The stock market is nervous about the microfinance sector, particularly SKS Microfinance—the country’s largest MFI—which is suffering for its deeds

Recent incidents are taking a toll on the share price of SKS Microfinance Ltd, probably the country's largest microfinance company. The SKS stock, which listed on the bourses only three months ago, has come under pressure after the company's chief executive was sacked without any proper reason.

On Friday, SKS shares ended 6.8% down at Rs1,130.30 on the Bombay Stock Exchange (BSE), while the benchmark Sensex declined 1.8% to 20,125 points. Even its peer, SE Investment Ltd, was down 1.3% to Rs46. SE Investment also touched a one-month low at Rs44.50, this week.

 There is a direct cause for the sharp fall of the SKS stock price. According to a PTI report, the Reserve Bank of India (RBI) has said it would constitute a sub-committee to look into the functioning of microfinance institutions (MFIs). RBI Governor D Subbarao told reporters in Chandigarh today that the central bank board had discussed the evolving situation in the MFI.

On Thursday, the Andhra Pradesh Cabinet approved an ordinance which seeks to regulate microfinance institutions (MFIs), after a spate of suicides among the rural poor in the state, allegedly due to coercive tactics of recovery agents of these MFIs. The ordinance provides for a three-year sentence and Rs1 lakh penalty for MFIs harassing borrowers in the recovery of loans.

There are several issues associated with the company, from its business model to corporate governance, and serious personal issues related to its founder Vikram Akula.

Now, the issue of MFIs and their lending and recovery methods has raised a political storm. According to media reports, crowds of protestors led by activists of the Communist Party of India (CPI) and Communist Party of India-Marxist (CPI-M) have been on a rampage in Andhra Pradesh, attacking and ransacking offices of MFIs, particularly SKS Microfinance. One report described the kidnapping of a minor girl in Vishakhapatnam district by an MFI.

According to an expert, as long as loans are not being 'marketed', access to money is far more important than interest rates. When the alternative is loan sharks who charge hundreds of per cent per annum and insist on collateral as well, micro-loans from SKS, BASIX, HOPE or any self-help group become attractive in comparison.

Just when SKS shares climbed to a new high (Rs1490.70, on 28th September), the SKS board sacked CEO Suresh Gurumani without giving any proper reason. And even big investors, like Vinod Khosala and NR Narayana Murthy have kept mum all through the controversy. SKS has a limited operational history and no dividend record, but asked a valuation of almost 50 times its FY10 earnings, for its IPO.

Even today, several non-resident Indians (NRIs) still think SKS is a non-governmental organisation (NGO) and that with the right backing it could become a large corporation if it met the basic need of people. The truth is SKS ceased to be an NGO long ago and is now a for-profit organisation that pays fat salaries to its high profile officials. Even as the RBI struggles to find the right candidates, MFIs have recruited ex-foreign bankers and are paying them fat pay cheques in addition to stock options. (read more http://www.moneylife.in/article/4/9959.html)

When SKS came up with its IPO, Moneylife had said: "An IPO multiple of 50 reminds one of the era of tech bubble. Plus, there are other issues like commitment of the top management, high remuneration paid to top executives, geographical concentration of business and mismatch in its assets and liabilities." (Read more http://www.moneylife.in/article/81/7674.html)

During the first quarter to 30th June, incremental loan disbursement increased 81% to Rs2,283 crore. Net profit zoomed by 265% to Rs67 crore, as total revenues increased by 81% to Rs314 crore.

On the personal front, Mr Akula is also under attack from his former wife. In a letter to Moneylife this week, Malini M Byanna said that the "corporate governance" issues, or more accurately "power and control" issues, that have been long-standing, date back to our separation and divorce." (read more http://www.moneylife.in/article/4/9924.html and http://www.moneylife.in/article/4/9924.html). Ms Byanna alleged that SKS employees were involved in the abduction of her son, as well as buying air tickets and boarding pass in both her and her son's name in order to file false criminal charges against her in India and in the US. According to Ms Byanna, SKS failed to fully disclose all pending litigation against Vikram Akula in its initial draft red herring prospectus (DRHP), after which she filed a formal complaint with the Securities and Exchange Board of India (SEBI). She said that following her complaint, SEBI asked the company to disclose the information by issuing a second public notice, but the company failed to divulge details of litigations against its directors.

Last month, speaking at the Clinton Global Initiative, Mr Akula said: "SKS loan officers are not incentivised by loan size; we want him to give out the right loan amount. The logic is to create great shareholder value as she (the woman who takes the loan) moves up the ladder to take multiple loans for multiple products. SKS has reduced interest rates from 36% to 24% and in the same period ROE (return on equity) has gone up from 5% to 22%. You can bring these two elegantly together."

Interestingly, he was engaged in a debate with none other than Nobel prize winner and founder of Grameen Bank, Muhammad Yunus, more commonly referred as the father of microfinance. Mr Yunus said: "Microcredit is not about exciting people to make money off the poor. That's what you (Mr Akula) are doing. That's the wrong message completely." (read more http://blogs.forbes.com/meghabahree/2010/09/21/microfinance-or-loan-sharks-grameen-bank-and-sks-fight-it-out/)

As of end-June 2010, SKS has a network of 2,266 branches across 19 states and a total member base of 7.3 million. Out of its total branches, over 600 branches are in Andhra Pradesh alone. Although SKS has branches in 19 states, its business is concentrated in some five states in the southern part of the country. — Moneylife Digital Team