SKS Microfinance -Finance ministry introduces the MFI bill, Retain UW ::JPMorgan,

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SKS Microfinance Underweight
SKSM.BO, SKSM IN
Finance ministry introduces the MFI bill, Retain UW


RBI to get autonomy to regulate MFIs: The Finance ministry released
the “The Micro Finance Institutions Bill” which gives RBI the
authority to decide on the ceiling and tenure of the MFI loan, quantum
of maximum interest and fees to be charged and set net-worth
requirements for MFI operations. The bill does not specify any operating
parameters for MFIs but gives complete autonomy to RBI to regulate
MFIs. The bill will come into force once approved by the cabinet and
notified in the official Gazette.
 The MFI bill to override other laws: The bill clearly stipulates that
the provisions of the bill would override any state laws relating to
money lending. This could be positive for SKS given severe operational
restrictions under the APMF act but we believe collections would not
improve materially from existing AP portfolio, given the large time gap
since the introduction of the AP MFI act in Oct-10.
 RBI’s accepted recommendations in May-11 may apply: After
Malegam committee’s recommendations in Jan-11, RBI had accepted the
recommendations with some modifications. Given the regulatory
autonomy given to RBI for MFI regulations, we believe those accepted
guidelines would be operational framework for MFIs.
 Maintain Underweight: This is a positive development for SKS
Microfinance as the bill clearly stipulates RBI’s regulation to overrule
any state legislation on MFIs. In spite of this regulation, we continue
with our Underweight stance as (1) we believe that the business has
fundamental flaws, (2) recoveries from AP are unlikely, in our view, in
spite of this bill, and (3) current valuations at 2.4x FY12E book still look
expensive.