The stock market is nervous about the microfinance sector, particularly SKS Microfinance—the country’s largest MFI—which is suffering for its deeds
Recent incidents are taking a toll on the share price of SKS Microfinance Ltd, probably the country's largest microfinance company. The SKS stock, which listed on the bourses only three months ago, has come under pressure after the company's chief executive was sacked without any proper reason.
On Friday, SKS shares ended 6.8% down at Rs1,130.30 on the Bombay Stock Exchange (BSE), while the benchmark Sensex declined 1.8% to 20,125 points. Even its peer, SE Investment Ltd, was down 1.3% to Rs46. SE Investment also touched a one-month low at Rs44.50, this week.
There is a direct cause for the sharp fall of the SKS stock price. According to a PTI report, the Reserve Bank of India (RBI) has said it would constitute a sub-committee to look into the functioning of microfinance institutions (MFIs). RBI Governor D Subbarao told reporters in Chandigarh today that the central bank board had discussed the evolving situation in the MFI.
On Thursday, the Andhra Pradesh Cabinet approved an ordinance which seeks to regulate microfinance institutions (MFIs), after a spate of suicides among the rural poor in the state, allegedly due to coercive tactics of recovery agents of these MFIs. The ordinance provides for a three-year sentence and Rs1 lakh penalty for MFIs harassing borrowers in the recovery of loans.
There are several issues associated with the company, from its business model to corporate governance, and serious personal issues related to its founder Vikram Akula.
Now, the issue of MFIs and their lending and recovery methods has raised a political storm. According to media reports, crowds of protestors led by activists of the Communist Party of India (CPI) and Communist Party of India-Marxist (CPI-M) have been on a rampage in Andhra Pradesh, attacking and ransacking offices of MFIs, particularly SKS Microfinance. One report described the kidnapping of a minor girl in Vishakhapatnam district by an MFI.
According to an expert, as long as loans are not being 'marketed', access to money is far more important than interest rates. When the alternative is loan sharks who charge hundreds of per cent per annum and insist on collateral as well, micro-loans from SKS, BASIX, HOPE or any self-help group become attractive in comparison.
Just when SKS shares climbed to a new high (Rs1490.70, on 28th September), the SKS board sacked CEO Suresh Gurumani without giving any proper reason. And even big investors, like Vinod Khosala and NR Narayana Murthy have kept mum all through the controversy. SKS has a limited operational history and no dividend record, but asked a valuation of almost 50 times its FY10 earnings, for its IPO.
Even today, several non-resident Indians (NRIs) still think SKS is a non-governmental organisation (NGO) and that with the right backing it could become a large corporation if it met the basic need of people. The truth is SKS ceased to be an NGO long ago and is now a for-profit organisation that pays fat salaries to its high profile officials. Even as the RBI struggles to find the right candidates, MFIs have recruited ex-foreign bankers and are paying them fat pay cheques in addition to stock options. (read more http://www.moneylife.in/article/4/9959.html)
When SKS came up with its IPO, Moneylife had said: "An IPO multiple of 50 reminds one of the era of tech bubble. Plus, there are other issues like commitment of the top management, high remuneration paid to top executives, geographical concentration of business and mismatch in its assets and liabilities." (Read more http://www.moneylife.in/article/81/7674.html)
During the first quarter to 30th June, incremental loan disbursement increased 81% to Rs2,283 crore. Net profit zoomed by 265% to Rs67 crore, as total revenues increased by 81% to Rs314 crore.
On the personal front, Mr Akula is also under attack from his former wife. In a letter to Moneylife this week, Malini M Byanna said that the "corporate governance" issues, or more accurately "power and control" issues, that have been long-standing, date back to our separation and divorce." (read more http://www.moneylife.in/article/4/9924.html and http://www.moneylife.in/article/4/9924.html). Ms Byanna alleged that SKS employees were involved in the abduction of her son, as well as buying air tickets and boarding pass in both her and her son's name in order to file false criminal charges against her in India and in the US. According to Ms Byanna, SKS failed to fully disclose all pending litigation against Vikram Akula in its initial draft red herring prospectus (DRHP), after which she filed a formal complaint with the Securities and Exchange Board of India (SEBI). She said that following her complaint, SEBI asked the company to disclose the information by issuing a second public notice, but the company failed to divulge details of litigations against its directors.
Last month, speaking at the Clinton Global Initiative, Mr Akula said: "SKS loan officers are not incentivised by loan size; we want him to give out the right loan amount. The logic is to create great shareholder value as she (the woman who takes the loan) moves up the ladder to take multiple loans for multiple products. SKS has reduced interest rates from 36% to 24% and in the same period ROE (return on equity) has gone up from 5% to 22%. You can bring these two elegantly together."
