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SKS Microfinance Ltd

BSE: 533228 | NSE: SKSMICRO ISIN: INE180K01011
Market Cap: [Rs.Cr.] 5,122.77 Face Value: [Rs.] 10
Industry: Finance & Investments

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Director's Report

Dear Members,

Your Directors have pleasure in presenting the Tenth Annual Report of your Company together with the audited statement of accounts for the year ended March 31, 2013.


FY13 has been a momentous year for the MFI industry in India, particularly so for your Company due to the following significant changes:

1. Investors are beginning to return to the microfinance sector. Ten investors, domestic as well as foreign, have invested approximately Rs. 869 crore in the sector in FY13, according to The Economic Times

2. The pan-India Gross Loan Portfolio (GLP) for the MFI industry grew by 23% to Rs. 21,245 crore in FY13 as compared to Rs. 17,264 core in FY12, when there was a 14% degrowth (Rs. 20,000 crore in FY10-11). Loan disbursals during FY13 increased by 13% to Rs. 23,209 crore from Rs. 20,613 crore in FY12, when there was a degrowth of 36% (Rs. 32,418 in FY11)

3. Total debt funding to the MFI industry increased by 79% to Rs. 10,203 crore in FY13 from Rs. 5,713 crore in FY12

4. Average loan amount disbursed on a pan-India basis remained below Rs. 15,000

5. The productivity ratios in the industry continued to improve in FY13 (Source - Points 2 to 5: MFIN Micrometer 2013)


The Reserve Bank of India (RBI) has further strengthened the regulatory framework for Non-Banking Finance Companies-Microfinance Institutions (NBFC-MFIs) vide notifications dated August 3, 2012 and May 31, 2013 when the following dispensations were announced:

a. In December 2011, the RBI announced the creation of a separate category of Non-Banking Financial Companies, namely Non-Banking Financial Company-Micro Finance Institutions (NBFC-MFIs). RBI has issued guidelines for the classification of existing NBFC as an NBFC-MFI. Your Company has adopted several aspects of the new regulatory framework and has applied for its re-classification as an NBFC-MFI. The application is currently under consideration of the RBI

b. NBFC-MFIs are required to maintain not less than 85% (earlier 90%) of their net assets as Qualifying Assets and, in this regard, only the assets originating on or after January 1, 2012 will have to comply with the Qualifying Assets criteria

c. NBFC-MFIs are also required to ensure that the aggregate amount of loans given for income generation activities should constitute at least 70% of an MFI’s total loans, which prior to the notification was at 75%. Members of an SHG (Self Help Group) or a JLG (Joint Liability Group) as well as new clients can borrow from NBFC-MFIs. However, a member of an SHG or a JLG cannot borrow from more than two MFIs at a time

d. 100% of the provisions made towards the Andhra Pradesh portfolio as on March 31, 2013 is to be notionally reckoned as part of Net Owned Fund (NOF) for calculating the Capital to Risk (weighted) Assets Ratio (CRAR) and is to be progressively reduced, equally over a period of 5 years, that is, 20% each year upto March 2018

e. All NBFCs, irrespective of their size, are subjected to a margin cap of 12% till March 31, 2014. However, with effect from April 1, 2014 margin caps may not exceed 10% for large MFIs (that is, loan portfolios exceeding Rs. 100 crore) and 12% for others. With this requirement, your Company has been effectively given a transition period of two years to comply with the margin cap of 10%

The MFI Bill 2012

In July 2011, the Central Government released a Draft of the Micro Finance Institutions (Development and Regulation) Bill ("MFI Bill") for public comments. Subsequently, on May 22, 2012 the Micro Finance Institutions (Development and Regulation) Bill, 2012 was tabled in Parliament. The MFI Bill 2012 will require the approval of the Indian Parliament as well as the assent of the President of India and publication in the Official Gazette before becoming a law. The MFI Bill 2012 states that its provisions shall be effective notwithstanding anything inconsistent contained in any other law. The MFI Bill, once passed, will provide for the development and regulation of microfinance institutions in facilitating access to credit, thrift and other microfinance services to the rural and urban economically weaker sections and promote financial inclusion. The Parliament of India has referred the MFI Bill to the Standing Committee for Finance, headed by former Union Finance Minister, Mr. Yashwant Sinha, for its recommendations. The Committee is yet to submit its report.


