NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, April 20, 2016

Just as it seemed SKS Microfinance was getting back on its feet, it has received a body blow once again. It had applied for a small finance bank (SFB) licence, but while eight of the 10 entities the Reserve Bank of India (RBI) awarded these licences to were microfinance institutions (MFIs), SKS Microfinance was not one of them (See Left Out). Indeed, of the 10 leading MFIs in the country, one, Bandhan, has become a full-fledged bank, while another eight will shortly be converted into SFBs. SKS Microfinance is the only one left out.

Why did this happen? “The company didn’t get fit and proper clearance from the concerned agencies,” says an RBI official on condition of anonymity. SKS Microfinance failed to get a clearance because its President, S. Dilli Raj, who was also said to be a director at the Chennai-based First Leasing Co, faces a Central Bureau of Investigation (CBI) probe. Last October, cases were registered against the then Chairman A. C. Muthiah and three directors, including Dilli Raj, for allegedly cheating IDBI Bank of Rs 274 crore. “My name has been unnecessarily dragged into a controversy in which I had absolutely no role,” said Dilli Raj in an official statement released by the company. “I will take all steps in accordance with the law to defend myself and set the record straight.”

The RBI announcement, on September 17 last year, saw SKS Microfinance hammered on the bourses the next day, losing 16 per cent of its value. But in the six months since, it has been able to bounce back, gaining 43.5 per cent during a period when the Sensex dipped four per cent. Its December quarter results, too, have been encouraging with revenue growing 66.6 per cent to Rs 307.25 crore from Rs 184.41 crore in the corresponding quarter a year ago, and its net profit rising a whopping 93.6 per cent to Rs 79.5 crore from Rs 41.05 crore in the same period.

Long-term Danger

But the danger was never in the short term. It is in the medium to long one. For the first 18 to 24 months, it is the other MFIs that have won SFB licences that will have to incur additional expenditure on setting up branches, improving technology and establishing their brands, which could impact their margins. (Some of these MFIs, though, already have a fair number of branches.) As time passes, however, their advantage over SKS Microfinance will become increasingly manifest. “The SFB model may or may not be successful,” says Parag Jariwala, Vice President – Institutional Research at Religare Capital Markets. “But it will certainly cause a disruption in the MFI sector, which will impact SKS Microfinance.”