Paying the Bill: SKS earnings seen halved over 2 years

The new Microfinance Institutions (Regulation of Moneylending) Act ratified by the Andhra Pradesh assembly on Tuesday is likely to impact the operations of SKS Microfinance in the near to medium term, analysts said.

The company has been under pressure since the promulgation of an ordinance to check rogue microfinanciers in the state on October 15.

While there have been no fresh loan disbursals, the recoveries too have been less than 20%.

Analysts said the changed regulatory regime in the state, which accounts for about 30% of the country’s microfinance market, would not be the same for all entities because of field-level organisational structures.

Nischint Chawathe and Manish Karwa, analysts with Kotak Institutional Equity Research said SKS is better-placed compared with others because of its lower exposure to Andhra Pradesh.

“We are factoring 5-7% credit losses in Andhra. However, since the situation in the state has been weaker for a longer-than-expected period, non-performing loans may be higher at 15-20% — (but it is) difficult to quantify at the current stage,” Chawathe and Karwa wrote in a note on Thursday.

SKS and other microfinanciers have not resumed disbursements in Andhra on the back of poor collections till date.

“We believe that the new norms for obtaining permission from the local authority in case of multiple loans by the same borrower may be cumbersome and temper the lending process as and when business resumes. The industry will have to evolve a mechanism to resolve the issue of multiple lending and avoid overleveraging in the sector,” Chawathe and Karwa said.

The regulatory imbroglio is estimated to have a negative impact on the earnings, growth and asset quality of most of microfinance entities.

Manish Chowdhary and Aditya Narain of Citigroup, in a note, said if the imbroglio prolongs the impact could be higher, with possibilities of further downsides to the stock. “We are cutting SKS’ earnings 41%-52% over fiscal 2010-11 up to fiscal 2012-13 to factor in reduced lending rates, higher funding costs, lower growth and increasing credit cost requirements medium term,” Chowdhary and Narain said.

They have downgraded the stock from ‘hold’ to ‘sell’ with a target price of Rs 605.

Though microfinanciers are reporting that the situation in villages is gradually improving, sources said normalcy would be restored only on government intervention.

“More than the ordinance, the opposition political parties have completely damaged the mood in the field. The borrowers are not willing to repay only with the opposition parties provoking them to chase away agents visiting the villages for recoveries. There is an immediate need for the government to step in and support the law-abiding microfinanciers, if not all entities,” a source associated with a leading microfinancier said.