Consolidation in the MFI sector has been caused by the following:

• Large Andhra Pradesh MFIs have opted for Corporate Debt Restructuring (CDR)

• Many small and medium sized MFIs are under pressure on account of reduced credit availability

• Small and medium MFIs are not in a position to comply with enhanced supervisory standards

By deciding not to take the CDR route and by sustaining your Company’s turnaround with a higher profit of Rs. 2.7 crore in Q4-FY13 as compared to a profit of Rs. 1.2 crore in Q3-FY13, when your Company turned around after seven consecutive quarters of losses, your Company is poised to reap the fruits of consolidation.


Your Company continues to be one of the largest microfinance institutions (MFIs) in India in terms of the total value of loans outstanding and the number of borrowers, as of March 31, 2013 and the only listed MFI in India.


The financial performance of your Company for the fiscal year ended March 31, 2013 is summarized in the following table:

(Rs. in crore)

Year ended March 31 2013 2012
Total revenue 352.6 472.3
Less: Total expenditure 649.7 1,796.1
Profit (Loss) Before Tax (297.1) (1,323.7)
Profit (Loss) After Tax (297.1) (1,360.6)
Surplus brought forward (1,051.3) 309.3
Amount available for appropriation - -
Appropriation has been made as under:
Transfer to Statutory Reserve - -
Surplus carried to Balance Sheet (1,348.4) (1,051.3)
Earnings Per Share (EPS) (30.55) (188.06)
Diluted EPS (30.55) (188.06)

- Your Company’s total revenue for the year ended March 31, 2013 has recorded a reduction of 25.4% from Rs. 472.3 crore in FY12 to Rs. 352.6 crore in FY13

- Net loss declined from Rs. 1,360.6 crore in the previous year to Rs. 297.1 crore in FY13

The increasing growth momentum in non-Andhra Pradesh states has helped your Company in reporting a lower operating loss (excluding Andhra Pradesh provisioning) of Rs. 297 crore in FY13 as compared to a loss of Rs. 1,360.6 crore in FY12. In FY13, your Company’s Andhra Pradesh portfolio reduced to a nil from a high of Rs. 1,491 crore at the start of the Andhra Pradesh microfinance situation in October 2010. With this last and final provisioning towards the Andhra Pradesh exposure, your Company looks beyond the Andhra Pradesh microfinance situation.


The following table summarizes the operational performance of your Company for the year ended March 31, 2013:

Year ended March 31 2013 2012 Percentage change
Number of branches 1,261 1,461 (13.7)
Number of members (in lakh) 50.2 53.5 (6.1)
Number of employees 10,809 16,194 (33.3)
Amount disbursed (Rs. in crore) 3,320 2,737 21.3
Portfolio outstanding (Rs. in crore) 2,359 1,669 41.3

During the period under review, your Company’s member base decreased by 6.1% to 50.2 lakh (5.02 million) as compared to 53.5 lakh (5.35 million) for the previous year, which was primarily due to the consolidation of branches and closure of non-profitable branches.

However, loan disbursement increased by 21.3% from Rs. 2,737 crore to Rs. 3,320 crore. Your Company has closed or merged 200 branches as part of its business rationalization policy.


Your Company sustained its turnaround with a higher profit of Rs. 2.7 crore in Q4-FY13 as compared to a profit of Rs. 1.2 crore in Q3-FY13, when it turned around after seven consecutive quarters of losses caused by the external event, namely the Andhra Pradesh microfinance situation.

Your Company could improve profitability on account of robust growth in assets with the core interest income in non-Andhra Pradesh states increasing by 15% to Rs. 90 crore in Q4-FY13 from Rs. 78 crore in Q3-FY13. Your Company’s loan disbursements rose by 65% to Rs. 1,295 crore in Q4-FY13 from Rs. 784 crore in Q3-FY13 while incremental drawdowns registered a 201% jump to Rs. 1,704 crore in Q4-FY13 from Rs. 566 crore in Q3-FY13 (year-on-year increase of 94% to Rs. 2,875 crore in FY13 from Rs. 1,484 crore in FY12). The non-Andhra Pradesh loan portfolio outstanding increased by 35% to Rs. 2,016 crore in Q4-FY13 from Rs. 1,496 crore in Q3-FY13.

