ABSTRACT The stock price of SKS Microfinance on 1 st sept2010 was Rs 1493(all time high) & the price on 1 st Oct 2012 was Rs. 129 what went wrong??? Why India s Largest Microfinance Institution went from BOOM to GLOOM??? This case study is about a company who is the largest in India, the company who maintain more then 103% CAGR in terms of growth revenue, assets & liabilities in last 4 years before the listing of an IPO. The company who had undergone a successful IPO listing, started to fall in terms financial aspects only within the span of 6 Financial Quarters. There was a sharp fall in the price of the stock as well as the growth of the company was halted carried forward with a huge decline, all due to an unhealthy political scenario that prevailed in Andhra Pradesh. The state from where the SKS microfinance starts his mission, it is the state from where the company once earn more then 28% of the revenue, now is the only reason of the GLOOM of the company. In this Paper I will discuss How one man can change the life s of the millions and The question of whether altruism and capitalism can coexist?
Understanding Microfinance Microfinance is usually understood to entail the provision of financial services to microentrepreneurs and small businesses, which lack access to banking and related services due to the high transaction costs associated with serving these client categories. Many of those who promote microfinance generally believe that such access will help poor people out of poverty. Microfinance is a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses. The two main mechanisms for the delivery of financial services to such clients are: (1) relationship-based banking for individual entrepreneurs and small businesses this model is called as Self Help Group (SHG) (2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group, this model is known as Joint Lending Group (JLG) Almost by definition, poor people have very little money. But circumstances often arise in their lives in which they several need money or the things money can buy. Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood, old age. Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death. Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of dwellings. Investment Opportunities: expanding a business, buying land or equipment, improving housing, securing a job (which often requires paying a large bribe), etc.
The obstacles or challenges to building a sound commercial microfinance industry include: History Inappropriate donor subsidies Poor regulation and supervision of deposit-taking MFIs Few MFIs that meet the needs for savings, remittances or insurance Limited management capacity in MFIs Institutional inefficiencies Need for more dissemination and adoption of rural, agricultural microfinance methodologies Poor people need not just loans but also savings, insurance and money transfer services. Over the past centuries practical visionaries, from the Franciscan monks who founded the community-oriented pawnshops of the 15th century, to the middle of the 1800s when the theorist Lysander Spooner was writing over the benefits from small credits to entrepreneurs and farmers as a way getting the people out of poverty. Independently to Spooner, Friedrich Wilhelm Raiffeisen founded the first cooperative lending banks to support farmers in rural Germany. The founders of the microcredit movement in the 1970s Mr. Muhammad Yunus have tested practices and built institutions designed to bring the kinds of opportunities and riskmanagement tools that financial services can provide to the doorsteps of poor people Modern world Micro financing The 1970s when organizations, such as Grameen Bank of Bangladesh with the microfinance pioneer Muhammad Yunus, were started and shaping the modern industry of micro financing. Another pioneer in this sector is Dr.Akhtar Hameed Khan. In 1976, during visits to the poorest households in the village of Jobra near Chittagong University, Muhammad Yunus discovered that very small loans could make a disproportionate difference to a poor person. His first loan, consisting of US$27.00 from his own pocket, was made to 42 women in the village, who made a net profit of US$0.02 each on the loan. Dr. Akhtar Hameed Khan, founder of the Bangladesh Academy for Rural Development, is credited alongside Muhammad Yunus for pioneering the idea. From his experience at Jobra,
Yunus, an admirer of Dr. Hameed, realized that the creation of an institution was needed to lend to those who had nothing. Yunus securing a loan from the government Janata Bank to lend it to the poor in Jobra in December 1976. The institution continued to operate by securing loans from other banks for its projects. By 1982, the bank had 28,000 members. On 1 October 1983 the pilot project began operations as a full-fledged bank and was renamed the Grameen Bank (Village Bank) to make loans to poor Bangladeshis. As of July 2007, Grameen Bank has issued US$ 6.38 billion to 7.4 million borrowers. Indian scenario India has 800 million poor people who live on the brink of subsistence. This is one of the largest populations of poor in the world. The bottom 5% of India s poor, considered ultra poor, face even deeper levels of chronic hunger, persistent poor health and illiteracy. To cope with their