Not so long ago, the Indian microfinance industry was like a newly discovered treasure box, a storehouse of seemingly never-ending riches emanating from interest payments on loans to the poor. Then came a rash of suicides followed by an ordinance, in October 2010, by the Andhra Pradesh government, which prevented microfinance institutions (MFIs) from doing business in the state, leaving the industry in shambles.
Two years since that act was passed, Rs 7,000 crore of non-recoverable dues of MFIs in the state have gone up in smoke. A series of laws now keep a close watch on MFIs, especially on interest rates charged by them. Vikram Akula, former head of SKS Microfinance and once the most powerful person on the MFI circuit, has left it to join a little-known agriculture consultancy firm, AgSri, as a director. Names like Suresh Gurumani, the famous CEO of SKS who was sacked by Akula, have receded from public memory. Some 30,000 jobs have been lost. Yet, while the industry may never regain its past lustre, evidence suggests that the MFI industry may well be on the path to revival.
The revival of SKS
Before 2010, four Andhra Pradesh-based MFIs — SKS, Share, Spandana, and Asmitha — together constituted more than 60 per cent of the business of microfinance, with SKS being the largest, and the only listed firm. Today, SKS has been usurped by West Bengal-based Bandhan in terms of size. At the end of the first quarter of this financial year, SKS had a portfolio outside Andhra Pradesh (the active portfolio of SKS), of about Rs 1,229 crore, which is less than half of Bandhan’s portfolio of Rs 3,467 crore.
|A GLIMMER OF HOPE
- Banks in the first quarter of FY 2013 lent close to Rs 8,000 crore to MFIs, against almost nil in the same period last year
- Recently, Intellecash Microfinance Network bought a majority stake in a Kolkata-based MFI, called Arohan Financial Services. This was the first acquisition in the MFI space since 2010
- Gross loan portfolio by MFIs in 2011-12 dropped 15% over 2010-11, at Rs 15,400 crore
- On the other hand, non-AP MFIs gross loan portfolio increased by 22%
- Securitisation transaction increased 100% in FY 2011-12 to Rs 3000 crore, versus Rs 1500 crore in FY 2010-11
Ironically, in spite of the shrinking size of its portfolio and a net loss of Rs 30 crore last quarter, SKS’s share price has risen by almost 50 per cent since July. In the same month, the MFI raised Rs 230 crore through a qualified institutional placement (QIP), which was oversubscribed on the last day of its issue. Last month, the Royal Bank of Scotland (RBS) bought five million shares of SKS for a little over Rs 58 crore, while Morgan Stanley Asia (Singapore) had acquired 4.5 million shares of SKS for over Rs 54 crore through open-market transactions. This was probably because the company’s loss had come down substantially, from Rs 329 crore in the quarter ended March 31, 2012, to Rs 30 crore last quarter. “Three factors — optimisation of cost structure, digitisation of accounts and recapitalisation, have helped SKS come out of its blues,” said Dilli Raj, SKS’s chief financial officer.
In a sign of the times, SKS has been expanding its portfolio in states like West Bengal and Karnataka, and is even mulling a shift in its headquarters from, Hyderabad to Mumbai. Notably, SKS was the only major MFI in Andhra Pradesh which did not opt for corporate debt restructuring (CDR) by banks. The process would have restricted SKS from taking independent business decisions, as it would need the consent of banks. Between January and March this year, banks had lent close to Rs 1,360 crore to the MFI. In fact, in the first quarter of the present calendar year, banks had lent close to Rs 8,000 crore to MFIs, versus almost nil last year.
Diversify or perish
MFIs will never be able to make the kind of profits they did before 2010. Therefore, diversification has emerged as a key strategy for survival. As part of business model restructuring, SKS is planning to diversify by entering into the business of gold loans through a separate non banking finance subsidiary. “While, we always planned to be in the business of gold loans, after the crisis, we expedited the process,” said Raj.
Share, which used to be one the biggest MFIs in the country, is also keen to diversify. “In the current environment, Share is re-engineering leaner, cost-efficient systems and processes for its model in non-AP operations. We want to diversify into new services up to the permissible level of 15 per cent of portfolio, provide credit-plus services to the government, pension funds, insurance houses, banks and financial institutions,” said Udaii Kumar, founder of Share.
As part of its diversification plan, the country’s largest microfinance institution, Bandhan, has entered the retail business under the entity, Bandhan Creation. The marketing outlet of Bandhan has been incorporated as a separate company, and, once it expands, the firm plans to raise funds exclusively for the retail business through the vehicle, with eventual plans to expand the retail business overseas.
Other changes are afoot. Trident, which is also a part of CDR cell of the Reserve Bank of India, is looking to move to a system of monthly repayment of loans, against the earlier practice of weekly repayment.
This would help the MFI reduce cost substantially, according to Puli Kishore Kumar, CEO and Promoter, Trident. Recently, Intellecash Microfinance Network Company, a subsidiary of the Intellecap Group of companies, bought a majority stake in a Kolkata-based MFI, called Arohan Financial Services. This was the first acquisition in the MFI space since 2010.
Two big MFIs, Share and Asmitha, are also firming up plans for a merger, making the entity a close competitor to Bandhan. “In the current environment and revenue model, it would be difficult for many MFIs to sustain their operations unless they have robust operational processes and IT systems. The consolidation and mergers would be the solution for MFIs to attain economies of scale and diversify geographically,” said Kumar.
The AP Albatross
The future of the MFI industry now hinges on the recovery of dues worth Rs 7,000 crore stuck in Andhra Pradesh. The inability to collect the money has left all MFIs in the state with a negative net worth. The MFIs are hoping that once the central government passes the MFI Bill, the Andhra Pradesh state law will stand nullified, and they will be able to collect their dues. “It is crucial that the MFI Bill is fast-tracked and heard in Parliament at the earliest. This will provide clarity and will help in the recovery of the sector,” said Alok Prasad, CEO, MFIN.
Cleary, the struggle for survival is not yet over for MFIs, but a silver lining in the clouds is just about visible.