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SKS Microfinance1 MUMBAI: Spandana Spoorthy Financial Services, Share Microfin and Asmitha Microfin plan to merge their businesses to create the largest lender to small entrepreneurs, surpassing SKS Microfinance, said three people familiar with the proposal. The merger will bring down costs and improve their chances of returning to profitability, saving thousands of crores of rupees lent by banks, those people said. "We have made a proposal before the corporate debt restructuring cell to merge the three entities,'' said Padmaja Reddy, founder and managing director of Spandana Spoorthy Financial Services. "We have an in-principle approval from the shareholders. This will help us to improve our net worth and bring down our operating cost." The merged entity will manage assets of about 6,600 crore, higher than SKS' 4,300 crore. However, there is no certainty the merger will go ahead as the banks are yet to approve it. The three lenders have been negotiating with banks to continue their operations that became unviable after the Andhra Pradesh state law curbed lending practices and loan recovery. Borrowers started voluntarily defaulting since the companies were robbed of the methods they adopted to recover. Although recovery remained at 95% in the rest of the country, in Andhra Pradesh, where two-thirds of the business was concentrated, it collapsed to 22%. Almost all of the microfinance institutions in the state plunged into losses. The government was also forced to designate the Reserve Bank of India as the single regulator for the sector. "We have accepted all the terms put up by the CDR,'' said M Udaia Kumar, promoter, Share Microfin."We have agreed to pay 8 crore as promoters' contribution from both Share and Asmitha to the empowered group of CDR cell." These companies were admitted into the debt restructuring programme by lenders as they could not meet their payment commitments. The restructuring itself was dragging on for months since the promoters were not willing to give personal guarantees. "They will have to agree to the terms of the committee,'' said a person familiar with the negotiations. "Bankers will be keen on improving the business," the person said on condition of anonymity. Spandana has agreed to pay Rs 7 crore as promoters' contribution. The industry may be slowly getting out of the woods with improvement in liquidity and possibility of equity funding from other investors. SKS Microfinance is the only listed MFI in the country which raised around Rs 1,600 crore through a public issue last year. It boasts of investors such as Infosys Technologies founder NR Narayana Murthy and private fund Sequoia Capital. With the central bank now planning to come out with comprehensive regulations based on the recommendations of YH Malegam committee, more microfinance institutions may get a lifeline as banks feel comfortable in reviving their lending to the sector. However, profitability may be under pressure with RBI capping lending rates.
SHILPY SINHA & ANITA BHOIR, ET Bureau Aug 13, 2011, 01.39am IST
with investors closing over 200 venture deals estimated at $1. At present there are about five KGFS centres serving 10 districts across Tamil Nadu. 2 Biswarup Gooptu. both. with the common consensus being that fund corpus and deal sizes are. The expectations from 2012 are quite promising.000 grant to Bangalore-based public charitable trust. Orissa and Uttarakhand. partner invest 26 crore in IFMR rural channels2 BANGALORE: Mumbai-based Lok Capital and one of its limited partners have together invested $5 million ( 26 crore) in IFMR Rural Channels for an undisclosed stake. 01. will be used for building Kshetriya Gramin Financial Services which offers financial services in remote rural locations. in September it had invested $3 million in rural business process outsourcing firm Rural Shores. Ujjivan's fifth round of equity financing. after the turmoil in the microfinance sector and concerns over corporate governance saw them adopt a rather hands-off approach. SKS Microfinance.5 million in Bangalore-based Edusys Services. and Mumbai Angels investing 5 crore in eDreams Software Innovation. This was in spite of 2011 being perceived as a blockbuster year for venture capital investing. has seen investment play by the risk capital industry. compared to $699 million invested across 132 deals in early-stage companies in 2010. which was set up by e-Bay founder Pierre Omidyar and his spouse. The KGFS portfolio includes savings.Article 2: Lok Capital. as they look to diversify their portfolio and significantly raise their assets under management. ET Bureau Mar 30. with Ujjivan raising $25 million earlier in January. The microfinance sector. The philanthropic investment firm. The latest investment by Lok Capital is the third such from its second fund. which will be paid out in a single tranche. expected to grow in the current year. also completed two rated pool assignment transactions worth 221 crore and two assignment transactions worth 100 crore from two PSU and an equal number of private banks totaling 321 crore. early-stage investment fund Kae Capital raised $25 million from a number of marquee venture capital firms which includes impact investment firm Omidyar Network. Lok Capital's series A investment in IFMR Rural Channels. and also participated in urban microfinance venture. underscoring the return of impact investing by venture capital firms after a lean 2011. small-ticket loans and investments using a wealth management approach for low-income consumers. too.28AM IST . the only listed microfinance company in India. insurance. also announced a three-year $950. Other recent deals include Sequoia Capital investing $7. Last year. Venture capital firms are making a cautious return to investing in the country's social enterprises. remittance. 2012.09 billion. The development also draws attention to the fund of funds investment strategy being increasingly utilised by risk capital in India. The education sector has been one of the early gainers with Omidyar Network investing an undisclosed amount in education resources company EnglishHelper on March 22. Akshara Foundation. Earlier in the month.