Your Company’s cost of interest-bearing liabilities has come down significantly to 12.5% in FY13 from 13.4% in FY12 while collection efficiency in non-AP states has further improved to 99.1% in FY13 as compared to 95.4% in FY12.

Your Company’s turnaround strategy had four building blocks -- fully providing for the Andhra Pradesh exposure, managing the supply-side shock, cost structure optimization and recapitalization. The strategy helped your Company return to profitability in Q3-FY13, and improve the same in Q4-FY13. With this, your Company’s financial turnaround has been completed and sustained.

Strong capital base, robust liquidity, improved productivity and cost efficiencies should further accelerate these gains. The debt-equity leveraging improved to 4.1 times in Q4-FY13 from 2.7 times in Q3-FY13 (2.3 in FY12).


Your Company continues to be recognized as one of the largest MFIs in India with its unique achievements and strengths. Among these are:

• Your Company has repaid more than Rs. 8,320 crore to the banking system without a single day’s delay since the Andhra Pradesh microfinance situation, that is, from October 2010 to March 2013

• Incremental drawdowns in FY13 were Rs. 2,875 crore compared to Rs. 1,484 crore in FY12 (growth of 94% YoY)

• Your Company has grown its non-Andhra Pradesh Portfolio Loan Disbursements by 21.3% (YoY) to Rs. 3,320 crore

• Your Company’s collection efficiency in non-AP states continues to be robust at 99.1%

• Your Company has a healthy cash and bank balance of Rs. 895 crore with a networth of Rs. 390 crore and a strong capital adequacy of 33.9% * (as against the 15% stipulated by the RBI) as of March 31, 2013

• Your Company’s un-availed deferred tax benefit stands at Rs. 555 crore which will be available to offset tax on future taxable income. Deferred tax assets will be recognized on the books upon virtual certainty of future taxable profits supported by convincing evidence as per AS-22. For Q4-FY13, your Company has posted a net profit of Rs. 2.7 crore and, given the carried forward tax loss, no current tax provision is required

• In order to protect members from over-indebtedness, your Company has been playing a leading role in pioneering industry-wide efforts on creating and sharing credit-related information with Credit Bureaus

• Your Company’s policies and processes along with documentation have been modified to comply with: 1. RBI guidelines of December 2, 2011; 2. RBI Fair Practice Code guidelines of July 2, 2012; 3. Guidelines and codes of industry bodies like Sa-Dhan and MFIN

• Mr. Verghese Jacob, a seasoned corporate and social sector expert with three decades of experience, is your Company’s Ombudsman

• Your Company has commissioned EDA Rural Systems, a reputed development sector consultancy, to develop a training programme encompassing the seven principles of CPP (avoidance of over-indebtedness, transparency, responsible pricing, appropriate collection practices, ethical staff behaviour, privacy of client data and grievance redressal mechanism) and certify several staff members after imparting train-the-trainer coaching to them

(*) Capital adequacy without RBI dispensation on Andhra Pradesh provisioning is 20.6%

On account of such distinctions, your Company has been appreciated by key stakeholders including banks and financial institutions. Your Company has completed 12 securitization transactions and one asset assignment transaction with eight funding partners aggregating to Rs. 1,195 crore in FY13. In addition, your Company has raised incremental drawdowns from banks and financial and other institutions of Rs. 2,875 crore in FY13 and raised fresh equity of Rs. 263.5 crore taking the total incremental funding inflow for FY13 to Rs. 3,139 crore, which is more than double the Rs. 1,484 crore raised in FY12.


