Andhra Pradesh is a one-off problem: SKS Microfinance

While most microfinance institutions in India and even globally do not have even a total of 100,000 clients, SKS Microfinance last year was adding 100,000 new clients each week. But the scene has changed dramatically for the worse since then. In an interview to E Kumar Sharma, founder and chairman of SKS Microfinance, Vikram Akula, says: "We have stopped acquiring new clients. Our focus is on our existing clients and bridging the gap created by other MFIs." Edited excerpts:

Q: You must be disappointed with the results. Who is to blame for the poor financial performance of SKS?
Clearly it is a disappointment in terms of the results. Particularly, the last quarter. But we are hopeful because the problems are really externally driven. They are not in any way reflective of any fundamental flaw in our model. (The external factors that Akula is referring to are the restrictions faced by microfinance institutions in Andhra Pradesh with the state government bringing out the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act. SKS has now moved the Supreme Court challenging it - and has sought a stay on it. This came up for hearing on May 12th in the Supreme Court. The court, has issued a notice to the Andhra Pradesh government to reply by the third week of July 2011).

Q: Is it only the external factors?
That is what we would argue. Look at our performance in the 18 states barring Andhra Pradesh where we work and where we do not have political challenges. We have a presence in 379 districts in the country. Except for the 23 districts of Andhra Pradesh we have an average repayment rate of 96 per cent. In contrast, we were down to 10.3 per cent repayment rate in Andhra Pradesh in the last quarter. That is why we feel this is a one-off problem and not a systemic issue.

Q: Some have accused you of evergreening?
Evergreening is when you are lending to a borrower and he is using it to repay an earlier loan. That is not the case here as we are lending to only those who have fully repaid their earlier loans. What is more, we are not lending at the same pace the borrower is repaying which means even under stress the model is working.

Q: People argue that it is time to review the Grameen model or at least the way it is implemented. SKS, which has grown rising on this model, however does not think so. But there is little denying that the whole loan appraisal mechanism is far from perfect and the crisis has exposed huge gaps in the way borrowers are appraised. What internal changes and corrections in methodology have you put in place on this front?
We have certainly looked at our processes but haven't fundamentally changed them. What we have done is look at questions like: Have we spent enough time with the borrower and are we doing a proper training of the five-member group (the Joint Liability Group or the JLG that is at the heart of the model and relies on the peer pressure in a group of borrowers). Earlier, we used to train them for five days and this went down to three days. We were waiting for the Reserve Bank of India's notification. Now, with that in place, we are looking at all the operational changes we need to make and we are looking at all our processes to see where we need to strengthen them.

Q: Why do you say the next two quarters will be painful? What can one expect?
By October 15th, our total portfolio will become one-year old (since the time of the ordinance issued by the Andhra Pradesh government). Therefore, every single outstanding will become due and by then we will get a clear picture on the repayment for the one-year loans (typical MFI loan is for a 50 week period).

Q: You have always spoken of expanding your reach and adding numbers (client outreach).  What is your client base today and what is your focus and strategy on adding new numbers?
Today, we have 7.3 million clients. Since October last year, we have stopped acquiring new clients and in fact our focus is today is not on acquiring new clients but it is really to look at our existing clients and to go back to them for larger loans and bridge the gap created by other MFIs who may drop out and fulfill all the financial needs of the borrower. This is based on the assumption that many MFIs may not be in a position to lend and survive. The regulations will obviously lead to consolidation in the sector.

Q: So, will you be acquiring some MFIs. There could be good ones in distress?
We are looking at consolidation not through M&A but at consolidating at the lending amount because of the consolidation the borrower may need to move from the, say, three MFIs to two MFIs.

Q: You talk of gold loans. Now that is not what your average loan officer is trained to deal in. For instance, there are MFIs that offer these but have different set of people to handle these. Will you reorient your staff or seek outside help?
We will be looking at outside recruitment for this and there will be separate branch and separate staff who would be co-located with our existing staff.

Q: Tell us about the pressures that an IPO puts on the growth strategy in a sector like this?
Not really. If at all, the IPO has helped us as we are sitting on cash and capital that is extremely important to survive (in this sector) today. Because of the IPO we are today in a strong position with about Rs 550 crore in cash or liquid assets and a net worth of Rs 1,800 crore.

Q: There is an argument that it is SKS in a sense is responsible for laying the ground for the unfolding of the events that have led to the current crisis in microfinance. The argument is: SKS with its aggressive growth, its yearning for scale and its valuations and the IPO which necessitated more of that encouraged others to enter this space and also seek to grow and scale up at all costs. All of this led to just a numbers game where the staff finally took over and the MFI lost the connect with the borrower creating ground for the current crisis. How do you defend this?
There is no doubt that our commercial success brought many players into the industry and also those who did not practice responsible lending and in some cases led to over-indebtedness. But this is not the fault of SKS. We have been practising responsible lending and where ever required have looked at our processes closely and introspected on ways to strengthen any of them if required.

Q: Has your stake in the company changed? What is it currently? Also, what is your outlook for the short to medium term?
It is the same. I continue to hold 3 per cent of the company's equity in the form of stock option. As for our outlook, the short term will be challenging, the medium term will see stability and in the long term, we will get back to our robust commercial operations.