SKS Microfinance hopes to get back Rs1,250 crore dues

After losing hopes on the funds that were stuck in the market unrecovered, microfinance major SKS Microfinance now finds a ray of hope. The monies would now become recoverable, thanks to the provisions in the new Microfinance Bill 2011.

About Rs1,250-crore portfolio of SKS has been in Andhra Pradesh and this is estimated to be about 25% of the company’s total portfolio. With the Andhra Pradesh government enacting an Act to regulate the microfinance sector, the company’s portfolio had become sticky in the state. This has become a major drag on the company’s operations.

“The Bill is a welcome move. All that we had lent in AP is more or less in the form of working capital. Unless we lend more, we will not be able to recover the funds that were already lent,” Dilli Raj, SKS’s chief financial officer, told DNA.

According to him, the company was not able to recover the loans in AP since it was not disbursing fresh loans. “According to the state government regulations, we need to take prior approvals for every loan application before disbursing the loan. We had filed about 75,000 applications with the authorities in AP alone for approvals. However, about 1,200 applications were approved. So, we were not actively lending. This has made the funds already lent unrecoverable,” he said.

The new Bill has taken microfinance out of the definition of money lending. The AP’s Act took control of the microfinance sector since the MFIs were primarily lending money. “Now, the Bill has clarified that microfinance is no more mere money lending. We also see the Bill, once approved by the parliament, will override the existing Acts including the one in Andhra Pradesh. That will allow us to actively start lending in the market and thereby recover all that is stuck in the market,” he said.

SKS sees the Bill to be “hugely positive for the MFI sector”. The Bill is expected to take effect in the next three to six months.

Meanwhile, SKS is also working on a strategy to retrieve about Rs7.5 crore that was found to have been misappropriated by its employees.

“The misappropriation has happened under three different heads — cash embezzlement, theft and burglary and fake loans. Though the quantum of all this has been pegged at about Rs7.5 crore, of the total portfolio of Rs7,831 crore, this is not significant,” Dilli Raj said.

The auditors of the company in their report had pointed out the swindling by the employees and the company too accepted the findings. In FY11, about 156 cases of embezzlement were detected with a total value of about Rs96 lakh as against 82 cases worth Rs87 lakh in FY10. Theft and burglary was detected in 313 cases worth Rs2 crore in FY11 as against 251 cases worth Rs1.73 crore.

Similarly fake loans worth about Rs3.5 crore too were detected by the auditors. The loans were allegedly raised by the company’s executives using fake documents showing non-existent borrowers.

“We have terminated the employees found indulging in these activities. We have also filed police cases against the individuals. There is also an insurance cover for all the cash transactions since our activity involves movement of cash for the last mile delivery. For instance, of the ¤96-lakh embezzlement, we have recovered Rs53.41 lakh from the employees, while Rs10.42 lakh was paid through insurance. For the theft cases, there is a police investigation going on. In fake loans too, we have recovered about Rs65 lakh from the individuals involved in those cases while Rs32.5 lakh was paid to us by the insurance companies,” Raj explained.

Though the company is celebrating the new Bill and willing to downplay the swindling act by its employees, SKS is still not exciting the analysts. Though the analysts too see the Bill making the RBI a sole regulator for the microfinance sector, they find issues with the company. “This is a positive development for SKS Microfinance as the Bill clearly stipulates RBI’s regulation to overrule any state legislation on MFIs. In spite of this regulation, we continue with our underweight stance as 1. We believe that the business has fundamental flaws 2. Recoveries from AP are unlikely, in our view, in spite of this Bill and 3. Current valuations at 2.4X FY12E book still look expensive,” Seshadri K Sen, Adarsh Parasrampuria and Sunil Garg of JP Morgan said in their note on July 7, 2011.