Article 1: 3 MFIs Spandana Spoorthy, Share Microfin and Asmitha Microfin plan merger to create biggest lender, surpass

SKS Microfinance1 MUMBAI: Spandana Spoorthy Financial Services, Share Microfin and Asmitha Microfin plan to merge their businesses to create the largest lender to small entrepreneurs, surpassing SKS Microfinance, said three people familiar with the proposal. The merger will bring down costs and improve their chances of returning to profitability, saving thousands of crores of rupees lent by banks, those people said. "We have made a proposal before the corporate debt restructuring cell to merge the three entities,'' said Padmaja Reddy, founder and managing director of Spandana Spoorthy Financial Services. "We have an in-principle approval from the shareholders. This will help us to improve our net worth and bring down our operating cost." The merged entity will manage assets of about 6,600 crore, higher than SKS' 4,300 crore. However, there is no certainty the merger will go ahead as the banks are yet to approve it. The three lenders have been negotiating with banks to continue their operations that became unviable after the Andhra Pradesh state law curbed lending practices and loan recovery. Borrowers started voluntarily defaulting since the companies were robbed of the methods they adopted to recover. Although recovery remained at 95% in the rest of the country, in Andhra Pradesh, where two-thirds of the business was concentrated, it collapsed to 22%. Almost all of the microfinance institutions in the state plunged into losses. The government was also forced to designate the Reserve Bank of India as the single regulator for the sector. "We have accepted all the terms put up by the CDR,'' said M Udaia Kumar, promoter, Share Microfin."We have agreed to pay 8 crore as promoters' contribution from both Share and Asmitha to the empowered group of CDR cell." These companies were admitted into the debt restructuring programme by lenders as they could not meet their payment commitments. The restructuring itself was dragging on for months since the promoters were not willing to give personal guarantees. "They will have to agree to the terms of the committee,'' said a person familiar with the negotiations. "Bankers will be keen on improving the business," the person said on condition of anonymity. Spandana has agreed to pay Rs 7 crore as promoters' contribution. The industry may be slowly getting out of the woods with improvement in liquidity and possibility of equity funding from other investors. SKS Microfinance is the only listed MFI in the country which raised around Rs 1,600 crore through a public issue last year. It boasts of investors such as Infosys Technologies founder NR Narayana Murthy and private fund Sequoia Capital. With the central bank now planning to come out with comprehensive regulations based on the recommendations of YH Malegam committee, more microfinance institutions may get a lifeline as banks feel comfortable in reviving their lending to the sector. However, profitability may be under pressure with RBI capping lending rates.

Article 2: Lok Capital, partner invest 26 crore in IFMR rural channels2 BANGALORE: Mumbai-based Lok Capital and one of its limited partners have together invested $5 million ( 26 crore) in IFMR Rural Channels for an undisclosed stake, underscoring the return of impact investing by venture capital firms after a lean 2011. Lok Capital's series A investment in IFMR Rural Channels, which will be paid out in a single tranche, will be used for building Kshetriya Gramin Financial Services which offers financial services in remote rural locations. The KGFS portfolio includes savings, remittance, insurance, small-ticket loans and investments using a wealth management approach for low-income consumers. At present there are about five KGFS centres serving 10 districts across Tamil Nadu, Orissa and Uttarakhand. The latest investment by Lok Capital is the third such from its second fund. Last year, in September it had invested $3 million in rural business process outsourcing firm Rural Shores, and also participated in urban microfinance venture, Ujjivan's fifth round of equity financing. The development also draws attention to the fund of funds investment strategy being increasingly utilised by risk capital in India, as they look to diversify their portfolio and significantly raise their assets under management. Earlier in the month, early-stage investment fund Kae Capital raised $25 million from a number of marquee venture capital firms which includes impact investment firm Omidyar Network. Venture capital firms are making a cautious return to investing in the country's social enterprises, after the turmoil in the microfinance sector and concerns over corporate governance saw them adopt a rather hands-off approach. This was in spite of 2011 being perceived as a blockbuster year for venture capital investing, with investors closing over 200 venture deals estimated at $1.09 billion, compared to $699 million invested across 132 deals in early-stage companies in 2010. The expectations from 2012 are quite promising, with the common consensus being that fund corpus and deal sizes are, both, expected to grow in the current year. The education sector has been one of the early gainers with Omidyar Network investing an undisclosed amount in education resources company EnglishHelper on March 22. The philanthropic investment firm, which was set up by e-Bay founder Pierre Omidyar and his spouse, also announced a three-year $950,000 grant to Bangalore-based public charitable trust, Akshara Foundation. Other recent deals include Sequoia Capital investing $7.5 million in Bangalore-based Edusys Services, and Mumbai Angels investing 5 crore in eDreams Software Innovation. The microfinance sector, too, has seen investment play by the risk capital industry, with Ujjivan raising $25 million earlier in January. SKS Microfinance, the only listed microfinance company in India, also completed two rated pool assignment transactions worth 221 crore and two assignment transactions worth 100 crore from two PSU and an equal number of private banks totaling 321 crore.

