A quick health check of MFIs

Less than two months back a microfinance company SKS issued its shares at a pricey 24 times its earnings and what's even better traded on the exchanges at a 40% premium to its offer price. SKS appeared to be teaching Indian banks, regulators and NBFCs a thing or two about how to reach banking access to the millions. Now, in the past two weeks all the glitter is gone. A boardroom power struggle in SKS and high stakes in the form ESOPs created doubts over the quality and intentions of the MFIs.

Incidents of suicides in Andhra apparently because of harassment by recovery agents of MFIs have drawn the attention of regulators and governments to the unsavoury practices of this industry, The Rs  30,000 core microfinance industry came under severe censure this week. First it was the SKS saga which exposed the lack of corporate governance in the first publicly listed MFI in India . The tussle between promoter Vikram Akula  and  former CEO Suresh Gurmani was not over principles but over power

Sources said another point of discord was that the outgoing CEO was entitled to Rs 35 crore by way of ESOPs and severance while Akula was only willing to give him Rs 25 crore  ( sks  money lending) these vast sums of ESOPs and the power struggle clearly tarnished the image of an industry that is supposed to benefit the poorest.

Coincidentally, in the same week, Andhra Pradesh, the birthplace of the MFI movement saw a spate of suicides apparently because of harassment by MFI recovery agents.

R Subrahmanyam, Principal Secy - Rural Development, AP, "We are not counting bodies, that's what I?ve been telling. It's not relevant as to how many people have committed suicide. Fact is that there are several cases of suicides and there is fair amount of distress. So problem exists, it has to be tackled. So we are focused on that."

An irate state government has drafted an ordinance to regulate all activities of MFIs. While the ordinance is not in the public domain, it will ask MFIs to register themselves and their borrowers with the state government and subject to a strict code on recovery. Violation of the rules or harassment of borrowers can invite stiff penalty of fines and imprisonment.

Subrahmanyam added, "Naturally, if you molest a person or you push a person to prostitution and abet one to commit suicide, its' an offence under Indian Penal Code and it's the responsibility of the law and order department to pursue such cases. So I am sure they'll be doing their job."

It is believed the ordinance coupled even cap interest rates charged by MFIs at 16%.

Most MFIs charge between 26-30% . They argue that with their cost of funds at 12% and operating costs at 11%, an interest rate of 28-30% is needed for survival. The central government, which is also working on an MFI act,  agrees with this math and believes that any effort to cap rates may kill the industry.

Despite this support from the centre, the MFI industry looks set for hard times. Firstly, it may look for legal options to resist the demand of the state government that they register with the local authorities. Even if it wins, political and local targeting may continue. Secondly the industry  has grown rapidly in some places with middlemen procuring borrowers and pocketing a margin. Some allege that the MFI industry may not be able to sustain growth and civilised recovery without these middlemen. Third is the more serious issue of interest rates. Faced with all round opposition MFIs  are making noises that they will lower their rates.

Vikram Akula, Founder and Chairman, SKS Microfinance said, ?We charge 26% anywhere in the state and that's our interest rate. If the RBI says we would like you to reduce it to Rs 2  we are ready to do so.

This move will hurt future profits. Also it will not stave off constant surveillance, a RBI committee has already been appointed to look into the sector.

D Subbarao, Governor, RBI said, ?We appointed a board sub committee to look into the functioning of MFI sector. What bearing they have on RBI?s policies so that we can take further action if necessary.?

Regulatory surveillance and public focus can drain enthusiasm and profits of the MFIs. If this happens, private equity investors and stock markets will also begin to leg it out of the sector. Yet the sector has some truly committed professionals.

In the days to come the challenge before these  professionals is can they succeed in building a profit making model within the constraints of reasonable rates and normal collection practices and thus continue to attract private capital. Or will the MFIs experiment in capital stock market  be a failure.

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