vulnerability, the poor have no choice but to take loan for consumption and income generation from money lenders that charge exploitative rates of interest. This can put the poor in a debt trap. If poor people can access loans with fair interest rates, they could break out of the cycle of poverty. Scope of Microfinance in India Microfinance in India started in 1974 in Gujarat as Shri Mahila SEWA (Self Employed Women s Association) Sahakari Bank. They provided banking services to poor women employed in the unorganised sector. Microfinance later evolved in the early 1980s around the concept of informal Self-Help Groups (SHGs) from modest origins, the microfinance sector has grown at a steady pace. Now in a strong endorsement of microfinance, the National Bank for Agriculture and Rural Development (NABARD) and Small Industries Development Bank of India (SIDBI) has committed themselves to developing microfinance. The microfinance sector has been "witnessing a tremendous growth" during the last few years in India in terms of loan portfolio, geographical area and outreach. With India s GDP growing at the rate of 7.1 % the country s socio-economic pyramid is turning around the story with millions of poor people becoming entrepreneurs. Delivery model of Microfinance (MFI) in India:
The MFI model has gained significant momentum in India in recent years and continues to grow as the viable alternative to SHGs. An MFI is a separate legal organization that provides financial services directly to borrowers. MFIs have their own employees, record keeping and accounting systems and are often subject to regulatory oversight. MFIs require borrowers from a village to organize themselves in small groups, typically of five women, that have joint decision making responsibility for the approval of member loans. The groups meet weekly to conduct transactions. MFI staff travel to the villages to attend the weekly group meetings to disburse loans and collect repayments. Unlike SHGs, loans are issued by MFIs without collateral or prior savings. MFIs now exist in a variety of legal forms, including trusts, societies, cooperatives, non-profit NBFCs registered under Section 25 of the Companies Act, 1956, or Section 25 Companies, and NBFCs registered with the RBI. Trusts, cooperatives and Section 25 companies are regulated by the specific act under which they are registered and not by the RBI.. SKS Microfinance Limited (SKS) SKS Microfinance Limited (SKS) is a non-banking finance company (NBFC), regulated by the Reserve Bank of India. SKS mission is to eradicate poverty by providing financial services to the poor. The company operates across 19 Indian states. According to a CRISIL Report on Top 50 Indian Microfinance Institutions (MFIs), SKS Microfinance is the largest MFI in India with more borrowers, more branches and more loans as of 30 September 2008.SKS was founded in 1997 by Vikram Akula, who also served as its executive chair until November 2011. As of December 31, 2010, SKS had 7.7 million clients in 2,403 branches across the country. Company Profile Incorporated in 2003, SKS Microfinance Ltd is the largest MFI in India in terms of total value of loans outstanding, number of borrowers, who they call members, and number of branches, according to the October 2009 CRISIL. SKS Microfinance is a non-banking finance company, or NBFC, registered with and regulated by the Reserve Bank of India, or RBI. They are engaged in providing microfinance services to individuals from poor segments of rural India.
Company's core business is providing small loans exclusively to poor women predominantly located in rural areas in India. These loans are provided to such members essentially for use in their small businesses or other income generating activities and not for personal consumption. These individuals often have no, or very limited, access to loans from other sources other than private money lenders that they believe typically charge very high rates of interest. SKS uses the group lending model where poor women guarantee each other s loans. SKS Microfinance is an effective tool that can help reduce poverty and spread economic opportunity by giving poor people access to financial services, such as credit and insurance. SKS distributes small loans that begin at Rs. 2,000 to Rs. 12,000 to poor woman so they can start and expand simple businesses and increase their incomes. Their micro-enterprises range from raising cows and goats in order to sell their milk, to opening a village tea stall. Team behind The Vision: Dr. Vikram Akula, SKS Mutual Benefit Trusts, MUC, SKS Capital, SCI II and Sequoia Capital India Growth Investments are the Promoters of the Company. Mr. Akula, a 41-year-old U.S. citizen and Yale University graduate, launched SKS in 1998 after working in nonprofit organizations in India that tried to help the poor. Even the best-run groups lacked the capital or the organization to meet the needs of the world's poor, He decided to build a new kind of micro lender that wouldn't have to depend on government money, grants and charity. Before launching the company that would become SKS, Mr. Akula went through the training program at Grameen Bank, telling Mr. Yunus that he wanted to tweak his model to reach more people. "If I remember correctly, he just smiled".
