The Directors have pleasure in presenting the Ninth Annual Report of
your Company together with the audited statement of accounts for the
year ended March 31, 2012.
The year was momentous for the microfinance industry in India in
general and your Company in particular due to the significant
regulatory changes. The following are the major developments on the
* On May 3, 2011 the Reserve Bank of India (RBI) accepted the
recommendations of the Malegam Committee, set up to study issues and
concerns in the microfinance sector. Also, the RBI re-affirmed priority
sector status for microfinance.
* On December 2, 2011, the RBI created a new category of finance
companies, the Non-Banking Finance Companies-Micro Finance Institutions
(NBFC-MFIs), and released operational guidelines for these firms which
will be regulated by the RBI. The guidelines lay considerable emphasis
on the financial stability of MFIs and prescribe prudential norms for
capital adequacy, asset classification and provisioning for bad assets.
Further, ceilings have also been imposed on individual interest rates
and realizable margins. Also, certain norms have been stipulated in
relation to fair collection practices and transparency in pricing.
* On May 22, 2012, the Micro Finance Institutions (Development and
Regulation) Bill, 2012 was introduced in Parliament.
Your Company has already adopted several aspects of the new regulatory
framework and has applied to the RBI for the classification of your
Company as an NBFC-MFI.
Your Company continues to be one of the largest microfinance
institutions (MFIs) in India in terms of the total value of loans
outstanding and the number of borrowers, as of March 31, 2012, and the
only MFI listed in India.
The financial performance for fiscal ended March 31, 2012 is summarized
in the following table:
(Rs. in Crore)
Year ended March 31 2012 2011
Total revenue 472.3 1,269.5
Less: Total expenditure 1,796.1 1,098.6
Profit (Loss) Before Tax (1,323.7) 170.9
Profit (Loss) After Tax (1,360.6) 111.6
Surplus brought forward 309.3 220.0
Amount available for appropriation - 331.6
Appropriation has been made as under:
Transfer to Statutory Reserve - 22.3
Surplus carried to Balance Sheet
Earnings Per Share (EPS) (188.06) 16.1
Diluted EPS (188.06) 15.2
- Your Company''s total revenue for the year ended March 31, 2012 has
recorded a reduction of 62.8 percent from Rs. 1,269.5 crore to Rs.
- Net Profit After Tax for the year declined from Rs. 111.6 crore to a
loss of Rs. 1,360.6 crore in FY12.
The following table summarizes the operational performance of your
Company for the year ended March 31, 2012:
Year ended March 31 2012 2011 Percentage change
Number of branches 1,461 2,379 (38.6)
Number of members (in Lakhs) 53.5 73.1 (26.8)
Number of employees 16,194 22,733 (28.8)
(Rs.in Crore) 2,737 7,831 (65.1)
(Rs. in Crore) 1,669 4,111 (59.4)
During the year under review, your Company''s member base has decreased
by 26.8 percent to 53.5 lakh (5.35 million) as compared to 73.1 lakh
(7.31 million) for the previous year, which is primarily due to Andhra
Pradesh Microfinance Institutions (Regulation of Money-Lending) Act,
2010 (AP MFI Act). Consequently, loan disbursement decreased by 65.1
percent from Rs. 7,831 crore to Rs. 2,737 crore. Your Company has
closed or merged 918 branches as part of its business rationalization
Your Company continues to be recognized as one of the largest MFIs in
India with unique achievements and strengths. Among these are:
* Your Company has repaid more than Rs. 3,800 crore to the banking
system since the Andhra Pradesh microfinance situation without even a
day''s delay and did not join CDR.
* Your Company has healthy cash and bank balances of Rs. 690 crore with
a networth of Rs. 435 crore and strong capital adequacy of 35.4 percent
(as against the 12 percent stipulated by the Reserve Bank of India) as
of March 31, 2012. In addition, the unavailed deferred tax benefit
stands at Rs. 460 crore.
* Your Company has also brought about a significant reduction in
operating costs from Rs. 106 crore in Q4-FY11 to Rs. 81 crore in
Q4-FY12 on account of branch consolidation from 2,379 in Q4-FY11 to
1,461 in Q4-FY12.
* Your Company has not lost a single Core Management Team member
voluntarily since the Andhra Pradesh microfinance situation.
* In order to protect members from over-indebtedness, your Company has
been playing a leading part in pioneering industry-wide efforts on
creating and sharing credit-related information with Credit Bureaus.
Between September 2011 and April 2012, your Company obtained Credit
Bureau reports for 44 lakh members, while loans have been given to only
26percent of them.
* Your Company''s policies and processes along with documentation have
been modified to comply with:
1. RBI guidelines of December 2, 2011.
2. RBI Fair Practice Code guidelines of July 2, 2012.
3. Guidelines and codes of industry bodies like Sa-Dhan and MFIN.
* Your Company disclosed on December 7, 2011 that it would invest Rs.
15 crore in the next three years in order to align its customer
grievance redressal and Customer Protection Practices (CPP) with
globally recognized benchmarks.
* Your Company announced on December 7, 2011 that it will cap Return on
Assets at 3 percent for the core microfinance business. Your Company''s
present interest is 24.55 percent as against the Reserve Bank of India
prescribed limit of 26 percent.
