Malegam committee report was made public. While, RBI has invited suggestions on the committee’s proposals, experts believe, if implemented, these could impact the growth prospects and profits of MFIs in the medium-term. While, there are some positives, these proposals may cap the revenue growth and profit margins of SKS and other MFIs.
Meanwhile, SKS’s December results disappointed, reflecting problems the company faces in Andhra Pradesh, its key market, and its pre-emptive move to provide for likely loan losses (thereby lowering profits) to meet the Malegam committee’s recommendations. Analysts believe concerns on recoveries, along with deteriorating financials, will continue to keep the stock under pressure.
Near-term headwinds
The Malegam Committee’s recommendations are both positive (from a long-term perspective) and negative (in the medium-term). It has suggested a 10-12 per cent cap on the gross margin (difference between lending rates and borrowing costs). However, given the high operational costs involved, which are in excess of 10 per cent, it will have a major impact on profits, unless players drastically cut costs.
| PROVISIONING WOES | |||
| In Rs crore | Q3-FY11 | Q2-FY11 | % chg |
| Total Revenue | 389 | 373 | 4.3 |
| Provision & Write-offs | 101 | 17 | 494.1 |
| Net profit | 34 | 81 | -58.0 |
| Net NPA (%) * | 0.2 | 0.1 | -13 |
| ROA (%) * | 2.3 | 5.6 | -330 |
| ROE (%) * | 7.5 | 22.8 | -1,530 |
| * change is in basis points Source: Company | |||
Certain proposals, if accepted, could also shrink the target market of MFIs. For instance, it has recommended MFIs lend only to borrowers with annual family income of less than Rs 50,000, which leaves out the urban poor and rural middle class. Likewise, a borrower can either be a member (take loans) of a self help group or an NBFC-MFI .
If implemented in totality, SKS management expects the norms to impact profit margins by 100-120 basis points.
Analysts also expect return on assets of MFIs, including SKS, to nosedive from 5-6 per cent to 2-3 per cent, which is also partly reflecting in SKS’ recent results.
On the brighter side, the committee’s proposal that RBI be the sole regulator for MFIs is a positive, as it saves lenders from adhering to multiple laws and ad hoc or politically motivated moves taken by these local bodies/states. While, it has suggested that banks should continue to treat MFI loans as priority sector loans, giving MFIs the flexibility to fix the frequency of repayment with their borrowers (weekly / fortnightly / monthly) is a big positive as most borrowers and MFIs prefer weekly payments (it also lowers the risk for MFIs) .
Q3: Provisioning impacts profits
Meanwhile, last Thursday SKS reported a sharp drop in net profit for the December quarter, both year-on-year and sequentially, led by higher provisioning. The total provisioning and write-offs at Rs 101 crore included potential losses of Rs 58.7 crore relating to the Andhra Pradesh portfolio (22 per cent of total business). Though not required, SKS also made a provision of Rs 27-crore to comply with the Malegam committee’s recommendations, thereby impacting the bottomline (by Rs 18 crore) as well as return ratios.
Due to headwinds and lack of clarity (over regulations) in the sector, analysts expect profitability of players, including SKS, to remain subdued in the near-term.