Article 3: Budget 2012: Microfinance Bill will help SKS recover Rs 800 cr in Andhra Pradesh3 HYDERABAD: SKS Microfinance, India's only listed microlender, today said it will be able to collect up to Rs 800 crore from Andhra Pradesh loan portfolio if the Microfinance Bill is passed as mentioned by the Finance Minister in his budget speech today, said a top executive of the company today. Dilli Raj, CFO, SKS Microfinance said the total receivables from the Andra Pradesh is nearly Rs 1300 crore and they had to write off Rs 900 crore so far. "The finance minister confirmed that the Microfinance Bill will be tabled in the current session. That brings a long term regulatory clarity and most importantly upon passage of MFI Bill, it will override the AP MFI Act. That would allow us to start collation and lending again in State." "We have written off Rs 900 crore on AP portfolio... totally we will be able to collect Rs 500 to Rs 800 crore from the outstanding," Dilli Raj told PTI. AP Microfinance Ordinance was implemented on October 15 2010 and subsequently made that into an Act in the wake of a spate of suicides by the borrowers allegedly due to the coercive recovery practices by the MFI agents in Andhra Pradesh. The legislation clipped the wings of all microfinance institutions including SKS by curtailing their activities. The Act mandated the MFIs to take permission from the Government before lending to borrowers and also insisted the collection cycle to be monthly instead of weekly. SKS suffered a loss of Rs 1031 crore for the nine months period ended December 31, 2011 against Rs 181 crore profit after tax for the same period in the previous fiscal.

Article 4: MFIs see sharp rise in securitization deals4 Mumbai: The fund-starved microfinance institutions (MFIs) have sold Rs3,000 crore worth of loans in fiscal 2012, almost double the amount in the previous year. This has been done through securitizationa process of pooling loans and turning them into marketable securities and selling them. MFIs are firms that give small loans to low-income borrowers at 24-36%. The loan securitization transactions rose in the January-March quarter, bolstered by clarity on regulations and revival in investor confidence. Banks are aggressively returning to the securitization market, after more than a year, also to meet their so-called priority sector lending target by buying such loan pools. Under current norms, banks have to lend 40% of their loans to agriculture, exports and other weaker sections. They can make up for any shortfall by buying such portfolios. Typically, banks rush for such transactions towards the end of a fiscal year. Three leading ratings agenciesCrisil Ltd, Care Ratings Ltd and Icra Ltdhave rated at least Rs3,000 crore worth of loans in the microfinance industry in 2011-12. In the previous year, it was around Rs1,700 crore. Icra rated securitization deals worth Rs800 crore in January-March from 11 transactions, compared with Rs100 crore in the last quarter of 2011 from two transactions. Crisil rated around Rs260 crore worth of loans in the fourth quarter as against Rs90 crore in the year-ago period and the quantum of microfinance securitization rated by Care Ratings is Rs930 crore during January-March from Rs830 crore in the year-ago period. Till last year, bank loans to NBFCs (non-banking financial companies) to on-lend to specific segments could qualify as prioritysectorloans.But norms have changed to quality banks purchase of securitization portfolios for this purpose, Abhinav Sharma, assistant general manager, NBFCs, at Care Ratings, said. The sector plunged into a crisis after Andhra Pradesh, the largest market for microfinance, passed a law to regulate MFIs. The new rules restricted MFIs from collecting money weekly and made it mandatory for microlenders to secure government approval to issue every second loan to a borrower. Following this, the collection rates of MFIs in the state fell to 5-10% and MFIs stopped giving loans to borrowers. Since then, commercial banks, too, stopped lending to the firms in the southern state. In December, RBI formulated regulations to govern NBFCs incorporated as MFIs, capping the interest rate they can charge from clients at 26% and their margin at 12%. This helped to improve investor confidence in the industry and prompted banks to be more active in the securitization market, experts said.