* Mr. Verghese Jacob, a seasoned corporate and social sector expert
with three decades of experience, was appointed as your Company''s
Ombudsman on January 31, 2012.
* Your Company commissioned EDA Rural Systems, a reputed development
sector consultancy, to develop a training programme encompassing the
seven principles (avoidance of over-indebtedness, transparency,
responsible pricing, appropriate collection practices, ethical staff
behavior, privacy of client data and grievance redressal mechanism) of
CPP and also certify several staff members after imparting
Train-The-Trainer coaching to them.
On account of such distinctions, your Company has been appreciated by
key stakeholders including banks and financial institutions. Your
Company completed 23 transactions with leading banks and financial
entities and obtained sanction for incremental debt of Rs. 1,360 crore
in Q4-FY12. During the fiscal, your Company also accomplished the
largest rated pool assignment transaction of Rs. 354 crore in the
Indian microfinance history.
Andhra Pradesh microfinance situation
The achievements should be viewed in the backdrop of the sensitive
Andhra Pradesh situation post the promulgation of the Andhra Pradesh
Micro Finance Institutions (Regulation of Money-Lending) Ordinance,
2010. Subsequently, on January 1, 2011, the Government of Andhra
Pradesh introduced the AP MFI Act to replace the Ap MFI Ordinance.
Prior to the promulgation of the new law, Andhra Pradesh was India''s
largest microfinance market accounting 30 percent of borrower accounts
and loan outstanding of microfinance institutions. Post the
promulgation, the Indian microfinance industry faced its worst crisis
ever with the lower middle class borrower bearing the brunt of the
The Andhra Pradesh Government''s stated aim was to protect the poor and
yet its actions have resulted in a 600-fold decrease in financing to
the very poorest of India''s citizens, according to Legatum Ventures''
report, Microfinance in India: A Crisis at the Bottom of the Pyramid''.
This should make everyone pause. The rural poor depend on access to
consistent and dependable finance to help smooth patchy income streams
and avert financial crisis. The Andhra Pradesh Government''s actions
have effectively shut off finance to these most vulnerable of India''s
citizens. Indeed, as this paper discusses, the very premise of the AP
MFI Act was fundamentally flawed. Quite apart from protecting the poor,
the AP MFI Act does just the opposite and risks creating a near term
financial and human crisis amongst the rural poor in Andhra Pradesh,
while also potentially jeopardizing the Indian Government''s broader
financial inclusion agenda.
The impact of the new law could be summed up on the following lines:
* In the first half of FY11, prior to the promulgation of the new law,
MFIs in Andhra Pradesh disbursed Rs. 5,000 crore to borrowers. This
dropped to Rs. 8.5 crore in the second half of FY11.
* The exit of microfinance companies had created a credit gap of Rs.
4,000 crore in Andhra Pradesh, The Hindu newspaper quoted a senior
official of National Bank for Agriculture and Rural Development as
* Close to 9.2 million customers or almost one in three microfinance
borrowers (almost equal to Mumbai''s suburban population) have defaulted
on loan repayment, according to Business Standard and The Economic
Times. These members would appear as defaulters in Credit Bureau lists.
* Microfinance recovery rates in Andhra Pradesh had fallen to 10
percent from 95 percent.
* Your Company has also brought down the residual Andhra Pradesh
exposure (Net) to Rs. 236 crore from a high of Rs. 1,491 crore in
October 2010 by writing off/ provisioning Rs. 1,129 crore.
MicroSave report: No harassment
The report of MicroSave, an independent international organization and
a close affiliate of CGAP which is housed at the World Bank, is an
eye-opener for all concerned. The report, What are Clients doing Post
the Andhra Pradesh MFI Crisis'', is based on 76 sessions using
participatory methods like focus group discussions, relative preference
ranking and financial sector trend analysis during July- August 2011 in
the Telangana, Rayalaseema and Coastal Andhra regions of Andhra Pradesh
covering the districts of Anantapur, Krishna, Nizamabad and Adilabad.
MicroSave also interviewed several government officials, who are
involved in SHG movement, bank officials, who have experience in
SHG-bank linkage, field staff of SHG federations, field staff of MFIs
and their borrowers and SHG members. Below are the extracts from the
Key findings of MicroSave study are:
* MFI members have taken loans at exorbitant interest rates from
moneylenders in the absence of loans from MFIs. Moneylenders have
increased lending in the past eight to 10 months in areas with higher
penetration of MFIs.
* Many members had reduced the scale of their business because of lack
of access to alternate sources of credit. Members have sold their
assets such as house, vehicle, cattle, jewellery, etc., to meet their
productive as well as essential non- productive expenditure which have
to be met.
* Most of the members stopped repaying as other members of the group
and the community stopped repaying.
* Most of the members denied any harassment from the MFIs, and said
that they are willing to repay their loans if MFIs start disbursing
fresh loans and if other members in the community also start repaying.
* Members would like to carry forward their relationship with MFIs,
given the fact that it is an economical and convenient credit option
One of the key recommendations (for the State Government/ MFIs): As the
majority of the clientele of MFIs are members of SHGs promoted by the
Government of Andhra Pradesh, there are chances of issues of conflict
between MFIs and the local machinery of the Government. The Government
and MFIs should take initiative to establish a forum at both district
and state level to resolve any conflicts.
