India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
SKS Microfinance
Underweight
SKSM.BO, SKSM IN
Malegam committee report: Some ray of hope, but
with stringent conditions; maintain Underweight
• Much awaited report: The Malegam committee has submitted its
proposal for the MFI sector. The recommendations do provide a ray of
hope for the MFIs but impose stringent conditions and caps on
operations and profitability of MFIs.
• Bad news – Stringent conditions: The committee has proposed (1)
interest rate caps (24%) and/or margin caps (10% for large MFIs), (2)
linking the repayment period to the loan amount, (3) capping loan values
at Rs25,000 and putting the onus of market behavior on MFIs. It noted
that MFIs were enjoying supernormal returns and the proposed margin
cap leaves a lot of work to be done by MFIs in rationalizing costs.
• Good news: The report (1) does not mention collection periodicity but
does suggest the repayment tenure should vary with loan size and
mentions the need for a moratorium period, (2) recommends the AP Act
be repealed, and (3) recommends the continuation of priority sector
benefits to the MFI sector.
• Recommendations only; RBI to make the final call: We believe the
RBI will likely the recommendations, but that the Andhra Pradesh
government is unlikely to back down even if RBI accepts the
recommendations. However, this report does reduce the risk of other
states replicating AP-like policies. We believe these recommendations
themselves will depress ROEs to upper-teen levels given the margin
caps suggested. Also near-term asset quality risks remain high with a
significant impact expected from the AP book.
• Maintain Underweight: These recommendations do provide a ray of
hope, but SKS still looks expensive at 2.5x FY12E book. We believe
things will get worse before they get better, with significant cost
rationalization required to generate 16-17% ROEs given the margin cap.
We maintain our Underweight rating and Dec-11 PT of Rs550.
Criteria to be complied with to be classified as an NBFC –
MFI
• Not less than 90% of its total assets are in Micro-credit
• The loan is given to a borrower who is a member of a household whose
annual income does not exceed Rs50,000
• The amount of the loan does not exceed Rs25,000 and the total outstanding
indebtedness of the borrower including this loan also does not exceed
Rs25,000
• The tenure of the loan is not less than 12 months where the loan amount
does not exceed Rs15,000 and 24 months in other cases with a right to the
borrower of prepayment without penalty in all cases
• The loan is without collateral
• The aggregate amount of loans given for income generation purposes is not
less than 75% of the total loans given by the MFIs
• The loan is repayable by weekly, fortnightly or monthly installments at the
choice of the borrower
It was recommended that any NBFC that does not satisfy these conditions should
not be allowed to have more than 10% of assets in Microfinance assets.
Restrictions recommended for NBFC- MFIs on Interest
rates/margins
The following are some caps on interest rates and margins proposed by the
committee report:
• Average “margin cap” of 10% for MFIs having a loan portfolio of Rs1.0B
and of 12% for smaller MFIs –For the last 2-3 years, spreads for SKS have
been ~12-17%.
• A cap of 24% for interest on individual loans – They have recently reduced
interest rates in most states to ~25% from 28-30% earlier.
• Levy only three charges: (a) processing fee; (b) interest; and (c) insurance
charge.
• Not more than two MFIs can lend to a single borrower.
No comments:
Post a Comment