Fears of regulatory checks drag SKS Micro down

MUMBAI: Shares SKS Microfinance fell below their issue price on Monday, weighed down by concerns of regulatory restrictions in the near future. The stock crashed to an intra-day low of . 894.70 — . 91 below the issue price of . 985 — before narrowing the losses to close at Rs 1,005, down 4% over its previous close.

Brokers are advising clients against buying shares of the company till there is clarity on microfinance regulations. According to them, rising regulatory interference , lending controls and the threat of rising non-performing loans could hurt the company’s financial health. “The basic business model itself is under pressure,” said Sanjeev Patni, head-institutional equities, Centrum Broking.

“There will be curbs on lending limits and interest rates (charged on borrowers) once a new regulator is appointed. Microfinance companies won’t be able to use aggressive means (like coercion) to collect money from borrowers. All these factors will impact earnings,” he said. Brokers tracking the stock say that current valuations can be justified only if there is strong credit growth, stable return on assets and very low default level, which can’t be more than 2%. However, investment advisors are of the opinion that SKS will not be able to maintain its growth if lending rates are capped and collection process relaxed.

“Capping of lending rates will result in yields on advances declining by 2%, from 26% to about 24%. Restrictions on aggressive collection methods will result in NPAs moving up. These factors will bring down returns on assets, which, in turn, will have an impact on returns on investments,” said Manish Sonthalia, senior VP-fund manager, Motilal Oswal Securities.

According to Mr Sonthalia, investors can consider buying the stock if it falls by another . 300 from current levels. Hyderabadbased SKS Microfinance found itself under the media glare after its board terminated the services of its CEO Suresh Gurumani without giving adequate reasons.

The matter snowballed into a major crisis after Sebi sought an explanation from the MFI for the reasons behind sacking Suresh Gurumani. Amidst reports of rampant mismanagement , partial disclosures at the time IPOs and low CSR quotient , the finance ministry announced its plans appoint a microfinance regulator and curb practices like overcharging borrowers and forceful collection of borrowed money, across industry.