Ex Andhra Pradesh Sarpanches back MFIs
The grassroots Andhra Pradesh perspective too reflects the plight of
the lower middle classes. In view of their plight, eminent ex
Sarpanches and other grassroots opinion leaders from 15 districts of
Andhra Pradesh have urged the State Government to restart microfinance
loans for the poor.
Media reports, featuring such requests, have been published regularly
by leading regional newspapers including Andhra Bhoomi, Andhra Jyothi,
Andhra Prabha, Eenadu, Namasthe Telangana, Sakshi, Surya and Vaartha
during the latter half of the fiscal. The media reports focus on the
* Repeal Ordinance: Sakshi has reported that the State Ordinance
against MFI loans had caused the people in Shadnagar area to again
depend on usurious moneylenders to run their small businesses since
they were unable to find easy credit after MFIs stopped offering loans
due to the Ordinance.
* Uncertainty due to lack of MFI loans leading to problems: Andhra
Prabha has reported that there was an urgent need for the Government to
reinstate MFI loans to farmers and the poor classes, who have been
badly affected by the lack of credit. The report went on to note that
non-availability of bank loans in villages could create a drop in farm
output, which could have an adverse impact on the state economy.
* Poor in the vortex of debt: Namasthe Telangana has pointed out that
farmers had been caught in the vortex of debt as the exit of MFIs has
forced them back into the clutches of moneylenders. It reported that
the previous year had seen farmers utilize loans from MFIs in a proper
manner and benefiting from them. The MFI ordinance had once again
increased their reliance on moneylenders, this year.
* Interest rates should be reduced: Eenadu has emphasized on the
increased interest burden on the lower income classes as a result of
the Government''s MFI Ordinance and subsequent dependence on
moneylenders. The article highlighted the hardships faced by the rural
poor on account of the exit of MFIs and lack of alternative credit
options at hand.
* Need for microfinance loans: Andhra Prabha has explained the
indispensable role that microfinance loans had played not just in
agricultural businesses but also in other important small businesses
such as the purchase of buffaloes and selling of milk to villagers.
Microfinance loans had benefitted a number of people and families
improving their living standards. The article emphasized on the
advantages of microfinance loans compared to loans from moneylenders in
The validity of the AP MFI Act has been challenged by several MFIs,
including your Company. The matter is currently pending in the
Honorable High Court of Andhra Pradesh.
The Sa-Dhan 2011 report had stated that concerted action from all the
stakeholders, viz, the Central Government, the RBI, the Government of
AP banks, Small Industries Development Bank of India (SIDBI) and
National Bank for Agriculture and Rural Development (NABARD), in
addition to involvement from industry associations such as the
Microfinance Institutions Network (MFIN) and Sa-Dhan (the Association
of Community Development Finance Institution), is important for
resolution of the AP microfinance crisis.
In July 2011, the Central Government released the draft Micro Finance
Institutions (Development and Regulation) Bill, 2011 (draft MFI Bill)
for public comments. The Draft MFI Bill was subsequently replaced by
the Micro Finance Institutions (Development and Regulation) Bill, 2012
(MFI Bill 2012). The MFI Bill 2012, which was presented before the
Indian Parliament on May 22, 2012, attempts to regulate the entire
microfinance sector, irrespective of the form of institutions involved.
The MFI Bill 2012 states that its provisions shall be effective
notwithstanding anything inconsistent contained in any other law. The
MFI Bill 2012 will require the approval of the Indian Parliament as
well as the assent of the President of India and publication in the
Official Gazette before becoming law. The draft MFI Bill, among other
things, states that its provisions shall be effective notwithstanding
anything inconsistent contained in any other law and that microfinance
services extended by any MFI registered with the RBI shall not be
treated as money-lending for the purpose of any state enactments
relating to money-lending and usurious loans. The introduction of the
draft MFI Bill is being seen by the MFI industry as a key step towards
resolving the uncertainty created by the AP MFI Act.
No contagion effect
The sensitive Andhra Pradesh situation has not shown any contagion
effect with non-Andhra Pradesh operations of SKS Microfinance
registering a 11 percent quarter-on-quarter portfolio growth to Rs.
1,320 crore in Q4-FY12 reversing the declining trend over the previous
five quarters. Your Company continued to maintain its high collection
efficiencies in 17 non-Andhra Pradesh states with the collection figure
for the quarter ending March 2012 standing at 95.1 percent.
New business initiatives
Your Company has built a large distribution network in rural India. As
of March 31, 2012, your Company has 13,596 branch managers, assistant
branch managers and Sangam Managers who comprise 84 percent of it''s
total workforce, across 1,461 branches in 18 states. Your Company can
leverage this network to distribute financial and non-financial
products of other institutions to the borrower- members at a cost lower
than the market price. Your Company''s network also allows such
distributors to access a segment of the market to which many do not
otherwise have access to.
Your Company intends to diversify into other businesses while retaining
the core microfinance business focus. Your Company is scaling up
certain pilot projects involving fee-based services and secured
lending, gradually converting them into separate business verticals.
Your Company''s objective in these non-microfinance businesses is to
focus on lending that will sustain high repayment rates, increase
borrower-members'' loyalty and also provide economic benefits to the
borrower-members and their families. Such non- microfinance products
and services offer higher operating margins and thus may help your
Company to increase the overall Return on Assets (ROA).