1. Mobile Phone Loans

Your Company had conducted a pilot programme for financing the purchase of mobile phones to its members in eight branches of four states. After the success of this pilot with Universal Digital Connect Limited (UDCL), a subsidiary of Videocon Industries Limited, this intiative was extended to seven states in India during FY13. The following are the features of the mobile business:

• The annual effective interest rate of the Mobile Phone Loans programme is 25.51%, the loan processing fee is 0.99% and the tenure of the loan is 25 weeks

• Your Company is paid a processing fee by UDCL

• The price of the mobile phones financed by your Company ranges from Rs. 1,800 to Rs. 2,500 (V1544 Model - MRP is Rs. 2,490 while SKS member price is Rs. 2,250)

As of March 31, 2012 and March 31, 2013, Mobile Phone Loans constituted 1.3% and 1.2% respectively, of your Company’s total loan outstanding portfolio.

2. Sangam Store Loans

The Sangam Store business was not commercially viable and hence the same has not been pursued further.

3. Gold Loans

India is one of the largest consumers of gold in the world due to a strong preference for gold jewellery among Indian households and its widespread use as a savings instrument. In FY11, your Company launched a gold loan pilot under the name of "Swarnapushpam" which provided personal or business loans to members in order to meet their short-term liquidity requirements. These loans are secured by gold jewellery. The pilot was extended to 40 branches, primarily across the states of Karnataka, Maharashtra and Uttar Pradesh. As of March 31, 2013, your Company had 198 employees servicing these 40 branches. Loan amounts range from Rs. 2,000 to Rs. 1,00,000 which can be repaid in full at maturity or as bullet payments, or equated monthly/ quarterly instalments with a maximum tenure of 12 months, at the option of the borrower. There are no penal or pre-closure charges and borrowers can choose to make partial prepayments. The annual effective interest rate for gold loans typically varies between 18.5% and 25%, and is determined by the loan-to- value ratio, tenure of the loan and repayment frequency. As such, gold loan products do not qualify as micro credit products.

As of March 31, 2013 your Company’s gold loan portfolio stood at Rs. 55.9 crore, which constituted 3.8% of your Company’s total outstanding loan portfolio. The gold loan business has seen encouraging results and makes our diversification foray into secure lending. The gold loan business may be operated in future through a subsidiary, based on successful results from the pilot project and receipt of the required regulatory approvals.


During the year under review, your Company completed 12 securitization transactions and one asset assignment transaction with eight funding partners aggregating Rs. 1,195 crore. Additionally, your Company raised incremental drawdowns from banks and financial and other institutions of Rs. 2,875 crore and fresh equity of Rs. 263.5 crore taking the total incremental funding inflow to Rs. 3,139 crore during the financial year ended March 31, 2013 which is more than double the Rs. 1,484 crore raised during the financial year ended March 31, 2012.

During the year, various instruments used by your Company to raise funds received ratings, a summary of which is presented in the following table:

Agency Item Rating
CARE Rating MFI Grading MFI 1
CARE Rating Securitization CARE A1+ (SO) *
CARE Rating Securitization CARE A+ (SO) #

* Rating for 10 transactions

# Rating for 2 transactions

"MFI 1" Grading is the highest obtainable MFI Grading on an eight point scale, "MFI 1" being the highest and "MFI 5" being the lowest. MFI Grading is a measure of overall performance on parameters of transparency, operational setup, scale of operations and sustainability.

A Securitization rating of "A1+ (SO)" is considered to indicate a very strong degree of safety regarding timely payment of short-term debt obligations and carries the lowest credit risk while a rating of "A+ (SO)" is considered to indicate a high degree of safety regarding timely servicing of long-term debt obligations and carries a low credit risk.


During the year under review, your Company successfully completed a Qualified Institutional Placement (QIP) of Rs. 230 crore in July 2012 and a Preferential Issue of Rs. 33.5 crore in August 2012.

Key highlights of the QIP and Preferential Allotments are:

• The first QIP in the financial services sector in FY13

• The QIP and the Preferential Allotment enabled your Company to raise the largest amount of capital in the microfinance sector post your Company’s IPO in August 2010

• The QIP, which was launched with an issue size of Rs. 165 crore (approximate), was oversubscribed with your Company receiving applications/ bids for Rs. 230 crore (approximate)

• Floor price of Rs. 75.4

The overwhelming response to the QIP validated the important role of microfinance in achieving financial inclusion in India. The proceeds from the QIP and the Preferential Allotment (Rs. 230 crore and Rs. 33.50 crore respectively) aggregating Rs. 263.50 crore, brought in the much-needed growth capital for your Company.