Dilli Raj. CFO. it will override the AP MFI Act. said a top executive of the company today." Dilli Raj told PTI. That would allow us to start collation and lending again in State. The Act mandated the MFIs to take permission from the Government before lending to borrowers and also insisted the collection cycle to be monthly instead of weekly. That brings a long term regulatory clarity and most importantly upon passage of MFI Bill. India's only listed microlender. 10. today said it will be able to collect up to Rs 800 crore from Andhra Pradesh loan portfolio if the Microfinance Bill is passed as mentioned by the Finance Minister in his budget speech today. 3 PTI Mar 16. SKS suffered a loss of Rs 1031 crore for the nine months period ended December 31. AP Microfinance Ordinance was implemented on October 15 2010 and subsequently made that into an Act in the wake of a spate of suicides by the borrowers allegedly due to the coercive recovery practices by the MFI agents in Andhra Pradesh.27PM IST . 2011 against Rs 181 crore profit after tax for the same period in the previous fiscal. totally we will be able to collect Rs 500 to Rs 800 crore from the outstanding. 2012." "We have written off Rs 900 crore on AP portfolio... SKS Microfinance said the total receivables from the Andra Pradesh is nearly Rs 1300 crore and they had to write off Rs 900 crore so far. The legislation clipped the wings of all microfinance institutions including SKS by curtailing their activities.Article 3: Budget 2012: Microfinance Bill will help SKS recover Rs 800 cr in Andhra Pradesh3 HYDERABAD: SKS Microfinance. "The finance minister confirmed that the Microfinance Bill will be tabled in the current session.
too. experts said. In the previous year. Three leading ratings agencies—Crisil Ltd. exports and other weaker sections. This helped to improve investor confidence in the industry and prompted banks to be more active in the securitization market. Following this. after more than a year. This has been done through securitization—a process of pooling loans and turning them into marketable securities and selling them. bolstered by clarity on regulations and revival in investor confidence. Icra rated securitization deals worth Rs800 crore in January-March from 11 transactions. Since then. In December.700 crore. the collection rates of MFIs in the state fell to 5-10% and MFIs stopped giving loans to borrowers. The government is also in the process of formulating a national regulation to govern the sector. Crisil rated around Rs260 crore worth of loans in the fourth quarter as against Rs90 crore in the year-ago period and the quantum of microfinance securitization rated by Care Ratings is Rs930 crore during January-March from Rs830 crore in the year-ago period. compared with Rs100 crore in the last quarter of 2011 from two transactions.” Abhinav Sharma. They can make up for any shortfall by buying such portfolios. The sector plunged into a crisis after Andhra Pradesh. MFIs are firms that give small loans to low-income borrowers at 24-36%. RBI formulated regulations to govern NBFCs incorporated as MFIs. “Till last year. banks rush for such transactions towards the end of a fiscal year. bank loans to NBFCs (non-banking financial companies) to on-lend to specific segments could qualify as priority sector loans. said. at Care Ratings. Banks are aggressively returning to the securitization market.000 crore worth of loans in fiscal 2012. also to meet their so-called priority sector lending target by buying such loan pools. passed a law to regulate MFIs. almost double the amount in the previous year. capping the interest rate they can charge from clients at 26% and their margin at 12%. it was around Rs1. which is expected to supersede all state-level regulations on MFIs—such as the Andhra Pradesh 4 Tamal Bandyopadhyay Mint’s deputy managing editor in Mumbai . NBFCs. commercial banks. stopped lending to the firms in the southern state. assistant general manager. The loan securitization transactions rose in the January-March quarter.000 crore worth of loans in the microfinance industry in 2011-12. Typically. Care Ratings Ltd and Icra Ltd—have rated at least Rs3. But norms have changed to quality banks’ purchase of securitization portfolios for this purpose. banks have to lend 40% of their loans to agriculture. The new rules restricted MFIs from collecting money weekly and made it mandatory for microlenders to secure government approval to issue every second loan to a borrower. Under current norms. the largest market for microfinance.Article 4: MFIs see sharp rise in securitization deals4 Mumbai: The fund-starved microfinance institutions (MFIs) have sold Rs3.
