SKS Microfinance: On the Road to Redemption|Finance|Case Study|Case Studies

SKS Microfinance: On the Road to Redemption

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Case Details:

Case Code : FINC085
Case Length : 20 pages
Period : 2010-2013
Pub. Date : 2013
Teaching Note : Not Available
Organization : SKS Microfinance
Industry : Microfinance
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"Our four-pronged strategy -- comprising calibrated credit cost approach, cost structure optimization, cash flow management to deliver promises, and capital raise -- has helped us weather the Andhra Pradesh microfinance crisis of October 2010"

-S. Dilli Raj, CFO of SKS Microfinance, in October 2012.

"We have been struck a blow by external forces. Now we are reinventing our company and microfinance. That’s what we are going to focus in this year. Reinvention of microfinance will focus on consolidations of existing customer base, diversifying product offerings and continuing to build consensus to resolve issues in Andhra Pradesh"

-Vikram Akula, Founder of SKS Microfinance in May 2011.

On January 24, 2013, SKS Microfinance (SKS), India’s only listed micro lender, declared a net profit of Rs. 11.5 million for the quarter ending December 31, 2012. The announcement was noteworthy considering that SKS had been incurring losses for seven consecutive quarters before the third quarter of Fiscal Year (FY) 2012-2013 (Refer to Exhibit-I for the consolidated Income Statement and key highlights of the Balance Sheet of SKS from FY 2007-08 to FY 2011-12). The company’s return to profit followed a turnaround plan initiated by the management of SKS to cope with the crisis that had engulfed the microfinance sector in India since 2010

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The microfinance sector in India faced a severe crisis after the state of Andhra Pradesh enacted an ordinance in October 2010 which placed severe restrictions on the activities of microfinance companies operating in the state. The ordinance by the Andhra Pradesh government was the result of a number of allegations regarding the business practices followed by Microfinance Institutions (MFIs) operating in the state. MFIs were accused of resorting to aggressive recovery practices which had allegedly led to the suicides of many small borrowers from the state. The ordinance made it difficult for MFIs to collect dues from the borrowers. Banks and other financial institutions, a major source of funds for MFIs, also stopped lending to them. The non recovery of dues and the halt in the flow of funds from banks made it difficult for SKS to expand its operations. The crisis also led to the exit of SKS’s founder, Vikram Akula, due to heavy pressure from investors.

The management of SKS came out with new strategies to help it emerge from the crisis. SKS started to expand in other Indian states like West Bengal, Bihar, Orissa, etc. where there were no restrictions on the operations of MFIs. It repaid some of its debts from the revenue generated from these other Indian states. It also raised some capital to fund its expansion. New guidelines issued by the Reserve Bank of India (RBI) also eased some of the pressure on SKS to raise funds. It cut costs by closing down branches and removing employees in areas where it had stopped operations. Efficient cash flow practices, securitization deals, and Qualified Institutional Placements (QIP) also helped SKS to overcome the crisis. SKS also started diversifying into other areas like gold loans, loans to small traders, and loans for the purchase of mobile phones to protect itself from future negative policy decisions related to the microfinance sector. On the consumer front, SKS set up an external ombudsman and a toll-free helpline to resolve the grievances of borrowers. It started proper verification of the background of prospective borrowers and instructed its recovery agents not to resort to any aggressive collection practices while dealing with the borrowers Meanwhile, SKS was awaiting the passage of the Microfinance Institutions (Development and Regulation) Bill (MIB) in the Indian parliament. The bill would override any other state legislation and make the RBI the sole regulator of MFIs in India. SKS hoped that the passage of the bill would help it to grow faster in the future.

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