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We believe that the AP assembly’s ratification of the MFI Ordinance increases the risk of delay in stabilizing
the operating environment for MFIs in AP. Low collection efficiency (15-20%) in the
state and weak liquidity position of AP-focused MFIs is a concern. SKS’s high equity
base (post IPO) and low exposure (27%) to AP are its key positives in this regard. Nearterm environment remains challenging though we continue to believe that well-run
MFIs have good prospects in long term, as we await the Malegam committee report.
MFI Ordinance ratified by AP assembly
The Andhra Pradesh assembly has approved a legislation to regulate the microfinance sector.
The bill is passed by the state assembly and will be sent to the upper house of lawmakers.
We understand that most covenants of the Ordinance are unchanged and hence the operating
environment of MFIs in the state continues to remain challenging.
Collection efficiency remains low in AP
Collection efficiency for MFIs in AP remains low at 15-20%. Based on a recent notification issued
by the Government of AP, MFIs have shifted to a monthly collection cycle from the earlier practice
of a weekly collection cycle—the key reason for decline in collections. Since most borrowers
generate income on a daily or weekly basis, a weekly collection cycle augurs well for borrowers,
most of whom do not have access to bank accounts. MFIs have insisted that a weekly collection
cycle should be reinstated and challenged the notification in the High Court. We would like to
highlight that the notification is not directly included in the Ordinance/bill and the Government
may not need to revisit the MFI Bill if this has to be reviewed.
No new disbursements in AP as yet
SKS has obtained provisional registration from all districts (as required by the Ordinance) and the
KYC process of obtaining ration cards etc. has been followed. The company has robust IT system
to support the data requirements under the regulations.
SKS and other MFIs have not resumed disbursements in AP on the back of poor collections till
date. We believe that new norms for obtaining the 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 the business resumes. The industry will have to evolve a mechanism to resolve the issue of
multiple lending and avoid overleveraging in the sector.
RBI/Malegam committee report expected shortly
We understand that the Y.H. Malegam committee constituted by RBI will look into all issues
pertaining to the MFI sector over the next few weeks. We believe that RBI will take
cognizance of the fact that well-managed for-profit MFIs can be effective agents for
improving financial inclusion. We believe that long-term prospects of SKS hence remain
intact. We also expect RBI/Government to provide clarity on the scope of operations of state
governments in regulating MFIs/NBFCs so that other states do not introduce regulations for
NBFCs/MFIs like AP.
Liquidity continues to be a concern for MFIs in AP
Low collections in AP for about six weeks have weakened the liquidity position of several
MFIs which have high exposure to AP. CRISIL recently downgraded the bonds of Spandana
Sphoorthy Financial to BBB from A- and Asmitha Microfin to BBB- from BBB. Notably, the
ratings for both the entities remain in investment grade but under ‘rating watch’ with
negative implications.
SKS better-placed but NPLs in AP can affect near-term financials
We believe that SKS is better-placed as compared to other MFIs due to lower exposure to AP.
We are factoring 5-7% credit losses in AP (in our estimates). However, since the situation in
AP has been weaker for a longer-than-expected period, NPL may be higher at 15-20%—
difficult to quantify at the current stage. We highlight scenarios of 10%, 20% and 30%
gross NPLs in AP and likely impact on financials of SKS. We are assuming 80% provision
coverage. The credit losses on this account will likely be a one-time hit.
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