SKS Microfinance is hopeful of recovering at least Rs 300 crore out of the Rs 1300 crore of loans it had written off in its Andhra Pradesh portfolio, Chief Financial Officer Dilli Raj said in an interview to CNBC-TV18 today. The recovery could be spread over the next two years, Dilli Raj said.
SKS Microfinance is looking to resume operations in Andhra Pradesh, following a Supreme Court interim order earlier this week allowing it to lend to customers in the state. The state government, however is set to challenge the SC order.
SKS had stopped operations in Andhra around two years back after the state government tightened regulations against micro finance firms in the wake of a spate of suicides.
The company is readying a plan for restarting its Andhra Pradesh operations, and will finalise it within a week. The company has 120 branches and 1200 staff in the state. Dilli Raj said two lakh out of its 18 lakh customers in the state have repayed loans in the last two years even though the company had suspended operations. He said the company would give priority to these customers once it resumes business in the state.
He is confident that the company will get a good response from borrowers in the state when it returns.
"We have not been replaced at the ground level; in fact the poor borrowers have been driven back to the money lenders after micro finance firms suspended operations. So there is a strong economic rational for them to come back to us," Dilli Raj said.
Since SKS had already written off the entire Andhra Pradesh portfolio, every rupee of recovery would flow into the bottomline, Dilli Raj said.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: The stock was quite nervous on the news that principal secretary of Andhra Pradesh had said that he will appeal against the Supreme Court relief to SKS Microfinance. How do you read that development?
A: That is a natural reaction, in the sense one could appeal. If you look at even the interim relief we have got from the Supreme Court, which is something we have been pleading and praying for the last two-and-a-half year and we have seen some light at the end of the tunnel. This order firmly puts us in a position to go back and start lending and collecting, although we have fully provided for it, there is a huge upside on it.
Q: Where do things stand for SKS Microfinance? Can you resume operations with the confidence that business can continue as normal or have you brought things to halt because if the recent turn in legal events?
A: No. This is Supreme Court’s interim relief, which completely empowers to go back and do that. We have no doubt in our minds that we are allowed to resume operations. What is holding us is not this development but we are preparing the operating plant. If you recall, we have retained a small footprint in Andhra Pradesh (AP). We have 120 branches even today, and 1,200 people. We are preparing the operating plan and in a week’s time we should be there, hitting the ground.
More importantly even though collection efficiency has dwindled down in AP but out of our 1.8 million borrowers, 200,000 of them have repaid all their dues to us even during this two-and-a-half years. So, we would like to go back and start lending them.
Q: You have already written off more than Rs 1,300 crore from the AP portfolio. Once you restart operations, what extent of recovery would you be expecting and how soon?
A: Not as a matter of guidance or for that matter economic reality, but our assessment is that we could look at recovering 30 percent of what we have provided for, of course spread over period of two-and-a-half to three years. So, even if we do a present value of that, it is a sum of Rs 300 crore, which is almost 3/4th of our present day’s networth. That is our assessment.
The reason we are confident of that is because we have not been substituted at the ground level. If you look at the credit behaviour, of other retail asset classes, the credit default was higher because they have been substituted. The credit grantors have been substituted and the borrowers at choice, they could take from ‘A’ and go to ‘B’. However, here the unfortunate thing is that they have been thrown back to the moneylenders from whom we got. Since we have not been substituted, they still have the economic rationale to come back and deal with this and that is what we are trying to do.
Q: Will there be any impact you see in Q4 though either in terms of losses you have may have to book or whether there is further provisions you will have to write down?
A: We have fully provided for it way back in Q2, so there won’t be any additional thing, but if at all, if we collect even a rupee just for the sake of argument since we have provided for that will go to bottomline and networth.
Of course barring AP, in terms of Q4 that will be a quarter we would like to remember for sometime because as we could see there has been a very strong funding inflow into the company. So, the debt drawdown for the first three quarters where at about Rs 1,200 crore but in Q4 alone as of date, we have accessed Rs 1,200 crore. Riding on that surge in funding inflow the asset growth in non-AP market has stepped up significantly. One could see a 50 percent quarter on quarter growth in the disbursement and that could lead to a 25 percent growth in portfolio quarter on quarter.
Q: You have done two securitisation transactions which takes your total number for this year, FY13 to nearly Rs 1000 crore. Do you see the pace of securitisations continuing as we go into FY14?
A: Certainly yes, and even for the residual year, we are working on to more transaction and the total number may add up to Rs 1,250 crore for FY13. The reason why we say that the demand will continue in FY14 is also the fact that if you look at it for direct agri and indirect agri, microfinance is the only outlet for the banks to achieve their direct lending target. So, that is the reason for this upsurge in demand for microfinance.
Q: The Supreme Court verdict has setout certain sections applicable to you but given the confrontational relationship you share with the state government, are you confident that SKS Microfinance can eek out the same kind of topline growth or lending growth that it did in AP in the past?
A: We are not in confrontation with the state government, in fact we have always recorded and I reiterate that Andhra Pradesh state government deserves full credit for igniting national attention on this issue but for their efforts, the rural poor women would not have got this kind of attention. Today, we have a far more stable regulatory framework, thanks to the efforts of Andhra Pradesh government.
It is just that AP, which was the pioneer in financial inclusion, today has this problem that 9.2 million rural women borrowers are the defaulters on the credit files of credit bureaus, which is largest in any part of the world. So, what you have on ground is disruption of working capital cycle for millions of micro enterprises. Some one has to step in and infuse liquidity, and we are willing and that is what we were praying to do. Now that we have the legal strength from none other than the Supreme Court, we would go back and resume. As I said we will start lending to only those 200,000 women who have paid all their bills to us for the last two-and-a-half years.
The two Sections are Section 9 on interest rate not exceeding the principal and Section 16 that there should be no harsh recovery practices. So, on both we are absolutely comfortable with and in any case Reserve Bank of India guidelines stipulate them therefore there is absolutely no issue on that. The Supreme Court has also included in the order that there should be no coercion against SKS Microfinance.