Interestingly, he was engaged in a debate with none other than Nobel prize winner and founder of Grameen Bank, Muhammad Yunus, more commonly referred as the father of microfinance. Mr Yunus said: "Microcredit is not about exciting people to make money off the poor. That's what you (Mr Akula) are doing. That's the wrong message completely." (read more http://blogs.forbes.com/meghabahree/2010/09/21/microfinance-or-loan-sharks-grameen-bank-and-sks-fight-it-out/)
As of end-June 2010, SKS has a network of 2,266 branches across 19 states and a total member base of 7.3 million. Out of its total branches, over 600 branches are in Andhra Pradesh alone. Although SKS has branches in 19 states, its business is concentrated in some five states in the southern part of the country.
New Delhi: The textile industry has sought the prime minister's intervention for ensuring availability of cotton for domestic firms considering that exporters registered 55 lakh bales cotton for exports within 10 days of the government initiating the process, reports PTI.
The government has permitted export of 55 lakh bales of cotton (of 170 kg each) for the period ending 15 December 2010. Registration of export contracts was started on 1st October while the shipments are to begin from 1st November.
However, the total contracts have already touched the ceiling of 55 lakh bales, spurring fears of cotton shortage in the country.
"This will lead to a cotton famine in the country and mills will be forced to close down or scale down production drastically," Confederation of Indian Textile industries (CITI) chairman Jaipuria said in a letter to the prime minister.
Completion of export registration within 10 days means that exporters would need to acquire this quantity by November end and ship this out by 15 December 2010, the confederation said.
Even if last year's ending stock of 40.5 lakh bales as estimated by Cotton Advisory Board (CAB) is taken into account, there will be practically no cotton stock left if 55 lakh bales get exported during this time," Mr Jaipuria said.
"This scenario has pushed up cotton prices to over Rs41,000 a candy, as against Rs23,000 a candy that prevailed during this time last year," Citi said while urging the government to delay the cotton exports against the contracts already registered, up to 1 January 2011.
Each candy consists of 356 kg of cotton.
Citi also demanded the withdrawal of export incentive of 1.5% given by government on cotton exports.
Earlier, the government had announced that duty free exports of 55 lakh bales would be allowed in the current cotton marketing season.
The commerce ministry had said that exports beyond 55 lakh bales would attract duty. To curb exports in wake of rising domestic prices of cotton, a duty of Rs2,500 per tonne was imposed.
As per conservative estimates, the cotton production in 2010-11 is likely to be 325 lakh bales. However, the agriculture ministry expects the yield to touch 335 lakh bales.
The country's largest lender aims to tap the retail market through an
attractively-priced bond issue for the first time; plans to create a secondary market for the same to enable further such issues
India's largest public sector bank State Bank of India (SBI) is trying to gauge the feasibility of availing another funding avenue. The bank today announced the public issue of Lower Tier-II Bonds worth Rs500 crore, with an option to retain oversubscription upto Rs500 crore for issuing additional bonds aggregating to a sum of Rs1,000 crore for resident applicants. The bond issue is SBI's first foray into the retail bond market and is part of the bank's strategy to develop another avenue of funding by creating a secondary market around the same.
The issue has been priced rather attractively for a bank which can otherwise access funds at a much lower cost without breaking sweat. Available in two series having maturity of 10 years and 15 years respectively, the issue offers a coupon rate of 9.25% and 9.5% respectively on the same. This is in sharp contrast to the bank's retail deposits which attract rates substantially lower at 7.5%.
SBI chairman OP Bhatt stated categorically that the pricing was purely based on the fact that the bank was coming out with such an issue for the very first time. The current upward bias in interest rates also was a factor behind the pricing, Mr Bhatt said. Commenting on the reason for bringing out such a product, he said, "We want the option of having this market available on tap. We wish to create a secondary market around this avenue, which will allow price discovery to take place."
Depending on the investor response to this issue, SBI will take a call on bringing out more such issues, even on a quarterly basis. Although the stated objective of the issue is to shore up the capital adequacy ratio (CAR) of the lender, it is not the most compelling factor. The chairman pointed out that the bank was looking at the option to avoid a long term liquidity mismatch. "We felt there is a need for having specific long term liquidity in our portfolio," said Mr Bhatt.
The bonds are proposed to be listed on the National Stock Exchange (NSE), where investors will trade freely in the open market. The retail portion forms 50% of the issue size while the balance is being offered to high net-worth individuals (HNIs) and qualified institutional buyers (QIBs). The bonds are to be issued compulsorily in a dematerialised form.
With a minimum application size of Rs10,000, these bonds will be allocated on a 'first-come-first-serve' basis. The issue will be open for subscription from 18 October 2010 and will close on 25 October 2010. The bank has an option to call back the bonds after 5 years and 1 day for the 10-year bonds and 10 years and 1 day for the 15-year bonds. If the bank does not exercise this option, the investor will be offered the coupon rate plus an additional 0.5% on the bonds.