majority of the loans have been given to agriculture and small. Article 5: Can india’s MFI industry be saved?5 Andhra Pradesh. Ltd. the investor confidence came back and banks started looking at the sector again.law. SKS did securitization deals of around Rs1. As the female population in Andhra Pradesh is 42. In the January-March quarter alone. About 9. theoretically one in every 11 Andhraites is a defaulter. and Kolkata-based Bandhan Financial Services Pvt. when the Indian government announced a Rs60.000 crore debt-waiver scheme for farmers across the nation. in 2008. “The MFI industry has gone through a difficult time since the Andhra Pradesh law. the debt has not been waived even though a section of the local politicians has created that impression and encouraged borrowers not to pay back. Somewhere in the second half of 2011.” Pai said. As Andhra Pradesh has a population of 84. Ramraj Pai. “It is always cost-effective to go for a securitization deal if you have a good rated pool and cash guarantee support. He did not want to be named. the money involved in Andhra Pradesh is minuscule compared with the national debt-waiver scheme.and medium-sized companies. is not the actual case as most such borrowers have more than one account. By industry estimates.06 trillion during the same period in last year. director. Of this. Crisil. To put the Andhra phenomenon in perspective. Bandhan concluded a securitization deal worth Rs500 crore in February. however. but the point to note is that in this case. Indian banks have lent Rs12. has set a world record. Among the MFIs which have done large securitization transactions are the country’s lone listed microlender. up from Rs12. one in every 10 women in this state has borrowed from MFIs but not repaid. around four million people of the state—almost all women—have turned defaulters. This. securitization transactions will continue to remain a viable investment along with direct lending because of the credit enhancement and the structural features built into the transactions. India’s fourth largest state by area and fifth largest by population. said.6 million (2011 census provisional figure).7 trillion to the so-called priority sector as on 24 February 2012.2 million borrowers in the southern state have defaulted in repaying money borrowed from microfinance institutions (MFIs)—the largest number of defaulters in any location in the world.000 crore and around Rs1. SKS Microfinance Ltd. According to Pai. 5 Tamal Bandyopadhyay Mint’s deputy managing editor Mumbai .” the head of a leading state-run bank. Indeed.1 million.120 crore in the full fiscal. said improved confidence in the sector has encouraged banks to actively return to the securitization space. some 40 million farmers didn’t repay debt.