Your Company currently offers certain loan products that
borrower-members can use to purchase products that will increase the
productivity of borrower-members and their businesses. Your Company is
selective about the products for which loans are issued. To ensure the
loans are used for the purchase of the specified product, your Company
first enters into a strategic relationship with a selected supplier of
the product and specifies the loan disbursement will be made directly
to the supplier of the product rather than to the borrower-member.
Your Company has two programmes under this category, namely Mobile
Phone Loans and Sangam Store Loans.
Mobile Phone Loans
After a successful pilot programme with Nokia during FY10 and FY11 for
financing of mobile phones for the borrower-members, your Company
extended this initiative to 11 states in India. The following are the
features of MBL:
* The annual effective interest rate of the Mobile Phone Loans
programme is 26.0 percent and the loan processing fee is 1.0 percent.
* A processing/ referral fee is paid to your Company by Nokia and its
* The term of this loan is typically 25 weeks.
* The price of the mobile phones financed by your Company ranges from
Rs. 1,800 to Rs. 3,000.
* Principal and interest payments are due on a weekly basis during the
term of the loan.
As of March 31, 2011 and March 31, 2012, Mobile Phone Loans constituted
0.4 percent and 1.3 percent respectively, of your Company''s total
outstanding loan portfolio.
Sangam Store Loans
Your Company has also undertaken a pilot project involving a
business-to-business loan programme with Metro to fund the working
capital requirements of the borrower-members and certain
non-borrower-members, who own and operate ''kirana'' or Sangam Stores.
* This programme allows Sangam Stores to purchase their inventory of
consumer goods and groceries from Metro at wholesale prices.
* Loan amounts range from Rs. 2,500 to Rs. 12,500 and are interest
* The term of the loan is seven days.
* Non-members are serviced on the basis of cash-on-delivery.
* Your Company also offers credit to non-borrower-members upon
satisfactory credit appraisals and obtaining requisite approvals.
* Your Company receives a fixed commission from Metro for the total
purchases a store makes from it, while utilizing the productivity loan.
Your Directors have not recommended any dividend as your Company
reported losses during the year under review.
Change in Registered Office
The Registered Office of your Company was shifted from Ashoka
Raghupathi Chambers, D. No. 1-10-60 to 62, Opp. Shoppers Stop,
Begumpet, Hyderabad - 500 016, Andhra Pradesh, India to 3rd Floor, My
Home Tycoon, Block - A, 6-3-1192, Kundanbagh, Begumpet, Hyderabad - 500
016, Andhra Pradesh, India with effect from May 7, 2012.
Further, the Board in its meeting held on May 7, 2012 recommended
shifting of the Registered Office from Andhra Pradesh to Maharashtra,
by amendment to the Situation Clause of the Memorandum of Association
of your Company, subject to approvals of the Members and Statutory
Your Company is in the process of obtaining necessary approvals.
Management Discussion and Analysis
The Management Discussion & Analysis Report for the year under review
is presented in a separate section on Page 39 in this Annual report.
Your Company adopts the corporate best practices and is committed to
conducting its business in accordance with applicable laws, rules and
regulations. Your Company follows the highest standards of business
ethics. A report on Corporate Governance is provided on Page 55 in this
Resources and liquidity
Your Company, being a Systemically Important Non-Deposit Accepting
NBFC, is subject to the capital adequacy requirements prescribed by the
Reserve Bank of India. Your Company has to maintain a minimum ratio of
15 percent as prescribed under the Non-Banking Financial (Non-Deposit
Accepting or Holding) Companies Prudential Norms (Reserve Bank)
Directions, 2007 (as amended from time to time) based on total capital
to risk weighted assets. Your Company maintained Capital to Risk Asset
Ratio (CRAR) of 35.4 percent and 45.4 percent respectively as on March
31, 2012 and as on March 31, 2011 respectively, which is higher than
the statutory 15 percent requirement.
During the year, your Company has received ratings for various
instruments to raise funds and a summary of the ratings is presented in
the following table:
Agency Item Rating
CARE Rating Short Term Debt CARE A1*
CARE Rating MFI Grading MFI 2
CARE Rating Assignment CARE A1 (SO)
CARE Rating Securitization CARE A1 (SO)
*Rating withdrawn in May 2012 as no instrument is outstanding.
Your Company has not accepted any fixed deposits and, as such, no
amount of principal or interest was outstanding as of the Balance Sheet
Increase in share capital
During the year under review, 32,985 equity shares were issued under
the ESOP plans of your Company. Thus, the issued, subscribed and
paid-up equity share capital increased from 72,323,910 to 72,356,895 as
on March 31, 2012.
Post the Balance Sheet date, your Company issued 906,734 Equity Shares
under ESOP 2007 on May 4, 2012 and opened QIP issue on July 12, 2012
for issue of Equity Shares pursuant to and in accordance with the
provisions of Chapter VIII of the SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009, as amended. The said QIP issue is
being carried out in accordance with the resolution passed by the
shareholders of your Company through Postal Ballot on December 7, 2011.
