Malegam will return the poor to the sharks: Akula

Implementing the recommendations of the Malegam Committee will curb the microfinance industry’s growth and force people back to moneylenders, SKS Microfinance Ltd, the country’s largest and only listed microfinance institution (MFI) said on Thursday.

The Reserve Bank of India-constituted committee had suggested capping interest rates charged by microfinance institutions (MFIs) at 24%.

The panel’s other recommendation — making only households with up to eS50,000 in annual income eligible for borrowing money from microfinance institutions — makes SKS vulnerable.

Half of the company’s borrowers at the time of joining the company have annual income of more than Rs50,000.

But the company’s founder-chairman, Vikram Akula, is not worried. On the contrary, he says he is “relieved” and thinks the embattled microfinance company is “taking a pause like a tiger, seconds before it pounces on its prey”.

“The worst is behind us,” Akula beamed at a meeting with the press.
The panel’s recommendation of capping interest rates would have no impact on the company, he said. “If we look at the interest rates, the Malegam Committee suggests 24% as the maximum. They also say a 1-2% processing fee. We can also charge insurance at cost 0.7%. Effectively, that is 26.7% that the Malegam committee allows for.

 Now before this, in AP, we were already at 27%. So we would have no impact.”
The panel has in fact removed the single-biggest operational challenge, of regulatory ambiguity, by making the central bank the overruling and single regulator, Akula said.

Further, by asking to assign MFI NBFCs a priority status, the panel gives the industry a legitimate role and help in solving the issue of financial inclusion.
SKS maintains that it is present in 379 districts of the country, including 152 of the 256 most-backward districts, as defined by Reserve Bank of India.
“Philosophically, I am against any interest rates being placed… sectoral growth will slow down. By how much, depends on the suggestions that are finally accepted,” said Akula. “But I understand the political compulsions and the fact that we don’t have UID and rural banking in place. So the suggestion of capping interest rates.”

The last six months have been difficult for SKS. The company raised $358 million last August in an initial public offering that valued it at $1.5 billion. On October 4, the company fired its CEO Suresh Gurumani as the company found him unable to steer the company post the successful listing. Soon after, it was forced into a tight spot amid a backlash by Andhra Pradesh authorities, who accused the company of seeking “hyper-profits” from the poor through over-lending and “coercive” collection tactics.

“Agreed, there have been aberrations among our 25,000 workforce. But we are constantly reviewing it and sorting out,” said Akula.

To a question on the company losing half of its clients in one stroke if the panel’s suggestions are accepted, he said, “Let’s understand, not everyone has a pan-card. So how do you calculate which household has annual income of X or Y and put caps?”

SKS believes that in the changing environment, newer entrants would find it hard in the new environment as many won’t be able to efficiently work under an interest rates regime.

“We started as an NBFC that charged 36%. Now with barriers to entry, I think there would be consolidation,” said Akula. This is not to say that larger companies would be acquiring small new players, but that clients of smaller microfinance companies would shift to larger players like his, he clarified.
Last week, the company reported a 38% fall in net profit to $7.7 million in the quarter ended December after a significant disruption in loan collections in its key market, Andhra Pradesh. Repayment rate on loans too fell to 42% and the company had to write-off loans to the tune of `100 crore in the quarter.

Yet, Akula gave away no sign of anxiety. On the contrary, he had some advice for the Andhra Pradesh government, which has so far refused to accept the Malegam panel’s recommendation of making RBI the sole regulator. “If I would be the CM, I would rather take credit in actually coming out with a legislation that led RBI to come out with a regulatory panel,” said Akula.

Finally, asked if he responded to Muhammad Yunus’ scathing attack on for-profit microfinance companies, published on 14 January in New York Times, Akula joked that the ‘father of microfinance industry in Bangladesh’ has more pressing problems to deal with. “I did send him a copy (Vikram Akula’s A Fistful of Rice). I am still to hear from him. But I hope all allegations against him turn out to be wrong and he gets out of trouble. He does talks a lot about us, which obviously I don’t agree with.”

Meanwhile, investors seem to have renewed confidence in SKS. The company’s stock jumped 8.5% to close the day at Rs722.15 on the BSE, still halfway below the all-time high of Rs1,436.60 the scrip touched in intraday trade on September 15 last year, after getting listed at Rs1,212.25.