keeping themselves afloat is not an easy task as commercial banks.200 crore in 2010 and they have been able to collect from the borrowers only 10% of this money.000 crore in October 2010. The outstanding loan book of the industry. They are carrying on their books Rs. banks are now charging more. Share Microfin Ltd. No wonder then most MFIs are making losses. which accounted for at least a quarter of the microlending industry. hasn’t got any money from banks ever since the Andhra crisis broke out. 80 crore in March 2010 to Rs. In 2010 and early 2011. and at least 30% of 1. Apart from giving tiny loans. close down offices and retrench employees. an RBI panel capped the loan rate by MFIs at 26% and the margin at 12%. are not forthcoming in giving money for fear of piling up bad assets.The MFI industry’s total exposure to Andhra Pradesh was around Rs. many of India’s big MFIs’ net worth will turn negative.50. which was Rs. even though it doesn’t have a single borrower in the southern state. and when they write off this amount in March. Unless the Reserve Bank of India (RBI) relaxes the prudential norms that stipulate a 15% capital adequacy ratio (Rs. It lends to poor people in eastern Uttar Pradesh and Bihar. an MFI in West Bengal. SKS Microfinance will be the least affected as it had raised money from the public through its capital float in August 2010. the others are in a bad shape. which provide 90% of resources that MFIs need for business. is one of them.500 crore worth of bad assets. 15 capital for every Rs. With no fresh money in the kitty and Andhra Pradesh borrowers not repaying loans. The law. promulgated a law to control microlenders after a spate of reported suicides following alleged coercive recovery practices adopted by some. many will have to shut shops. which takes care of the tiny loan needs of the urban poor. These norms were fine when banks were giving money to MFIs at 11%.The origin of the crisis was in October 2010 when Andhra Pradesh. Utkarsh Micro Finance Pvt. and sells mortgages and enterprise loans through 66 branches across 41 cities in 11 states. 6. it is shrinking assets and closing down offices. Ltd of Varanasi is another instance. For lack of resources. The . 100 worth of loans) for this set of financial intermediaries. a few banks have started sanctioning loans but they are not releasing money. MFIs are forced to shrink loan books. Interestingly. Asmitha Microfin Ltd and Vijay Mahajan-promoted Bhartiya Samruddhi Finance Ltd—India’s oldest MFI. With the increase in interest rates. and if we add to that the processing fee and the cash margin that MFIs need to keep with the banks. But even then. made government approval mandatory for borrowers taking more than one loan. has shrunk to Rs.000 crore in January. banks withdrew all lines of credit. Arohan Financial Services Ltd. Subsequently. Subsequently. 7. 260 crore now. Janalakshmi distributes financial products such as pension and insurance. 15. In this pack. The MFIs that will bear the brunt will include India’s lone listed microlender SKS Microfinance Ltd. There are a few exceptions though. which restricted MFIs from collecting money from borrowers on a weekly basis. at the end of the current fiscal. Spandana Sphoorty Financial Ltd. For instance. The Bangalore-based firm has grown its assets from Rs. 30. Some are restructuring the debt taken from banks.0000 employees have been shown the doors. the effective cost of money is at least 17%. even the MFIs which do not have any direct exposure to Andhra Pradesh are being shunned by the banks. Janalakshmi Financial Services.
It has recently overtaken SKS in terms of loan book size. and even though SKS founder chairman Vikram Akula endorsed it at that time. In January itself it achieved the year-end target and may end the fiscal with a loan book of Rs. It has been talking to SBI and ICICI Bank Ltd for this. the duo hopped across to State Bank of India (SBI) headquarters in Mumbai’s business district Nariman Point. but they could do so only because of the aggressive initiative of two shareholders who are also directors—Paresh Patel. Both the banks as well as a very large Indian corporation may even pick up stakes in SKS. the industry needs to get rid of its obsession for growth and learn from the Bandhan and Janalakshmi experiments to reorient its business models. the independent directors of the SKS board such as P. managing director of WestBridge Capital. Rao and chief financial officer Dilli Raj were seen leaving the firm’s crucial board meeting in Mumbai on Wednesday much before it got over. where the board meeting was held. and earn fees. Tarun Khanna.Kolkata-based Bandhan Financial Services Pvt. At