Evolution of SKS Microfinance Mr. Akula started on his own with a small team that went from village to village in the southern state of Andhra Pradesh. He used the Grameen model, which sets up groups of poor women and lends them as little as $50 to help with small businesses like growing vegetables or running a tea stand. SKS charges an annual effective interest rate between 26.7% and 31.4% for core loan products. At the end of financial year 2010 on 31 March 2011, the company listed a gross loan portfolio of US$925,844,433 with 6,242,266 female active borrowers. SKS plans "To serve 50 million households across India and other parts of the world and also to create a commercial microfinance model that delivers high value to our customers" SKS practices a standardised process of managing loans. They reach distant villages by charging interest rates that clients are willing to pay to avoid starvation, poor money management or government Company Financials: Company had performed extremely well from the day of the inception. It gives the tremendous growth in all front, from assets to income side company give the phenomenon growth. As the company want to expand more, they find the way to go for the private placement or go for the public placement. The company chose the second option they have file the Draft Red Herring Prospectus (DRHP) to the SEBI on 25 Mar 2010. The financial status of the company till the submission of DRHP:-
IPO Profits Reported before the IPO Assets & liabilities before the Networth of the company before the IPO The wide Network of SKS Micro Finance Just before the IPO: SKS won approval from the Securities Exchange Board of India to proceed with an IPO The company and its early investors expect to raise more than $250 million from the deal, which is likely to happen within 30 days and would make SKS the first micro lender in India to go public. Only a handful of micro lenders around the world have made it to the global stock markets, so the SKS deal could encourage other companies in the sector to follow.
SKS is the largest micro lender in India, with a portfolio of about $1 billion. About $5 billion in microloans were made in the country last year, and the IPO would help SKS borrow money to fuel expansion. The approval of an IPO Launching moved a step closer to bringing Wall Street to the slums of India. But that also will bring more criticism from microfinance experts who say profits and initial public offerings have no place in the industry. "Microcredit should not be presented as a money-making opportunity. It is an opportunity to make an impact on poor people's lives," Mr. Yunus said in an interview. "An IPO gives a wrong message." "Vikram is a very capable young man," Mr. Yunus said. "But he took a wrong turn when he decided to use microcredit for making money." Well facing the criticism & appraise by the leaders of Microfinance across the globe, finally SKS microfinance has came with the IPO on 28 th Jul 2010. Objects of the Issue: The objects of the issue are: 1. To meet future capital requirements arising out of growth in business; and 2. To achieve the benefits of listing on the Stock Exchanges. Issue Detail: SKS Microfinance Ltd IPO Grading / Rating CARE has assigned an IPO Grade 4 to SKS Microfinance Ltd IPO. This means as per CARE company has 'Above Average Fundamentals'. SKS Microfinance Ltd Issue Open Jul 28, 2010 - Aug 02, 2010 Issue Type 100% Book Built Issue IPO Issue Size 16,791,579 Equity Shares of Rs. 10 Issue Size Rs. 1,628.78 Crore Face Value Rs. 10 Per Equity Share Issue Price Rs. 850 - Rs. 985 Per Equity Share Market Lot 7 Shares Minimum Order Quantity 7 Shares Listing At BSE, NSE
The IPO of SKS Microfinance Ltd get the overwhelming response from the market, Overall it was subscribed more then 13 times:- Number of Times Issue is Subscribed (BSE + NSE) As on Date & Time Qualified Institutiona l Buyers (QIBs) Non Institutional Investors (NIIs) Retail Individual Investors (RIIs) Total Shares Offered / Reserved 7,052,464 1,679,157 5,037,474 13,769,095 Day 1 - Jul 28, 2010 17:00 IST 0.3400 0.0500 0.0200 0.1800 Day 2 - Jul 29, 2010 17:00 IST 1.4400 0.0500 0.0700 0.7700 Day 3 - Jul 30, 2010 17:00 IST 20.3800 0.1300 0.1600 10.5100 Day 4 - Aug 02, 2010 20:30 IST 20.3800 18.2600 2.8100 13.6900 The SKS Microfinance was listed in NSE/BSE on Monday, 16 th Aug 2010. It gives very good return to their investor who has applied for the ipo And also to the intraday Trader. The price movement of the stock in NSE/BSE on the Day of an IPO is as under:
First Blow of Sand Storm strikes to the SKS Microfinance LTD During the first half of the year 2010, the industry continued its growth path, but in the second half the industry faced regulatory constraints emanating from the Government of Andhra Pradesh (AP). This led to a reduction in the industry s disbursements and consequently loan book. In the wake of nearly around 200 deaths allegedly due to harassment by MFIs on loan dues, The Andhra Pradesh Government promulgating the Microfinance Institutions (Regulation of Money Lending), Ordinance 2010 in 15 October 2010. This Ordinance was ratified two months later on December 15, 2010 by the lower house of the Andhra Pradesh assembly. This was applicable from the 1 St Jan 2011. The key features of the Bill are: All MFIs should be registered with the district authority. No person should be a member of more than one SHG. All MFIs shall make public the rate of interest charged by them on the loans extended. There would be a penalty on the use of coercive action by the MFIs. Any person who contravenes any provision of the Ordinance shall be punishable with imprisonment for a period of 6 months or a fine up to the amount of Rs 10,000, or both. The AP MFI Act, which was aimed at curbing irresponsible players in the sector, raised a regulatory conundrum for NBFC- MFIs, such as SKS, which are registered with the RBI as it was unclear whether the NBFC-MFIs should follow the State Government Act or the RBI guidelines. In these unclear environment the RBI set up the Malegam Committee to look into all aspects of microfinance. The Malegam Committee submitted its report on January 19, 2011 and based on the recommendations of the committee the government has introduced the Micro Finance Institutions (Development and Regulation) Bill, 2011. The object of the bill is to provide a formal statutory framework for the promotion, development, regulation and orderly growth of the micro finance sector and thereby to facilitate universal access to integrated financial services for the unbanked population.