Further, in terms of Regulations 81(c) of Chapter VIII of the
Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009, the Board has fixed July 12, 2012 as
the ''Relevant Date'' for the purpose and accordingly the floor price is
Rs. 75.40 per Equity Share as per the pricing formula under Regulation
85 of Chapter VIII of the SEBI ICDR Regulations, 2009.
The Reserve Bank of India, based on the recommendations of the Malegam
Committee, notified the directions, inter alia, for the introduction of
new category for MFIs, known as Non Banking Financial Company-Micro
Finance Institutions (NBFC-MFIs).
Following is the criteria for classifying an NBFC as an NBFC- MFI:
* Minimum net owned funds of Rs. 5 crore.
* Not less than 85 percent of its net assets are in the nature of
* Further the income an NBFC-MFI derives from the remaining 15 percent
of assets shall be in accordance with the regulations specified in this
* An NBFC, which does not qualify as an NBFC-MFI shall not extend loans
to the microfinance sector, which in aggregate exceed 10 percent of its
* Qualifying asset'' shall mean a loan, which satisfies the following
* Loan disbursed by an NBFC-MFI to a borrower with a rural household
annual income not exceeding Rs. 60,000 or urban and semi-urban
household income not exceeding Rs. 1,20,000.
* Loan amount does not exceed Rs. 35,000 in the first cycle and Rs.
50,000 in subsequent cycles.
* Total indebtedness of the borrower does not exceed Rs. 50,000.
* Tenure of the loan not to be less than 24 months for loan amount in
excess of Rs. 15,000 with prepayment without penalty.
* Loan to be extended without collateral.
* Aggregate amount of loans, given for income generation, is not less
than 75 percent of the total loans given by the MFIs.
* Loan is repayable on weekly, fortnightly or monthly installments at
the choice of the borrower.
All new NBFC-MFIs shall maintain a capital adequacy ratio consisting of
Tier I and Tier II Capital, which shall not be less than 15 percent of
their aggregate risk weighted assets. The total of Tier II Capital at
any point in time shall not exceed 100 percent of Tier I Capital.
i. Among the existing NBFCs to be classified as NBFC-MFIs, those with
asset size less than Rs. 100 crore will be required to comply with this
norm w.e.f April 01, 2012. Those with asset size of Rs. 100 crore and
above are already required to maintain minimum CRAR of 15 percent.
ii. The CRAR for NBFC-MFIs, which have more than 25 percent loan
portfolio in the state of Andhra Pradesh will be at 12 percent for the
year 2011-2012 only. Thereafter, they have to maintain CRAR at 15
Asset classification norms: With effect from April 01, 2013:
i. Standard asset means the asset in respect of which no default in
repayment of principal or payment of interest is perceived and which
does not disclose any problem nor carry more than normal risk attached
to the business.
ii. Non-performing asset means an asset for which interest/ principal
payment has remained overdue for a period of 90 days or more.
Provisioning norms: With effect from April 01, 2013
The aggregate loan provision to be maintained by NBFC-MFIs at any point
in time shall not be less than the higher of:
* 1 percent of the outstanding loan portfolio, or
* 50 percent of the aggregate loan installments, which are overdue for
more than 90 days and less than 180 days and
* 100 percent of the aggregate loan installments, which are overdue for
180 days or more.
The RBI has, through its circular dated March 20, 2012, deferred the
implementation of the asset classification and provisioning norms
prescribed for NBFC-MFIs until April 1, 2013.
Pricing of credit:
i. All NBFC-MFIs shall maintain an aggregate margin cap of not more
than 12 percent. The interest cost will be calculated on the basis of
average fortnightly balances of outstanding borrowings, and interest
income is to be calculated on the basis of average fortnightly balances
of outstanding loan portfolio of qualifying assets.
ii. Interest on individual loans will not exceed 26 percent per annum
and the same will be calculated on a reducing (diminishing) balance
iii. Processing charges shall not be more than 1 percent of gross loan
amount. Processing charges need not be included in the margin cap or
the interest cap.
iv. NBFC-MFIs shall recover only the actual cost of insurance for
group, or livestock, life, health for borrower and spouse.
Administrative charges, where recovered, shall be as per Insurance
Regulatory Development Authority (IRDA) guidelines.
Fair Practices Code
The Reserve Bank of India on March 26, 2012 amended the Fair Practices
Code for all NBFCs including MFIs and Gold Loan companies, requiring
NBFC-MFIs and Gold Loan companies to comply with certain additional
norms with respect to their lending practices and recovery methods.
Your Company has revised the Code of Conduct for field staff, who have
been involved in microfinance activities and Gold Loans along with
relevant policies and documents in line with the RBI guidelines on Fair
Practices Code for NBFCs.
On December 21, 2011, your Company submitted an application to the RBI
for classification as an NBFC-MFI and is awaiting necessary approval
from the RBI.
Credit bureau for MFIs
In order to address the issue of multiple lending or over-indebtedness,
various Micro Finance Institutions/ NBFCs have come together to invest
in the Credit Information Bureau, namely High Mark Credit Information
Services Private Limited via Alpha Micro Finance Consultants Private
Limited. In order to facilitate the collective investment in High Mark
as well as undertake other collective steps for building the technology
infrastructure for credit information sharing among themselves, and to
educate their staff in ensuring good Customer Protection Practices are
followed, Alpha has been established as a collective entity by 25
NBFC-MFIs which together have about 70 percent of the total portfolio
of the microfinance loans. Your Company invested Rs. 20 lakh in Alpha.