the same time. Its bad assets have grown but are still way below 1% of total assets and it is making profits. The government and RBI must draw an MFI survival strategy before it’s too late. The SKS saga is the story of a clash of personalities. A meeting was scheduled with SBI’s two managing directors to discuss India’s lone listed and till recently the biggest microlender’s new business strategy—conversion from a microfinance institution (MFI) to a multi-product rural financial services company. CEO of Sandstone Capital Advisors.H. The problem was elsewhere. The dramatis personae in this theatre of the absurd are Akula. Chandrasekaran played a role in Akula’s exit. SKS wants to play the role of an intermediary between banks and rural India. he started opposing it later. The death of the MFI industry will push the poor into the grip of moneylenders and deal a blow to the government’s financial inclusion drive. Raj and former CEO and managing director of SKS. Suresh Gurumani.R. Indeed. Ltd’s office. and Sumir Chadha. We need them at least till such time the banks are ready to reach out to the masses. 3. From private equity fund Sandstone Capital Advisors Pvt.500 crore. Geoff Woolley and V. Article 6: Why did Akula have to go? The untold story6 SKS Microfinance Ltd’s managing director and chief executive officer (CEO) M. The decision to change the business model was taken at a meeting in San Francisco in August. Ravikumar. Ltd is another MFI. But Akula’s ouster from SKS was not the result of serious differences on strategic issues between him and other senior executives and/or the board as it has been made out to be. Both saw massive erosion in the value of the firm because of the conflict between Akula and the Rao6 Tamal Bandyopadhyay Mint’s deputy managing editor Mumbai . Rao.
but the independent directors scrapped this arrangement as they expected the chairman to be the guiding light of the firm and not a hands-on manager.Raj duo. It is yet to submit its report. Rao and Raj had joined hands with Akula o throw Gurumani out. At the San Francisco meeting. Once the committee was dismantled and Rao was asked to oversee day-to-day operations. but Akula continued to interfere in operations. Ernst and Young was appointed to conduct a forensic audit of SKS. but the two later fell apart. which neither had any other member nor held meetings.R. The company also instituted an advisory board. The board ratified the sale treating it as a one-off case because Murthy’s integrity is unquestionable. At least one independent director put his foot down against this. The first time the independent directors of SKS found something amiss in the firm’s corporate governance was when N. He was persuaded to withdraw this by other members of the board. who pointed out that an on-the-record dissent note would weaken the company’s case should Gurumani legally challenge his ouster. Almost nobody would talk to him. Gurumani was appointed as CEO because the board did not find Rao fit for the top job. Rao himself was instrumental in bringing Gurumani on board. Apparently. He tried to do so by setting up a committee of executives who would directly report to him. The stock lost at least 90% since September 2010 and is now trading at less than its book value. backed by Rao and Raj. Subsequently. They also claim he becomes insecure about his role and position if he is not operationally in control. . bypassing the managing director and CEO. The first clash happened when Akula. SKS insiders say Akula has vision and passion. Akula defended the pricing by saying it had been committed to earlier. but after that mission was accomplished. Akula did not protest and also endorsed a decision to get into gold loans. The Rao-Raj combination and Akula did not find Gurumani adding much value to the company and claimed he was spending more time in Mumbai with his family than in Hyderabad where the firm is based. Rao was made the CEO and managing director after Gurumani’s ouster. the group split. but lacks the ability to execute plans. headed by Murthy. with Akula in one camp and the duo in the other. when the decision was made to change the business model. Akula found himself completely isolated. as Gurumani had steered the historic IPO and wrote a dissent note against his ouster. Earlier. But later he expressed his reservations on changing the character of the company. He used to come to office and stare at the wall in his room. Narayana Murthy’s Catamaran Ventures was given a stake in the company at a price lower than what other investors (who had come in earlier) had paid. wanted to throw Gurumani out in October 2010 after SKS’ blockbuster initial public offering (IPO).
