Despite write-offs, AP a problem area for SKS

Andhra Pradesh continues to be a sore point for SKS Microfinance. The company, which has had to write off loans worth Rs678 crore, including a Rs350 crore provision in the second quarter, is still laden with an outstanding of Rs822 crore in the state as recoveries pose a huge challenge.

However, S Dilli Raj, chief financial officer, sought to play down the difficulties. “The decision to provide for Rs350 crore in this quarter itself has been voluntary, though we could have easily spread the same over the next six quarters as per RBI norms. We have written off the outstanding loans in AP and brought them down from Rs1,500 crore to Rs822 crore. In addition, there is a cushioning of deferred tax of Rs220 crore, and if that is factored in, the total outstanding comes down further. If we write off the total loan outstanding in AP, we get a tax benefit on write-off of Rs270 crore and, in the unlikely worst case scenario of zero recovery of loans in AP, we would only be left with a net residual risk of Rs337 crore,” he said.

The company is now pinning its hopes on growth in other markets and on the new legislation passing muster. “Our confidence is on account of three reasons: collection efficiency in non-AP states is 96-97%; seven states with strong MFI operations are part of the panel that drafted the Central MFI Bill which is likely to be tabled in Parliament in the winter session; and no other state has enacted a law similar to Andhra Pradesh,” said Raj.    

The company has always been well-capitalised and highly liquid, he claimed, adding, the average capital adequacy over the last five years was at least 2.5 times the RBI norm. “Today, we have a capital adequacy of 47% and our net worth is Rs1,181 crore as at September 30. In the unlikely eventuality of the company facing the worst-case scenario where its collections would be zero in AP, the restructured capital adequacy ratio would still be 35%.

However, even in the worst of situations, the company’s collections did not drop below the 11% mark in AP.”

Meanwhile, SKS is gearing up to raise additional funds from the market through a placement with qualified institutional investors. It had earlier sought approval for raising up to Rs900 crore through QIP and is currently in the process of completing the postal ballot process.

The QIP issuance is expected to be ready by December and the fundraising is expected to happen sometime in January. “The QIP is basically a growth capital raise to help us cash in on the demand-supply gap in the non-Andhra Pradesh markets,” said Raj.

According to him, a couple of existing investors have evinced interest in the proposed QIP in view of the fact that the company is seeking growth capital to fund opportunities stemming from the “unprecedented consolidation in the microfinance sector.” The potential investors fall into five different buckets —- existing investors, socially relevant investors, microfinance investment vehicles in the developed world, private equity players and public market participants.

The company has several pre-IPO investors, including Catamaran Management Services, WestBridge, Sequoia Capital India, Sandstone Investment Partners, Kismet Microfinance and Vinod Khosla, founding CEO of Sun Microsystems. “They have not sold a single share in the company,” said Raj.