Self-regulations for MFIs
Your Company is a member of both Industry Associations viz.,
Microfinance Institutions Network (MFIN) and Sa-Dhan (the Association
of Community Development Finance Institution) that aim to work with
various stakeholders, including regulators to promote microfinance as a
tool for achieving larger financial inclusion goals. These
self-regulatory organisations have defined an Unified Code of Conduct
for microfinance institutions in India, which seek to create social
benefits and promote financial inclusion by providing affordable
services to un-served and underserved households. The Code, in addition
to reiterating the regulatory guidelines, defines core values and fair
practices for the sector so as to ensure that microfinance services
through MFIs are provided in a manner that benefit borrowers- members.
Ethical approach and dignity for borrowers-members are the key elements
of the Code.
Globally benchmarked Customer Protection Practices
In view of the concerns raised during the Andhra Pradesh situation,
your Company has been rolling out several initiatives in order to make
Client Protection Principle (CPP) a strategic priority as also to
integrate the same into the business plan. Among the initiatives are:
Credit bureaus and over-indebtedness: In order to protect members from
over-indebtedness, your Company has been playing a leading part in
pioneering industry-wide efforts on creating and sharing credit-related
information with Credit Bureaus. Between September 2011 and April 2012,
your Company obtained Credit Bureau reports for 44 lakh members, while
loans have been given to only 26 percent of them.
Regulatory compliance: Your Company''s policies and processes along with
documentation have been modified to comply with: 1. RBI guidelines of
December 2, 2011; 2. RBI Fair Practice Code guidelines of July 2, 2012;
3. Guidelines and codes of industry bodies like Sa-Dhan and MFIN.
Third-party verification and endorsement: Your Company has been seeking
external validation for compliance. Accordingly, M-Cril, a well-known
rating agency, conducted a study during October 2011-December 2011
across five states and issued a fully complaint report. A similar
study for the period January 2012-June 2012 covering eight states is
Rs. 15 crore investment for CPP: Your Company disclosed on December 7,
2011 that it would invest Rs. 15 crore in the next three years in order
to align its customer grievance redressal and CPP with globally
Cap on Return on Asset: Your Company announced on December 7, 2011 that
it will cap Return on Assets at 3 percent for the core microfinance
business. Your Company''s present interest is 24.55 percent as against
the Reserve Bank of India prescribed limit of 26 percent.
Ombudsman: Mr. Verghese Jacob, a seasoned corporate and social sector
expert with three decades of experience, was appointed as its Ombudsman
on January 31, 2012.
CPP training and certification: Your Company commissioned EDA Rural
Systems, a reputed development sector consultancy, to develop a
training programme encompassing the seven principles (avoidance of
over-indebtedness, transparency, responsible pricing, appropriate
collection practices, ethical staff behavior, privacy of client data
and grievance redressal mechanism) of CPP and also certify several
staff members after imparting Train-The-Trainer coaching to them.
CPP assessment: Your Company has volunteered for an independent
assessment of its current practices by Smart Campaign Team of Accion
International. Their initial comments capture the best practices being
implemented by your Company. The final report is awaited.
Upgradation of Customer Grievance Redressal systems and processes: Your
Company was the first microfinance company in India to start a
Toll-free Helpline (1800 300 10000), which is operational in eight
Indian languages since July 6, 2009. A couple of new Customer Grievance
Redressal initiatives are being implemented to ensure faster complaint
Integrating CPP into employee KRAs: Zero-tolerance policies have been
rolled out specifying severe penalties including termination for
non-compliance of the regulatory guidelines.
The above-mentioned measures will align your Company''s CPP with
globally benchmarked best practices, helping your Company''s customer
satisfaction levels while addressing policy-makers'' concerns, if any.
Your Company is focused on technology solutions that drive growth.
Initiatives are being taken in the following areas:
* Cost-effective total branch connectivity solution and strengthen
existing communication channels.
* Centralization of data for real-time decision making.
* Building strong business intelligence reporting and analytics
* Consolidation of network, storage and hardware infrastructure by
using Cloud and virtualization services to drive economies of scale.
* Use of advanced communication channels like video conferencing to
increase productivity and efficiencies.
* Build robust framework to strengthen technology assets, artifacts and
The execution of the above-mentioned initiatives will help your Company
in achieving its goals.
Human Resource Management
The Human Resources function has been implementing several initiatives
to attract and retain talent. In this regard, the function has been
implementing various programmes in the areas of manpower planning and
optimization, devising development plans, employee engagement as also
indiscipline. A key initiative in this regard is CARE built on the four
pillars of: Creative communication, Appreciation for all, Reward and
recognition and Energy and enthusiasm.
The function has been playing a critical role in ensuring that the
field employees follow a standardized set of processes and policies
resulting in minimization of business risks and enhancing customer
satisfaction. It plays a pivotal role in disseminating Client
Protection Practices, Code of Conduct and Staff Ethical Behavior across
the organization enabling the human capital of your Company to gear up
for future with a special focus on rapid changes pertaining to internal
and external environment.
