SKS Microfinace has had a chequered life history so far. Its IPO in August 2010 was greeted with great pomp and show. The issue was oversubscribed 13.69 times. The issue price was Rs. 985 per share. It surged to a high of Rs. 1,490 on 22.09.2010. Thereafter, the Andhra Pradesh Government issued an Ordinance in December 2010 which prevented ‘coercive’ recovery from the poverty-stricken micro-borrowers. This caused the stock price to plunge till it reached an all-time low of Rs. 54 on 22.05.2012. Since then, SKS has been clawing back slowly and steadily and is presently at Rs. 465.
According to a detailed report by Parag Jariwala and Vikesh Mehta of Religare Institutional Research, there is another “crises brewing” at SKS Microfinance and they have recommended a sell of the stock.
In a mammoth report running into 191 pages, Parag Jariwala and Vikesh Mehta have painted a grim picture about SKS’ prospects.
The bottomline of the report is that aggressive competition amongst MFIs and ambitious growth targets means that the MFIs are lending to anyone and everyone who walks upto their door with no regard to the risks involved or the potential of the borrower to repay the loan.
The report has conducted a detailed study of crises situations that happened in the past in other countries like Bolivia, Nigeria, Pakistan, Bosnia, Nicaragua, Morocco as well as in Andhra Pradesh and Karnataka.
It also points out that the existing markets for the MFIs are overcrowded and saturated and that a foray into new markets entails higher risk and high operational costs.
The report also “debunks” microfinance misconceptions such as that the credit bureau data is failsafe and foolproof. It makes the shocking revelation that MFIs do not check indebtedness of the borrowers with the retail database with the result that the same borrower can end up borrowing from multiple lenders amounts which are far in excess of his repayment capability.
The report also points out that there is an omnipresent threat of political interference in matters of recovery from the impoverished borrowers. If there is a flood, drought, famine, earthquake or whatever calamity, the politicians will waste no time in enacting legislation which prevent the MFIs from adopting coercive recovery methods so as to woo the vote bank.
At the end of the grim report, Parag Jariwala and Vikesh Mehta are in no doubt that SKS Microfinance will face another crises sooner or later and that it is destined for a hard landing.
Parag Jariwala reiterated his view in an interview to CNBC TV18.
However, surprisingly, Rahul Arora of Nirmal Bang rubbished these concerns. He admitted that he had read the Religare report but he said:
“When you are looking at its business and when you are looking at huge under penetration of microfinance in this country and if you read the recent reports that have come out from regulators of microfinance, I do not see why this company should not be growing at 40 percent. It is a company that has 25 percent return on equity (RoE) and 5 percent return on assets (RaA); private sector banks do not give that. I do not know why you would want to sell this stock. The correction is giving you very good opportunity to enter, the return ratios are strong, the earnings profile is strong and as per our calculation the penetration is probably in the low double digits. So there is a huge scope for SKS Microfinance to grow”.
While SKS’ growth prospects cannot be disputed, Rahul Arora did not deal with the concern that the growth is coming at the cost of aggressive lending to people who may have neither the intention nor the wherewithal to repay the loans.
At this stage, we must note that even Daljeet Kohli is negative about SKS Microfinace. He said
“On the fundamental terms, I do not like this business model of going into microfinance because mainly my concern is that these deals with very poor people and therefore there is always a very high risk of political intervention from various political parties.
So, I would rather avoid such a sector therefore I do not like this stock so we are not recommending this”.
Now, if you do have SKS Microfinance in your portfolio, you have to take a quick decision whether you want to continue to back it or shift to some other NBFC like Capital First or Bajaj Finance!