The Joint Global Coordinators and Book Runners to the QIP, which was launched on July 12, 2012 and closed on July 17, 2012, were: Credit Suisse Securities (India) Private Limited and Yes Bank Limited.

The QIP helped your Company to strengthen its leadership position and improved the prospects of the MFI sector as a whole. Most importantly, the QIP enabled your Company to meet the credit requirements of 4 million rural borrowers who were directly affected by the MFI situation.


During the year under review, 9,07,734 equity shares were issued under your Company’s ESOP plans. Additionally, your Company concluded a QIP of 3,04,98,069 Equity Shares to Qualified Institutional Buyers at a price of Rs. 75.40 per Equity Share and a Preferential Allotment of 44,50,000 Equity Shares to Kumaon Investment Holdings, a wholly owned subsidiary of one of the Promoters,

WestBridge Ventures II LLC, at a price of Rs. 75.40 per Equity Share both, in accordance with the provisions of the Securities and

Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009. Thus, the issued, subscribed and paid-up equity share capital increased from Rs. 72.36 crore to Rs. 108.21 crore as on March 31, 2013.

Details of allotments during FY13 are hereunder:

- 9,06,734 Equity Shares were issued under ESOP 2007 on May 4, 2012

- 3,04,98,069 Equity Shares were issued through a Qualified Institutional Placement (QIP) on July 19, 2012 under Chapter VIII of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

- 44,50,000 Equity Shares were issued to Kumaon Investment Holdings, a wholly owned subsidiary of WestBridge Ventures

II, LLC, one of the promoters of your Company, through a Preferential Issue on August 23, 2012 under Chapter VII of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

- 1,000 Equity Shares were issued under ESOP (ID) 2008 on December 27, 2012


Your Directors have not recommended any dividend as your Company reported losses during the year under review.


The Shareholders vide special resolution dated August 27, 2012, passed through postal ballot, approved the shifting of the Registered Office from Andhra Pradesh to Maharashtra, by amendment to the Situation Clause of the Memorandum of Association of your Company.

Your Company is in the process of obtaining the necessary statutory approvals for shifting the Registered Office of your Company to Maharashtra.


The Management Discussion and Analysis Report for the year under review is presented in a separate section on Page 36 in this Annual Report.


Your Company has adopted best corporate practices and is committed to conducting its business in accordance with the applicable laws, rules and regulations. Your Company follows the highest standards of business ethics. A report on Corporate Governance is provided on Page 50 in this Annual Report.


Your Company has not accepted any fixed deposits and, as such, no amount of principal or interest was outstanding as on the date of the Balance Sheet.


1. Capital Adequacy Requirements

Your Company, being a Systemically Important Non-Deposit Accepting NBFC, is subject to capital adequacy requirements prescribed by the RBI. Your Company has to maintain a minimum ratio of 15% as prescribed under the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 (as amended from time to time) based on the total Capital to Risk (weighted) Assets Ratio (CRAR).

Your Company maintained a CRAR of 33.9% and 35.4% respectively as on March 31, 2013 and March 31, 2012 which is higher than the statutory 15% requirement.

The modifications to the NBFC-MFI directives issued by the RBI vide its Circular No. RBI/2012-13/161 DNBS (PD) CC.No.300 /03.10.038/2012-13, dated August 3, 2012 have specified that provision made towards portfolio in Andhra Pradesh should be in accordance with extant NBFC prudential norms and such provision could be added back notionally to the Net Owned Fund (NOF) for the purpose of calculation of the CRAR and would be progressively reduced by 20% each year, over 5 years, that is, from March 31, 2013 to March 31, 2017. Accordingly, the CRAR as at March 31, 2013 was 33.9%, after adding back the provision towards the portfolio in Andhra Pradesh of Rs. 257.63 crore to the NOF. Had the amount of provision, mentioned above, not been added back to the NOF, the CRAR as at March 31, 2013 would have been 20.65%. Your Company has taken cognizance of the specific dispensation granted by the RBI.

2. NBFC-MFI Classification

The RBI vide its circular DNBS.CC.PD.No. 312 /03.10.01/2012-13, dated December 07, 2012 issued a checklist of documents to be submitted along with the application for seeking a Certificate of Registration from the RBI with regard to the re-classification of existing NBFCs as NBFC-MFIs.