Your Company continues to implement various industry first initiatives
in the areas of role-based training and certification, performance
differentiation and value-based approaches. Building leaders from
within will continue to be a priority and your Company continues to
strengthen its efforts to build the pipeline.
Employee Stock Option Plan (ESOP) and Employee Share Purchase Scheme
Presently, stock options have been granted or shares have been issued
under the following schemes:
A. SKS Microfinance Employee Share Purchase Scheme 2007 (ESPS 2007)
B. SKS Microfinance Employee Stock Option Plan 2007 (ESOP 2007)
C. SKS Microfinance Employees Stock Option Plan 2008 (Independent
Directors) (ESOP 2008 (ID))
D. SKS Microfinance Employee Stock Option Plan 2008 (ESOP 2008)
E. SKS Microfinance Employee Stock Option Plan 2009 (ESOP 2009)
F. SKS Microfinance Employee Stock Option Plan 2010 (ESOP 2010)
G. SKS Microfinance Employee Stock Option Plan 2011 (ESOP 2011)
The disclosures with respect to each of the above-mentioned Employee
Share Purchase Schemes (ESPS) and Employee Stock Option Plans (ESOP),
as required by Securities and Exchange Board of India (Employee Stock
Option Scheme and Employee Stock Purchase Scheme), Guidelines, 1999,
are appended as Annexure - 1 and form part of this report.
Particulars of employees
Pursuant to the provisions of Section 217 (2A) of the Companies Act,
1956, read with the Companies (Particulars of Employees) Rules, 1975,
as amended, the names and other particulars of employees are set out in
Annexure - 2 to the Directors'' Report.
During the year under review, following are the changes:
1. Mr. Suresh Gurumani and Mr. Pramod Bhasin resigned as Directors
from the Board of Directors of your Company with effect from May 27,
2011 and August 12, 2011 respectively.
2. Dr. Vikram Akula resigned as the Executive Chairman of your Company
with effect from November 23, 2011.
3. Mr. V. Chandrasekaran''s nomination on the Board was withdrawn by
Small Industries Development Bank of India (SIDBI) with effect from
June 8, 2012.
The Board places on record its appreciation for the contribution made
by the above-mentioned Directors to your Company and industry during
Your Company is in the process of appointing a new incumbent in place
of Mr. V Chandrasekaran as SIDBI nominee on the board of your Company
on completion of certain formalities.
Mr. PH. Ravikumar and Mr. Paresh Patel will retire by rotation and are
eligible to offer themselves for re-appointment in the ensuing Annual
General Meeting. A brief profile of the Directors is given in the
Notice of the Ninth Annual General Meeting.
Directors'' Responsibility Statement
Pursuant to the requirement under Section 217(2AA) of the Companies
Act, 1956, your Directors confirm as under:
i) In the preparation of the annual accounts, the applicable accounting
standards read with requirements set out under Schedule VI to the
Companies Act, 1956 had been followed and there are no material
departures from the same.
ii) Your Company has selected such accounting policies and applied them
consistently and made judgments and estimates that are reasonable and
prudent so as to give a true and fair view of the state of affairs of
your Company at the end of the financial year and of the profit of your
Company for that year.
iii) Your Company has taken proper and sufficient care for the
maintenance of adequate accounting records in accordance with the
provisions of the Companies Act, 1956 for safeguarding the assets of
your Company and for preventing and detecting fraud and other
iv) Your Company has prepared the annual accounts of your Company on a
''going concern'' basis.
The Statutory Auditors of your Company, M/s. S. R. Batliboi & Co,
Chartered Accountants, Mumbai, retire at the ensuing Ninth Annual
General Meeting and have confirmed their eligibility and willingness to
accept office of the Auditors, if appointed. The Audit Committee and
the Board of Directors have recommended reappointment of M/s. S. R.
Batliboi & Co., as Statutory Auditors of the Company for the FY2012 -
2013 for your approval.
Response of the Board to the Auditors'' Comments
In terms of the provisions of Section 217(3) of the Companies Act,
1956, the Board would like to place on record an explanation to the
Auditors'' comments in their Audit Report dated May 8, 2012:
S.No. Auditors'' Comments Response
1. The Company''s Due to the impact of the Andhra Pradesh
Microfinance (Money-lending) Regulation
accumulated losses at the the field operations in Andhra Pradesh,
the Company has prudently written off
end of the financial year of the loans outstanding in
the state during the FY2011-12.
Your Company has reduced its net
are more than fifty percent exposure in AP to Rs. 236.0 crore as on
March 31, 2012 from Rs. 1,303.2 crore as
of its net worth and it has
31, 2011. The net exposure is post
provisions and write-offs of Rs.
1,007.2 crore on the AP
incurred cash losses in the portfolio during the financial year, which
have contributed primarily to the losses
current financial year. The your Company for the first time
in its history. Notably, the total
provisions and write-offs of
Company had not incurred Rs. 1,173.5 crore made during the financial
year 2011-12 exceed the accumulated losses
any cash losses in the of Rs. 1,051.3 crore at the end of the
financial year. The Company has a
strong networth of
immediately preceding Rs. 434.7 crore even after adjusting the
accumulated losses and capital adequacy
financial year. percent.
