Abstract

This case is about the crisis faced by SKS Microfinance (SKS), a leading Indian microfinance institution, after a new government policy affected its business activities. In October 2010, the government of the southern Indian state of Andhra Pradesh passed an ordinance after the microfinance industry faced a slew of allegations regarding their business practices. The ordinance made it almost impossible for SKS to collect dues from its borrowers. Banks and other financial institutions too stopped lending money to Micro Finance Institutions (MFIs) as they feared recoveries. The board of SKS implemented a number of initiatives to come out of the crisis. It started expanding in other states where there were no restrictions on the operation of MFIs. The management cut costs by closing down some branches and removing some employees. Other initiatives like competent cash flow practices, securitization deals, and Qualified Institutional Placements (QIP) also ensured that its operations were not choked due to the funds crunch. The new initiatives implemented by the SKS management paid off and the company returned to profits in the third quarter of the Fiscal Year (FY) 2012-2013. SKS also planned to expand into other related financing areas like gold loans and loans to small traders in order to diversify its business operations. Meanwhile, SKS was awaiting the passage of the Microfinance Institutions (Development and Regulation) Bill (MIB) in the Indian parliament. The bill would override other state legislations and make the RBI the sole regulator of MFIs in India. SKS hoped that the new bill would help it to grow faster in the future.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Appreciate the importance of managing finance effectively in enabling the success of a company facing tough times.
• Analyze the strategies that should be followed by companies when faced with harsh government policies which stifle their growth prospects.
• Appreciate the importance of the macro environmental factors like political and legal environments that can impact the business.
• Explore the future strategies that SKS should follow in order to return to its high growth path.
• Discuss the pros and cons of SKS expanding into other unrelated areas of finance like gold loans and loans to small traders.

Keywords

Microfinance, Cash flow management, Calibrated credit cost approach, Cost structure optimization, Capital raise, Securitization deals, Qualified Institutional Placements, Macro environmental factors, Regulatory environment, Diversification, Turnaround