The government is also in the process of formulating a national regulation to govern the sector, which is expected to supersede all state-level regulations on MFIssuch as the Andhra Pradesh law. Ramraj Pai, director, Crisil, said improved confidence in the sector has encouraged banks to actively return to the securitization space. The MFI industry has gone through a difficult time since the Andhra Pradesh law. Somewhere in the second half of 2011, the investor confidence came back and banks started looking at the sector again, Pai said. Indian banks have lent Rs12.7 trillion to the so-called priority sector as on 24 February 2012, up from Rs12.06 trillion during the same period in last year. Of this, majority of the loans have been given to agriculture and small- and medium-sized companies. According to Pai, securitization transactions will continue to remain a viable investment along with direct lending because of the credit enhancement and the structural features built into the transactions. Among the MFIs which have done large securitization transactions are the countrys lone listed microlender, SKS Microfinance Ltd, and Kolkata-based Bandhan Financial Services Pvt. Ltd. In the January-March quarter alone, SKS did securitization deals of around Rs1,000 crore and around Rs1,120 crore in the full fiscal. Bandhan concluded a securitization deal worth Rs500 crore in February. It is always cost-effective to go for a securitization deal if you have a good rated pool and cash guarantee support, the head of a leading state-run bank, said. He did not want to be named.

Article 5: Can indias MFI industry be saved?5

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Andhra Pradesh, Indias fourth largest state by area and fifth largest by population, has set a world record. About 9.2 million borrowers in the southern state have defaulted in repaying money borrowed from microfinance institutions (MFIs)the largest number of defaulters in any location in the world. As Andhra Pradesh has a population of 84.6 million (2011 census provisional figure), theoretically one in every 11 Andhraites is a defaulter. This, however, is not the actual case as most such borrowers have more than one account. By industry estimates, around four million people of the statealmost all womenhave turned defaulters. As the female population in Andhra Pradesh is 42.1 million, one in every 10 women in this state has borrowed from MFIs but not repaid. To put the Andhra phenomenon in perspective, in 2008, when the Indian government announced a Rs60,000 crore debt-waiver scheme for farmers across the nation, some 40 million farmers didnt repay debt. Indeed, the money involved in Andhra Pradesh is minuscule compared with the national debt-waiver scheme, but the point to note is that in this case, the debt has not been waived even though a section of the local politicians has created that impression and encouraged borrowers not to pay back.