The regulatory uncertainty created by the
AP MFI Act led to reduced bank lending to
the sector and for your Company resulting
in a decline in the non-AP outstanding
loan portfolio during the first three
quarters of the financial year 2011-12.
Subsequently, with clarity from the nBfC-
MFI directions issued by the RBI and
the Central Micro Finance Institutions
(Development and Regulation) Bill, 2012,
your Company accessed higher funds in
the fourth quarter of financial year
2011-12, resulting in quarter-on-quarter
growth in the non-AP portfolio. The
Company expects this trend to continue
into the next financial year. However,
lower revenues, due to the reduction in
non-AP portfolio over the full year,
coupled with less than proportionate
decrease in expenses, resulted in cash
losses in the financial year
2011-12. To control costs, your
Company has initiated several measures
and also steps to ensure AP operations
are cash neutral.
2. We have been informed Employee fraud is an inherent risk in the
business the Company operates in, since
that during the year transactions are cash-based. In case of
cash embezzlements, your Company has
there were instances of amount of Rs. 10,859,714 including the
insurance cover. Cash embezzlement is
cash embezzlements of disbursement during the year.
by the employees of the To mitigate this risk to a large extent,
the management has put in place several
Company aggregating control measures as under:
Rs 25,091,317; and
loans given to non Procuring indemnity bond from every field
staff, with personal guarantee of a third
existe nt borrowers on - Every bank transaction (deposit/withdrawal)
is to be executed by minimum of two staff
the basis of fictitious comprising a bank signatory and a confirmed
documentation created - The strongbox at every branch is controlled
by two keys and the keys are held by two
by the employees of the different employees in the branch.
company aggregating - Surprise visits are conducted by managerial
employees, at the time of carrying out
Rs 133, 313, 975. The bank transactions by field employees.
- Minimizing the cash balances at various
branches to the lowest level possible
services of all such
employees involved have next day disbursement)
been terminated and the There are also several detective controls,
Company is in the process - Employee-wise daily reconciliation of
cash balances by the managerial employees
of taking legal action. The branch
outstanding balance (net - Frequent surprise visits by accountants
and internal auditors, which covers
of recovery) aggregating physical cash and bank balances
Rs. 142,440,656 has been - The following is the action taken in such
written off. - Terminating services of all the employees
involved in cash embezzlements and taking
legal action against them
* Recovering money from such employees
Also, your Company has taken fidelity
insurance to minimize the losses from
In case of loans given to non-existent/
fictitious borrowers, your Company
has recovered an amount of Rs. 7,397,648
against these cases including insurance
cover. These cases are 0.49percent of
disbursement during the year.
The following are the various preventive
control measures included in the loan
process to mitigate the risk of loans to
non-existent borrowers/ fictitious
- All the loans disbursed have a
maker/ checker control; wherein all the
loans processed by sangam managers
are approved by branch managers/
assistant branch managers.
- Sangam managers are not deployed in
their home towns, so as to prevent
collusion with the local people there.
- Employee rotation every six months,
where in the sangam managers manage
different centres at the end
of every six months.
- Transfer of sangam manager/ branch
manager in a span of 9 to 12 months
- Developed internal processes to restrict
loan disbursements to inactive members
- The branch managerial employees perform
Loan Utilization Check for every loan
- The internal audit team, on a test
basis, verifies the loan documents and
performs Loan Utilization Check for
the loans disbursed.
- Terminating services of all the
employees involved in fake loan
transactions and taking legal action
- Recovering money from such employees
The net impact of frauds comes to
around 0.51 percent of the total
amount disbursed during the year.
Your Company is working towards
reducing this percentage to the
least possible by making process
improvements, covering the loss
by having an adequate insurance policy
and by increasing opportunities
for direct contact with our members.
During the year, your Company has
recovered an amount of Rs. 1.30 crore
against fraud amount written off
in previous years.
Energy Conservation, Technology Absorption and Foreign Exchange Earnings and
The particulars required to be furnished under sub section (1) (e) of
Section 217 of the Companies Act, 1956, read with the Companies
(Disclosure of Particulars in the Report of Board of Directors) Rules,
1988, are set out in the Annexure - 3 to this report.
During the previous fiscal, your Company started a sustainability
initiative with the aim of going green and minimizing the environmental
impact. Like last year, this year too your Company has published the
Annual Report prepared in compliance with provisions of the Companies
Act, 1956 and the Listing Agreement.
Your Company has 11 trademarks registered in its name, including the
trademark registrations for SKS Microfinance, the composite trademark
for SKS in English and eight other Indian languages, and the Swarna
Pushpam logo in English. Our trademark registration application for
the Swarna Pushpam logo in Telugu language as well as our application
for registration of a composite trademark for SKS Microfinance in
Bengali language are currently pending.
Your Company also has copyright certification of our anthem song titled
Udhte Jaayen Badte Jaayen.
Your Directors express their sincere appreciation of the cooperation
and assistance received from Sangam Members, shareholders, bankers, and
other stakeholders during the year under review. Your Directors also
wish to place on record their deep sense of appreciation for the
commitment displayed from all executives, officers and field employees
resulting in the successful performance of your Company during the
For and on behalf of the Board of Directors
Place: Hyderabad SD/- SD/-
Date: July 14, 2012 P.H. Ravikumar M.R. Rao
Chairman-Interim Managing Director and CEO