Your Company has accordingly submitted its application along with the supporting documents as per the aforesaid circular to the RBI in support of its application seeking its re-classification as an NBFC-MFI. The application is currently being processed by the Hyderabad Regional Office of the RBI.

3. Monitoring of Frauds

The RBI, vide its circular DNBS.PD.CC. No. 256 /03.10.042 / 2011-12, dated March 2, 2012 has extended the monitoring of frauds in deposit-taking NBFCs to include all NBFCs-ND-SI with effect from March 2, 2012.

Accordingly, your Company has reported cases of fraud in compliance with the said circular.

4. Fair Practices Code

The RBI on February 18, 2013 amended the Fair Practices Code for all NBFCs including MFIs and Gold Loan companies, requiring NBFCs to lay down an appropriate grievance redressal mechanism within their organization to resolve disputes between the company and its customers. The mechanism is to ensure that all disputes arising out of the decisions of lending institutions’ functionaries are heard and disposed of at least at the next higher level.

At the operational level, all NBFCs are required to display prominently details of their company’s grievance redressal officer, including details of the local office of the RBI at their branches and other places of business, for the benefit of their customers.

Your Company has revised the Code of Conduct along with relevant policies in line with the RBI’s amended Fair Practices Code for NBFCs and the details of its grievance redressal officer and the local office of the RBI, have been displayed at its branches.


In order to address the issue of multiple lending or over-indebtedness, a number of NBFC-MFIs have been submitting information to Credit Information Bureaus (CIBs) approved by the RBI viz., High Mark Credit Information Services Private Limited and Equifax Credit Information Services Private Limited. Your Company is a member of both these CIBs and has been regularly submitting information to them and utilizing their reports in lending decisions. As the number of MFIs submitting information with CIBs increases, the trend is helping build awareness about the perils of over-indebtedness amongst borrowers who are increasingly accepting the usage of Credit Bureaus in the lending process.


Your Company’s toll-free Customer Service Helpline (1800 300 10000) has been operational since July 6, 2009. Since then, the Helpline has been expanded gradually, offering services in seven Indian languages, namely Bengali, Hindi, Kannada, Malayalam, Marathi, Odiya and Telugu.

In October 2012, your Company’s Customer Grievance Redressal (CGR) system was revamped. It now features a three-level mechanism in tune with RBI guidelines and SKS Microfinance Limited’s policy of providing all possible services including grievance redressal at the grassroots level in a transparent manner. The three levels are: 1. Reporting grievance to the Sangam Manager at the Centre Meeting; 2. A toll-free Customer Service Helpline in seven Indian languages from 7:30 am to 9:00 pm for reporting grievances directly to the Head Office; 3. A toll-free Ombudsman line (1800 300 60000) for reporting grievance to an independent Ombudsman.

The highlights of the CGR are:

• The field staff received special CGR training for the implementation of the three-step process from July 16 to July 31, 2012

• 95.3% of the Sangam Member base were given special CGR training on the three-step process

• Policy aimed at protecting client data privacy has been implemented

• Customer grievance resolution of 99% within the promised turnaround time


Technology combined with innovation and business process change brings in the greatest return. Pursuing this line, your Company is focused on advanced technology solutions that drive it to exponential growth through the following:

• Building a secured private cloud to connect all SKS branches

• Developed a robust system to extract daily incremental data from branches and provide extensive reporting capability

• Provided enhanced c

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Key Information

Key Executives:

P H Ravi Kumar , Chairman (Non-Executive)

Tarun Khanna , Director

Geoffrey Tanner Woolley , Director

Sumir Chadha , Director

Company Head Office / Quarters:

Unit No 410 Madhava,
Bandra-Kurla Complex,
Phone : Maharashtra-91-020-26592375 / Maharashtra-
Fax : Maharashtra- / Maharashtra-
E-mail : skscomplianceofficer@sksindia.com
Web : http://www.sksindia.com


Karvy Computershare Pvt Ltd
Plot No 17-24 ,Vittal Rao Nagar ,Madhapur ,Hyderabad-500081

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