Some of the salient features of the Bill are as follows: Establishing a Micro Finance Development Council which will advice and assist the government in framing policies for the sector. The bill also seeks to establish a State Advisory Council. The MFIs can only operate business after obtaining a certificate of registration from the Reserve Bank of India. The existing MFIs will also have to apply for the registration within three months from the commencement of the Act. Any MFI which becomes systemically important will have to convert its institution into a Company registered under the Companies Act, 1956. An MFI can become systemically important if it deploys a certain amount of funds for providing micro credit to a minimum number of clients. The exact figures relating to the amount and the clients are not specified in the bill and rightly so. The RBI has been delegated the power to frame rules in this regard. The Bill gives wide powers to the RBI. Some of the specific powers conferred on the RBI are (i) to formulate policies (ii) to prescribe minimum standards required to be followed by MFIs in relation to method of operation, recovery, management and governance (iii) calling for information and data from the MFIs, among others. Any restructuring of the MFIs will require the prior approval of the RBI. The Bill mandates the establishment of a Micro Finance Development Fund. The fund will be applied towards providing the MFIs with financial assistance. The Bill once it comes into force will override the provisions of all other existing laws. Further, the Bill provides that any MFI registered with the RBI under the provisions of this Act (now bill) will not be treated as a money lender for the purposes of any state enactment. In effect this implies quite clearly that the Andhra Pradesh Micro Finance Institutions (Regulations and Money Lending) Act, 2010 would not be applicable to the MFIs holding a certificate of registration under the provision of this Act/Bill. But damage is already done, secondly even after the submission of report nothing was cleared it will blow out the price as well as the confidence & sentiment of the stakeholder of SKS Microfinance Ltd this leads the price of stock fall 50% from the high of Rs 1491.50 (on 28 th Sept,2010) to the low of Rs 647.35 (on 3 rd Jan, 2011) just after the implementation of the AP MFI Act. After the implementation of this act the company has continuously write off the loan for the next 6 Quarters, This bleeds the SKS very badly, the situation of the SKS Microfinance
deteriorate day by day. Since the implementation of the AP Act in the state company has almost near-complete halt of collection and disbursal of loansin the state, The state from where earlier they get the almost 40% of the revenue, not only that they have to continuously writ off the bad loan. Also the people of Andhara Has also stopped the repayment of their loan. These make no option to the company but exit from the state. They have shifted their Head Office from Hyderabad to Mumbai. This will close all the hope of the investors of company. They earns a substantial part of its other income, which was at Rs 366 crore in 2011-12, from distribution of insurance policies. But the situations of the SKS worsen when the Insurance regulator has found the irregularities in the institution s handling of insurance of its clients. The company has loss the Major loss of Rs.13606 million in the 2011-12 due to the huge Write-off of loan of A.P. the company has also see the bottom of the stock to Rs. 54.3 on 05 June,2012. The situation blows up many of its centre & branches. Also they no choice but to remove many of their Employee, the count is near to 14300 employees, cut of 1000 centre. Adding to its troubles was a boardroom battle which resulted in the exit of founder Vikram Akula The financials & other details is as follows: Profit Before & After Tax
The price movement of the stocks from the day of listing to till 03 rd Oct 2012 is as follow: Current scenario & small ray of hope The Micro Finance Institutions (Development and Regulation) Bill was introduced in the Lok Sabha a month ago. SKS, whose investors include Silicon Valley venture capitalist Vinod Khosla and Infosys founder N R Narayana Murthy, plans to resume lending in Andhara cautiously. It will rebuild relationships first with borrowers having a track record of timely repayment, only a small proportion of its clientele.