Coming full circle

Are the testing times for microfinance institutions (MFIs) really over? This quarter, the posterboy-turned-villain of MFIs in India is back in the spotlight after a turnaround. SKS Microfinance recorded a net profit of ₹1.2 crore in the December quarter compared with whopping losses of ₹262 crore in the September 2012 quarter and ₹428 crore in the year-ago quarter. Interestingly, its growth has been driven by states other than Andhra Pradesh, which was the most lucrative catchment area for MFIs before political conspiracy killed it. SKS’s Andhra Pradesh portfolio has been reduced to zero from a high of ₹1,491 crore in October 2010 when the microfinance crisis really hit the state. But loans disbursements rose by 14% to ₹784 crore during the quarter while interest income in those states, too, grew by 16% to ₹79 crore. 

This turnaround in SKS’s fortune after its spectacular fall from grace, followed by seven consecutive quarters of losses, is bound to trigger hopes of several MFIs that were planning to tap the public markets in their bid for greater visibility as well as valuations. 

But it may be a while before that happens. According to a recent report on the state of the microfinance sector, most MFIs surveyed had return on assets (RoA) in the range of 0-1%, while in terms of return on equity (RoE), most were in the 0-10% range (see: Diminishing returns). The yield on portfolio, too, has come down to 23.88% from 26.63% the previous year, even as operating cost has increased as a proportion of loan portfolio. Clearly, profitability of MFIs in FY12 has come down, thanks to the aftermath of the AP crisis, the liquidity crunch that followed and reduced client outreach. The growth in client outreach dropped 15.7% in 2011-12, compared with an increase of 19.1% the previous year (see: Down, but not out).

Meanwhile, the gross loan portfolio remained almost stagnant, falling 3%, suggesting that MFIs are “unable to service existing customers and perhaps not acquiring new customers”, the report says. If MFIs are to return to their earlier prime position, they will have to bring in more efficiency in their operations so that their profitability is at a level the stock markets will get excited about. But will that mean Round II of the SKS fiasco?