What was AP debacle for SKS Micro

Discussion in 'Ask A Query About Your Stock Picks And Portfolio' started by Rajesh, May 22, 2015.

  1. Rajesh

    Rajesh Member

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    Can anyone explain what was AP debacle for SKS Micro ? One can share the link too if possible. I tried to find the answer on many sites but could not get it. Actually stock looks good for me on growth and NPA front but this is the risk which can arise again that's why I want to understand it.
    Thanks.
     
  2. Meenakshi Razdan

    Meenakshi Razdan Administrator Staff Member Moderator

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    There is a lot of literature available on the subject. I found one that explains it well:

    "In the wake of incidents like MFIs using unethical practices to recover the loans which apparently lead to suicides by the borrowers, allegation of multiple borrowing and charging high interest rates forced Andhra Pradesh (AP) Government to promulgate an ordinance in October, 2010 to save the borrowers. In December, 2010 Ordinance was enacted as Andhra Pradesh Microfinance Institutions (regulation of money lending) Act. Following the Act, operations of MFIs just came to halt. In 2009 growth of loan portfolio and clients were 95 per cent and 57 per cent respectively; it came down to mere 17% for both in the fiscal year 2010. Loan write-offs also increased in 2010 to 3 per cent from a mere 0.6 per cent for the same period one year earlier. Even with an offer to halve the interest rate charged on overdue loans, the industry was not able to increase recovery rates (MIX Microfinance World, 2011). Ordinance refrained MFIs from collecting money door to door and enjoined them to collect money from the public places mentioned in the Act on monthly basis instead of on weekly basis. Since use of forceful practices to recover loans were now punishable under the Act and in absence of cluster and centre meetings where MFIs usually used to collect money , Andhra Pradesh Microfinance Crisis and its Repercussions on Microfinancing 697 message that was perceived by the borrowers was they are not required to repay their debt and in any case state government is there to protect them. The recovery rate plummeted from 99% to 10%

    However, Andhra Pradesh ordinance did not come out of the blue. Genesis of the Andhra Pradesh Microfinance crisis can be traced back in the year March, 2006 when Krishna district government closed down 57 branches of two largest MFIs (SHARE and Spandana) as well as those of few smaller MFIs. Decision to close down of these MFIs came because of the allegations of unethical collections, illegal operational practices (such as taking savings), poor governance, usurious interest rates, and profiteering (CGAP, 2010). There was even an allegation that 10 borrowers of MFIs in Krishna district committed suicide because they were unable to repay the loans taken from MFIs (Shylendra ,2006). Ghate (2006) cited near-saturation of Andhra with microfinance as one of the most important enabling cause for the crisis. The implication of above point is that borrowing from multiple sources like Velugu (SHG scheme backed by AP Government and assisted by World Bank), MFIs and moneylenders culminated in over indebtedness. Rapid expansion of bank credit as facilitated by initiatives like ICICI partnership model and availability of cheap credit in form of "Pavala Vaddi” scheme, motivated by political consideration, intensified the crisis. As diagnosed by Shylendra (2006) conflict between State supported SHGs and Civil society initiatives in form of MFIs as the major reason behind the eruption of crisis.

    MFIs had to face the brunt of Act in 2010, for not learning lesson from 2006 crisis and ignoring all the warnings pertaining to high interest and growth rate, concentration of activities in the region etc. Over indebtedness in AP can be gauged from the fact that, in comparison to national average of Rs. 7,700, in Andhra Pradesh, the average debt outstanding per household was Rs. 65,000 (CGAP, 2010). Inability of borrowers to repay such huge amount resulted in stress on the part of borrowers and use of coercive methods on the part of MFIs to recover the loan payments, which ultimately resulted in suicides of the borrowers. The government had cited the death of 54 customers by suicide. However state Government backed SHGs were kept out of the purview of the Act though different studies are showing they were also responsible for multiple borrowing. M-CRIL (2011) study clearly stated if the number of MFIs loans is over 100% of the number of eligible, financially excluded families, SHG loans are actually 310% of that number. So keeping SHGs away from the ambit of Act, agonized MFIs and it was perceived by them as an Act to protect state Government backed SHGs from the competition from MFIs. So in the wake of incidents like over‐indebtedness, hype created by the IPO of SKS Microfinance coupled with the reports of suicides in rural Andhra Pradesh resulted in ordinance of 14 October, 2010
    . "

    .....

    https://www.ripublication.com/gjmbs_spl/gjmbsv3n7_02.pdf

    https://www.livemint.com/Industry/hvWN2IbllrX5hXKj3keERL/SKS-Microfinance-The-inside-story.html

    The risk is an omnipresent one. One is dealing with the downtrodden and underprivileged class. A populist government could want to appear to be their saviour when the economy is not doing well.
     
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  3. bholu

    bholu Active Member

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    this is really a great write up ...written with professional and scientific finesse. did you write this?..I was also looking at SKS very closely but then decided not to buy (an inner voice said that something is wrong) ..
     
  4. Meenakshi Razdan

    Meenakshi Razdan Administrator Staff Member Moderator

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    No it copied from this pdf file. The author makes a number of interesting points in it.

    https://www.ripublication.com/gjmbs_spl/gjmbsv3n7_02.pdf
     
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  5. bholu

    bholu Active Member

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    One has to agree with most of the points made by the author, however two points are striking ..the offer by MFIs to charge half interest rates on outstanding loans and the levels of indebtedness in AP compared to national average (almost 9 times)..are they valid ? maybe they are but I was just wondering ....
     
  6. Rajesh

    Rajesh Member

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    Thanks Meenakshi for clarifying the issue. MFI investment is risky. I am already invested, now plan not to increase further.
    It puzzles me why FIIs are so keenly interested in this risky business. It may repeat AP anytime to lose capital permanently.
     
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