SKS Microfinance: On the Road to Redemption

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Excerpts

In the year 2010, the flourishing microfinance industry in India plunged into a deep crisis. Some analysts and the government of the southern Indian state of Andhra Pradesh accused the industry of charging higher interest rates from the borrowers and resorting to strong-arm tactics to recover the loans from the poor. It was reported that, unable to repay the loans, many of the poor borrowers had taken their own lives. Reports said that a shocking 200 borrowers from the microfinance institutions had committed suicide in late 2010...

The new ordinance issued by the government of Andhra Pradesh had a drastic influence on the business of MFIs operating in the country. As most of the business of MFIs was concentrated in Andhra Pradesh, the non-recovery of loans in the state brought the business activities of SKS to a near standstill. It became very difficult for the organization to raise more loans from banks as the latter were unwilling to lend to the sector. As MFIs could not raise their own money in the form of public deposits, they had to mostly depend on loans raised from banks and other major financial institutions to expand their operations...

After the crisis,, which nearly choked many MFIs to death, SKS and the other MFIs in the country started to follow many new strategies in a bid to revive their growth. As its operations in Andhra Pradesh were still in a limbo, SKS started to focus on expanding in other Indian states. Other Indian states where the growth of the microfinance business was still at a nascent stage did not put any fresh restrictions on the business activities of MFIs. The microfinance sector as a whole was also experiencing good growth rates in many other Indian states. While Andhra Pradesh was experiencing near zero percent growth, other states experienced a 10 to 15 percent growth in the year 2012...

After a hiatus of nearly seven quarters, SKS declared a net profit of Rs.11.5 million for the third quarter ending December 31, 2012, of the Fiscal Year 2012-13. Many analysts agreed that the worst might be over for the microfinance industry in India, but they cautioned that the MFIs still had a long way to travel on their road to redemption. By the end of February 2013, SKS had completed securitization deals totaling Rs.86.6 billion which generated a lot of liquidity for the cash strapped firm. SKS was contemplating altering its fundamental business model to include other businesses in its portfolio...

Other than reframing their strategies, the Andhra Pradesh crisis made MFIs rethink about other business operations related to disbursement and recovery of loans. SKS too implemented a number of steps to protect the interests of its borrowers. It set up an external ombudsman to deal with all the complaints of its borrowers and set up a toll-free helpline in 8 Indian languages to help its borrowers. SKS also started a customer grievance cell to deal with the problems of customers...

Exhibit I: Consolidated Income Statement of SKS (Figures in Rs Millions)
Exhibit II: Major Awards, Achievements, and Acclamations for SKS
Exhibit III: Stock Price Movement of SKS from Its IPO to February 2013
Exhibit IV: SKS Operational Highlights
Exhibit V: Cash Flow Statement of SKS for the FY 2010-11, 2011-12 (figures in Rs Thousands)

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