" Dilli Raj. told Reuters. we should return back to profits. under Indian law. after the IPO. but love of power. The meeting took as long as it did because there were several formalities to be completed —for instance. imposed a set of restrictive laws in October 2010 curtailing microfinance activity in the state. virtually did not hold any stake in SKS. "The provisioning and write-offs on the Andhra Pradesh (AP) portfolio has contributed to the loss. there are tax implications as Akula continues to be a US citizen. The two directors increased pressure on Akula to quit when he asked for an extension to exercise the first tranche of his employees stock option scheme. Wednesday’s three-hour board meeting was bereft of acrimony and Akula carried himself with dignity. but he could not arrange the money to pay for his stock option schemes and hence wanted more time to exercise it. The board is aware of this and wants to build a second line of leadership fast. the market price of the stock was higher than the price at which options were given to him and he could make money by selling them). 2012 9:29pm IST . Akula plans to start a new innings in the mobile banking space and I am sure he will do well. Akula had to give back the company laptop and minutes of past board meetings.Once the two shareholders’ representatives found the firm losing its value fast because of the infighting. Article 7: SKS Microfinance CFO says sees turnaround by Q1 FY137 SKS Microfinance (SKSM. but when Rao and Raj joined hands against him. "In the first quarter of financial year 2013. with both Gurumani and Akula out. he wanted Gurumani to return to tackle the two. India's microfinance sector came under severe stress after Andhra Pradesh. Besides. There was no severance package even though Akula had completed only about a year of his three-year term as chairman because. the chief financial officer of the microfinance firm. He also had to sign papers saying he would not start a venture that would compete with SKS and poach employees. the industry hub at the time. He threw Gurumani out. as very few can match his passion and vision. 7 Arjun Kashyap Reuters Thu Jan 19. who. He had to leave SKS not because of his greed for money. hopes to turn to profit by April-June after a third straight quarterly loss in FY12. which were with him. there is no provision for compensating for the unserved period. scaring away banks and investors and prompting many small to mid-sized lenders to the poor to shut shop. Now. on better recoveries and greater reach beyond Andhra Pradesh state. along with the change in business model. After SKS. the investors will keenly watch how long the bonhomie between Rao and Raj will last.NS). He was allowed to do so after he committed to quit SKS." he added. a top official said. the only public microfinance company in India. they stopped supporting Akula. Akula has been given two tranches of these schemes and sometime in August he was “in money” for the first tranche (this means.
7 percent in a firm Mumbai market that closed up 1. The worst is over." Raj said. which is currently worth about 4. and attracted investors such as George Soros and Goldman Sachs to SKS. a Yale-educated microfinance pioneer who founded SKS in 1997. citing issues such as high operational and funding costs. co-founder of Hyderabad-based Intellecap. said Anurag Agarwal. a consulting firm for microfinance operators. cash-strapped SKS said it would raise up to 5 billion rupees through a share sale to institutional investors by March 2012. then there is no additional hit to the AP portfolio P&L account. However. Raj said. . and raised the investment limit of foreign institutional investors in the company to 74 percent from 24 percent. overriding the restrictions imposed by Andhra Pradesh state. Akula. skepticism persists.8 billion rupees. The sector is now awaiting passage of a federal law that would make the central bank the sole regulator of the sector. which is posting a collection rate of 96 percent. reflecting the sliding fortunes of the country's beleaguered microfinance sector.2 percent. Since the turmoil SKS has been beset with bad loans. "I think it'll be a stretch for them to turn profitable in the first quarter of fiscal year 2013. Eventually the trouble saw the exit of its highprofile founder Vikram Akula in November 2011." he said.28 billion rupees. personnel issues and repayment problems in states other than AP such as West Bengal and Madhya Pradesh. "We have put the AP problem behind us. Last December. On Thursday. "So." he added. was named one of the 100 most influential people in the world by Time magazine in 2006. In 2011. if we were to use that to adjust it to the AP portfolio exposure. The loss is its third in a row following two earlier quarters of fiscal year 2012. It will take some time for banks to resume lending but if they are able to raise capital and sort out personnel issues. The idea is to grow the non-AP portfolio. Future write-offs from SKS's portfolio exposure to Andhra Pradesh. can be offset by a tax shelter of 5 billion rupees that the company has not yet taken advantage of.SKS posted a Q3 loss of 4. then there's a good potential upside. the company's stock ended the day up 0. the stock lost a whopping 88 percent of its value. boardroom struggles and its stock plunged after a successful IPO in August 2010 which raised $358 million.
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