Governments Meddling In Microfinance

Earlier last week, the Andhra Pradesh state government passed a bill restricting the interest rates and debt collection methods followed by the microfinance industry. To control collection measures, the bill restricts recovery agents to collecting debts only at the district government office. The bill also restricts the frequency of debt collection to once a month instead of weekly. Further, to control interest rates, the bill stipulates that the amount of interest on a loan cannot exceed the loan principle. The state’s politicians are encouraging borrowers to default on their loan repayments in a bid to discourage profit motives of the micro-financiers. According to reports, on the insistence of politicians, creditors in the state have stopped repayments on loans, and less than 10% of borrowers made payments in the past few weeks. India’s microfinance sector is estimated to have a total loan portfolio of Rs 31,500 crores (~$6.90 billion), of which Andhra Pradesh accounts for over Rs 9,000 crores (~$1.96 billion). The recent legislation is expected to hurt the microfinance sector in the country.

SKS Microfinance’s Financials
SKS Microfinance (SKSMICRO.NS) reported Q2 revenues of Rs 373 crores (~$81 million), recording a 75% growth over the year with EPS growing Rs 5.94(~$0.13) to Rs 10.99 (~$0.24) over the year. During the quarter, they increased their network to 2,407 branches, across 19 states. Incremental loan disbursements grew 61% over the year to Rs 3,171 crore (~$689 million) and gross loan portfolio increased 69% over the year to Rs 5,434 crore (~$1.18 billion).

SKS and Market Conditions
The recent government action was a result of the suicides of 30 people in 45 days that were attributed to coercive methods of the MFIs. Reports estimate that 17 of these people were SKS borrowers. Andhra Pradesh accounts for nearly 29% of SKS’s loan portfolio, and the recent legislation will impact their collection and debt disbursal in the state. SKS’s worries are set to become more severe with the state of Orissa also considering a similar rule for its microfinance operations.

Added to that, SKS is being investigated by India’s Insurance Regulatory and Development Authority (IRDA). According to IRDA, SKS has been violating norms by collecting more than 10% commission for insurance policies sold and by receiving checks for death claims on its name instead of in the beneficiary’s name.

SKS’s Corporate Partners
Amid such controversy, there are also reports that SKS’s corporate partners have become wary. SKS has tied up with players like Nokia, Airtel, and HDFC, to name a few, to help them expand their rural network. These projects were in pilot stage and expected to go live soon. However, the corporate partners are now waiting for SKS to resolve their regulatory issues before moving ahead.

The stock is trading at Rs 663.30 (~$14.41). It recently touched Rs 650.75 (~$14.14), far below its IPO price of Rs 985.00 (~$21.40).

The microfinance sector is an important tool in the portfolio of India and other developing nations. It is very important that regulatory issues are sorted out quickly to ensure that credit continues to be available for people trying to climb out of poverty.