SKS Microfinance Ltd, The largest and only publicly listed microfinance institution (MFI), has faced a 12% reduction in its workforce for the period ending March 31, amounting to 3,000 employees. This is the largest decrease the company has seen since its inception. The MFI had ceased to recruit new staff in the wake of changing market conditions due to the disruption to lending practices in October and November of 2010 in the Indian state of Andhra Pradesh. This crisis affected many of the Andhra-based MFIs including Spandana, SHARE. There have also been a number of high profile executives from MFIs who have changed jobs in the past few months including two from Spandana: Chattanathan Devarajan, the acting CEO, left to join ICICI bank and the CFO, Giri Giridhar, joined Wockhardt Ltd a pharmaceutical company.

Aveek Dutta

MFIs, which are in the business of extending tiny loans to poor people in rural areas, have suffered large-scale defaults in Andhra Pradesh after the state govt introduced a law restricting their activities

Mumbai: SKS Microfinance Ltd, India’s largest and only listed microfinance institution (MFI), has seen an exodus of at least 3,000 of its employees in the three months ended 31 March, even as the lender of tiny loans to the poor grapples with large-scale defaults from borrowers in Andhra Pradesh and a rapidly eroding market value.

The 12% decline in its employee strength for the March quarter is the sharpest fall the company has seen.

SKS is not the only micro-credit lender that has seen people leave after a crisis broke in Indian microfinance in October. Other Andhra Pradesh-based MFIs have also lost key executives who had been drawn to the sector and away from high-paying jobs with multinational firms, but whose aspirations were dealt a blow by the not-so-conducive environment for microfinance in the southern state that accounts for a quarter of the total microfinance business in India.

In the first two quarters of 2010-11, SKS witnessed significant growth in numbers. For instance, in the September quarter when it entered the capital market with a Rs. 1,629 crore public issue that was subscribed 11.44 times, its staff strength grew 16% compared with the previous quarter.

In the March quarter, SKS had 22,733 employees on its rolls.

The employee numbers reported factor in exits and new recruitments.

“SKS usually hires its apprentices/trainees…considering the growth and other business needs. As the situation in the market has changed significantly in Q3—we did not continue with them in Q4,” Srinivas Reddy Vudumula, executive vice-president (human resources) at SKS, said in an email, explaining the fall in numbers.

In a conference call with analysts on 27 January, following the announcement of SKS’ October-December results, M.R. Rao, the company’s chief executive officer (CEO), had said that the MFI had “frozen recruitments” since it was not opening any new branches, nor hiring any new loan officer trainees.

The number of loan officer trainees, along with head office staff at SKS, declined most in the fourth quarter.

While the trainees’ strength fell by 96% to only 95, that of head office staff fell 7% to 401 people.

SKS is one of the many Andhra Pradesh-based MFIs that have been at the centre of a storm brewing in the microfinance business.

The crisis has taken a toll on the people management abilities of other established lenders such as the Basix Group and Spandana Sphoorty Financial Ltd.

Both MFIs are headquartered in Hyderabad, the capital of Andhra Pradesh, and have seen a few high-profile exits in the last few months.

Sajeev Vishwanathan quit as the managing director of Bhartiya Samruddhi Finance Ltd, an arm of the Hyderabad-based Basix Group. He continues to serve as corporate adviser to Basix.

Spandana lost two key executives recently. While Chattanathan Devarajan, who was functioning as the company’s CEO, put in his papers earlier this month to join ICICI Bank Ltd, the MFI’s chief financial officer Giri Giridhar quit in November to join pharmaceutical company Wockhardt Ltd.

Padmaja Reddy, founder and managing director of Spandana, said Devarajan had been brought in four months back to spearhead a process of diversification into other products such as agri-loans and gold loans, planned by the lender to mitigate the impact of the crisis in Andhra.

Against Spandana’s hopes, collections from existing borrowers in the state fell further and fresh credit from banks dried up, making the planned diversification impossible, Reddy said.

“We decided to part ways mutually as we were unable to scale up the new ventures and Devarajan may also have felt that he could not contribute as the situation didn’t improve,” he added.

Commenting on Giridhar’s exit, Reddy stated that Spandana had plans to raise capital by way of a public issue as well as fresh loans. Giridhar’s responsibility was to prepare the ground for an initial public offering such as interacting with investment bankers, but that since a public offering is not possible in the current environment prevailing in the sector, he quit.

MFIs, which are in the business of extending tiny loans to poor people—especially women—in rural areas, have suffered large-scale defaults in Andhra Pradesh after the state government introduced a law restricting their activities. The state law followed a spate of suicides by borrowers, allegedly due to coercive methods adopted by certain lenders to secure repayments.

  1. Sudarshan, managing partner in-charge of emerging markets and Asia at global executive search firm, EMA Partner International Ltd, said companies in the sector had hired a lot of “fat cats” when the going was good, but found they could no longer afford them in the changed regulatory regime, where margins have been capped.

A business model that should have been fundamentally low cost, got glamourized, he said. “A valuation game was under way with a lot of private equity investment coming in. People thought delinquencies wouldn’t occur, but then recovery became a challenge,” Sudarshan added.

Anil Sharma, senior consultant and operational head at Pathproviderz Consultancy Pvt. Ltd, a recruitment consulting firm, said the resumes of a lot of microfinance professionals have been floating around in job portals, and that he has been receiving calls from some executives in the business.

Spandana’s Reddy also pointed out that a number of executives had been drawn to the sector over the past two years in the hopes of making money from stock options granted to them.

“Most MFIs were reporting 100% growth in business, repayments were good and valuations were soaring (back then), but stock options have no meaning now,” he said.

SKS’ stock price validates Reddy’s point.

From an all-time high of Rs. 1,490.70 per share in September, the company’s shares hit an all-time low of Rs. 262 each on the Bombay Stock Exchange (BSE) on 10 May. The bourse’s benchmark index, Sensex, lost 8.6% in the same period.

The shares closed at Rs. 373.45 each on BSE on Monday, losing 1.2%.

The chain of events since October led India’s central bank, the Reserve Bank of India (RBI), to constitute a committee under the chairmanship of chartered accountant Y.H. Malegam to draft a set of guidelines for microfinance firms operating as non-banking financial companies.

Among other provisions, the guidelines, accepted by RBI, cap the interest rate MFIs can charge borrowers at 26%, and their margins at 12%.

“Those who came to the sector in the hope of a better pay and greater power may look to leave, but those who joined the sector as part of a long-term social commitment will stay put,” said Udaya Kumar, CEO of Grameen Financial Services Pvt. Ltd.

His company has only seen a normal rate of attrition, he added.