The MFI industrys total exposure to Andhra Pradesh was around Rs. 7,200 crore in 2010 and they have been able to collect from the borrowers only 10% of this money. They are carrying on their books Rs. 6,500 crore worth of bad assets, and when they write off this amount in March, at the end of the current fiscal, many of Indias big MFIs net worth will turn negative. Unless the Reserve Bank of India (RBI) relaxes the prudential norms that stipulate a 15% capital adequacy ratio (Rs. 15 capital for every Rs. 100 worth of loans) for this set of financial intermediaries, many will have to shut shops. The MFIs that will bear the brunt will include Indias lone listed microlender SKS Microfinance Ltd, Spandana Sphoorty Financial Ltd, Share Microfin Ltd, Asmitha Microfin Ltd and Vijay Mahajan-promoted Bhartiya Samruddhi Finance LtdIndias oldest MFI. In this pack, SKS Microfinance will be the least affected as it had raised money from the public through its capital float in August 2010; the others are in a bad shape. Some are restructuring the debt taken from banks. But even then, keeping themselves afloat is not an easy task as commercial banks, which provide 90% of resources that MFIs need for business, are not forthcoming in giving money for fear of piling up bad assets. Interestingly, even the MFIs which do not have any direct exposure to Andhra Pradesh are being shunned by the banks. For instance, Arohan Financial Services Ltd, an MFI in West Bengal, hasnt got any money from banks ever since the Andhra crisis broke out, even though it doesnt have a single borrower in the southern state. For lack of resources, it is shrinking assets and closing down offices. Utkarsh Micro Finance Pvt. Ltd of Varanasi is another instance. It lends to poor people in eastern Uttar Pradesh and Bihar. In 2010 and early 2011, banks withdrew all lines of credit. Subsequently, a few banks have started sanctioning loans but they are not releasing money.

With no fresh money in the kitty and Andhra Pradesh borrowers not repaying loans, MFIs are forced to shrink loan books, close down offices and retrench employees. The outstanding loan book of the industry, which was Rs. 30,000 crore in October 2010, has shrunk to Rs. 15,000 crore in January, and at least 30% of 1,50,0000 employees have been shown the doors.The origin of the crisis was in October 2010 when Andhra Pradesh, which accounted for at least a quarter of the microlending industry, promulgated a law to control microlenders after a spate of reported suicides following alleged coercive recovery practices adopted by some. The law, which restricted MFIs from collecting money from borrowers on a weekly basis, made government approval mandatory for borrowers taking more than one loan. Subsequently, an RBI panel capped the loan rate by MFIs at 26% and the margin at 12%. These norms were fine when banks were giving money to MFIs at 11%. With the increase in interest rates, banks are now charging more; and if we add to that the processing fee and the cash margin that MFIs need to keep with the banks, the effective cost of money is at least 17%. No wonder then most MFIs are making losses. There are a few exceptions though. Janalakshmi Financial Services, which takes care of the tiny loan needs of the urban poor, is one of them. The Bangalore-based firm has grown its assets from Rs. 80 crore in March 2010 to Rs. 260 crore now. Apart from giving tiny loans, Janalakshmi distributes financial products such as pension and insurance, and sells mortgages and enterprise loans through 66 branches across 41 cities in 11 states. The Kolkata-based Bandhan Financial Services Pvt. Ltd is another MFI. It has recently overtaken SKS in terms of loan book size. In January itself it achieved the year-end target and may end the fiscal with a loan book of Rs. 3,500 crore. Its bad assets have grown but are still way below 1% of total assets and it is making profits. The death of the MFI industry will push the poor into the grip of moneylenders and deal a blow to the governments financial inclusion drive. The government and RBI must draw an MFI survival strategy before its too late. We need them at least till such time the banks are ready to reach out to the masses. At the same time, the industry needs to get rid of its obsession for growth and learn from the Bandhan and Janalakshmi experiments to reorient its business models.

Article 6: Why did Akula have to go? The untold story6 SKS Microfinance Ltds managing director and chief executive officer (CEO) M.R. Rao and chief financial officer Dilli Raj were seen leaving the firms crucial board meeting in Mumbai on
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Tamal Bandyopadhyay Mints deputy managing editor Mumbai

Wednesday much before it got over. From private equity fund Sandstone Capital Advisors Pvt. Ltds office, where the board meeting was held, the duo hopped across to State Bank of India (SBI) headquarters in Mumbais business district Nariman Point. A meeting was scheduled with SBIs two managing directors to discuss Indias lone listed and till recently the biggest microlenders new business strategyconversion from a microfinance institution (MFI) to a multi-product rural financial services company. SKS wants to play the role of an intermediary between banks and rural India, and earn fees. It has been talking to SBI and ICICI Bank Ltd for this. Both the banks as well as a very large Indian corporation may even pick up stakes in SKS. The decision to change the business model was taken at a meeting in San Francisco in August, and even though SKS founder chairman Vikram Akula endorsed it at that time, he started opposing it later. But Akulas ouster from SKS was not the result of serious differences on strategic issues between him and other senior executives and/or the board as it has been made out to be. The problem was elsewhere. The SKS saga is the story of a clash of personalities. The dramatis personae in this theatre of the absurd are Akula, Rao, Raj and former CEO and managing director of SKS, Suresh Gurumani. Indeed, the independent directors of the SKS board such as P.H. Ravikumar, Tarun Khanna, Geoff Woolley and V. Chandrasekaran played a role in Akulas exit, but they could do so only because of the aggressive initiative of two shareholders who are also directorsParesh Patel, CEO of Sandstone Capital Advisors, and Sumir Chadha, managing director of WestBridge Capital. Both saw massive erosion in the value of the firm because of the conflict between Akula and the Rao-Raj duo. The stock lost at least 90% since September 2010 and is now trading at less than its book value. The first time the independent directors of SKS found something amiss in the firms corporate governance was when N.R. Narayana Murthys Catamaran Ventures was given a stake in the company at a price lower than what other investors (who had come in earlier) had paid. The company also instituted an advisory board, headed by Murthy, which neither had any other member nor held meetings. Apparently, Akula defended the pricing by saying it had been committed to earlier. The board ratified the sale treating it as a one-off case because Murthys integrity is unquestionable. The first clash happened when Akula, backed by Rao and Raj, wanted to throw Gurumani out in October 2010 after SKS blockbuster initial public offering (IPO). Gurumani was appointed as CEO because the board did not find Rao fit for the top job. Rao himself was instrumental in bringing Gurumani on board, but the two later fell apart. The Rao-Raj combination and Akula did not find Gurumani adding much value to the company and claimed he was spending more time in Mumbai with his family than in Hyderabad where the firm is based.

At least one independent director put his foot down against this, as Gurumani had steered the historic IPO and wrote a dissent note against his ouster. He was persuaded to withdraw this by other members of the board, who pointed out that an on-the-record dissent note would weaken the companys case should Gurumani legally challenge his ouster. Rao was made the CEO and managing director after Gurumanis ouster, but Akula continued to interfere in operations. SKS insiders say Akula has vision and passion, but lacks the ability to execute plans. They also claim he becomes insecure about his role and position if he is not operationally in control. He tried to do so by setting up a committee of executives who would directly report to him, bypassing the managing director and CEO, but the independent directors scrapped this arrangement as they expected the chairman to be the guiding light of the firm and not a hands-on manager. Once the committee was dismantled and Rao was asked to oversee day-to-day operations, Akula found himself completely isolated. He used to come to office and stare at the wall in his room. Almost nobody would talk to him. Earlier, Rao and Raj had joined hands with Akula o throw Gurumani out, but after that mission was accomplished, the group split, with Akula in one camp and the duo in the other. At the San Francisco meeting, when the decision was made to change the business model, Akula did not protest and also endorsed a decision to get into gold loans. But later he expressed his reservations on changing the character of the company. Subsequently, Ernst and Young was appointed to conduct a forensic audit of SKS. It is yet to submit its report. Once the two shareholders representatives found the firm losing its value fast because of the infighting, they stopped supporting Akula, who, after the IPO, virtually did not hold any stake in SKS. The two directors increased pressure on Akula to quit when he asked for an extension to exercise the first tranche of his employees stock option scheme. Akula has been given two tranches of these schemes and sometime in August he was in money for the first tranche (this means, the market price of the stock was higher than the price at which options were given to him and he could make money by selling them), but he could not arrange the money to pay for his stock option schemes and hence wanted more time to exercise it. He was allowed to do so after he committed to quit SKS. Wednesdays three-hour board meeting was bereft of acrimony and Akula carried himself with dignity. The meeting took as long as it did because there were several formalities to be completedfor instance, Akula had to give back the company laptop and minutes of past board meetings, which were with him. He also had to sign papers saying he would not start a venture that would compete with SKS and poach employees. There was no severance package even though Akula had completed only about a year of his three-year term as chairman because, under Indian law, there is no provision for compensating for the unserved period. Besides, there are tax implications as Akula continues to be a US citizen.

After SKS, Akula plans to start a new innings in the mobile banking space and I am sure he will do well, as very few can match his passion and vision. He had to leave SKS not because of his greed for money, but love of power. He threw Gurumani out, but when Rao and Raj joined hands against him, he wanted Gurumani to return to tackle the two. Now, with both Gurumani and Akula out, the investors will keenly watch how long the bonhomie between Rao and Raj will last. The board is aware of this and wants to build a second line of leadership fast, along with the change in business model.

Article 7: SKS Microfinance CFO says sees turnaround by Q1 FY137 SKS Microfinance (SKSM.NS), the only public microfinance company in India, hopes to turn to profit by April-June after a third straight quarterly loss in FY12, on better recoveries and greater reach beyond Andhra Pradesh state, a top official said. India's microfinance sector came under severe stress after Andhra Pradesh, the industry hub at the time, imposed a set of restrictive laws
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Arjun Kashyap Reuters Thu Jan 19, 2012 9:29pm IST

in October 2010 curtailing microfinance activity in the state, scaring away banks and investors and prompting many small to mid-sized lenders to the poor to shut shop. "The provisioning and write-offs on the Andhra Pradesh (AP) portfolio has contributed to the loss," Dilli Raj, the chief financial officer of the microfinance firm, told Reuters. "In the first quarter of financial year 2013, we should return back to profits," he added. SKS posted a Q3 loss of 4.28 billion rupees, reflecting the sliding fortunes of the country's beleaguered microfinance sector. The loss is its third in a row following two earlier quarters of fiscal year 2012. Since the turmoil SKS has been beset with bad loans, boardroom struggles and its stock plunged after a successful IPO in August 2010 which raised $358 million. Eventually the trouble saw the exit of its highprofile founder Vikram Akula in November 2011. Akula, a Yale-educated microfinance pioneer who founded SKS in 1997, was named one of the 100 most influential people in the world by Time magazine in 2006, and attracted investors such as George Soros and Goldman Sachs to SKS. Future write-offs from SKS's portfolio exposure to Andhra Pradesh, which is currently worth about 4.8 billion rupees, can be offset by a tax shelter of 5 billion rupees that the company has not yet taken advantage of, Raj said. "So, if we were to use that to adjust it to the AP portfolio exposure, then there is no additional hit to the AP portfolio P&L account," he said. The sector is now awaiting passage of a federal law that would make the central bank the sole regulator of the sector, overriding the restrictions imposed by Andhra Pradesh state. Last December, cash-strapped SKS said it would raise up to 5 billion rupees through a share sale to institutional investors by March 2012, and raised the investment limit of foreign institutional investors in the company to 74 percent from 24 percent. However, skepticism persists. It will take some time for banks to resume lending but if they are able to raise capital and sort out personnel issues, then there's a good potential upside, said Anurag Agarwal, co-founder of Hyderabad-based Intellecap, a consulting firm for microfinance operators. "I think it'll be a stretch for them to turn profitable in the first quarter of fiscal year 2013," he added, citing issues such as high operational and funding costs, personnel issues and repayment problems in states other than AP such as West Bengal and Madhya Pradesh. On Thursday, the company's stock ended the day up 0.7 percent in a firm Mumbai market that closed up 1.2 percent. In 2011, the stock lost a whopping 88 percent of its value. "We have put the AP problem behind us. The worst is over. The idea is to grow the non-AP portfolio, which is posting a collection rate of 96 percent," Raj said.