MUMBAI - SKS Finance, an Indian lender whose backers include billionaires
George Soros and Narayana Murthy, is seeking to raise US$347 million with an
initial public offering (IPO) to help it put more money in the hands of India's
poorest budding businesses.
The issue has revitalized the debate on whether companies should profit from
lending money specifically to society's most impoverished people at rates that
can rise to as high as 30%. Proponents insist such big capital inflows will
scale up the microfinance work to make the poor less poor.
SKS, India's largest microfinance company, started on July 28 to
sell 16.7 million shares at between 850 and 985 rupees (US$18-$21) each in the
country's first IPO from a non-banking microfinancier. Kotak Mahindra,
Citigroup, and Credit Suisse are managing the issue.
Existing shareholders include Silicon Valley venture capitalist Vinod Khosla as
well as currency speculator and philanthropist Soros and Murthy, who founded
Infosys, one of India's top computer software companies.
The assorted mix of philanthropic billionaires who own SKS poses the
microfinance conundrum of whether corporate thirst for increasing profits can
be balanced with the pro-poor foundations of microfinance. Credit rating agency
Crisil estimates India has 120 million households without access to
conventional banking and financial services such as savings and pensions,
creating a market worth a potential $1.06 trillion.
Debate over the ethics of microfinance has been growing louder since 2006, when
Muhammad Yunus received the Nobel Peace Prize for his small-loan revolution in
Bangladesh, through his Grameen Bank.
Yunus's idea for Grameen Bank was born in Jobra, Bangladesh, in 1976, with a
$27 loan to 47 villagers. "Gram" is a root word meaning "village" in many South
Asian languages, with "grameen" in Bengali meaning "of the village". The
world's largest "village bank" of its kind, Grameen is a profit-making,
self-reliant, non-commercial lending firm; 65% of its 7.5 million borrowers
have come out of extreme poverty.
Grameen Bank helped to trigger worldwide growth in microfinance. "With more
transparency from institutions and better ratings standards, investment from
international markets will continue to drive microfinance towards Yunus's goal
of a poverty-free world," according to economist Rajdeep Sengupta and
researcher Craig P Aubuchon. Their 2008 research paper "The Microfinance
Revolution: An overview" estimates that about 2,000 microfinance institutions
(MFIs) serve 67 million people in over 100 countries.
"The less you have, the more you get" is Yunus's lending policy to reach the
poorest of the poor. Grameen Bank asks for no collateral; its loans are based
on trust, with no signed agreement with the borrower, as the bank does not take
defaulters to court. It is a long stretch from clients who survive on less than
$2 a day to billionaire stakeholders, as in SKS, and their need to derive
profit from their investments.
"Is it correct to make millionaires out of shareholders when your borrowers are
so poor?" asked Olivia Donnelly, founder and executive director of the
London-based Shivia Microfinance, a non-profit firm that serves India and
Nepal. "I have no problem with people making money out of the microfinance
industry, as long as they market correctly whom they are targeting," she told
Asia Times Online.
MFIs charge interest rates up to 30% for loans from around $40 to $630, and
their operations are already attracting the attention of regulators such as the
Reserve Bank of India and public questioning of their high rates.
Corporate MFI advocates say the poor still have a good deal, compared with
rural moneylenders charging 100% interest rates. Besides, the MFIs are subject
to regulation and accountability, compared with the borderline lawlessness of
the pawnbroker breed. The immediate future of SKS will influence the debate.
Yale and University of Chicago-educated Vikram Akula founded SKS in 2006, in
Secunderabad, near Hyderabad. By September 2009, it had disbursed $2.2 billion
in loans to 5.3 million people through 1,627 branches, making it India's
largest microfinance lender.
Akula, a former management consultant with McKinsey & Company, was clear in
his objectives. He said he was overwhelmed by poverty in the country, and hoped
SKS would help make a change for the better. SKS hands over loans from $44 to
$260 to poor women to start or expand small businesses, from raising cows and
goats, to selling milk, to opening a village tea stall.
It uses the group-lending model, with each borrower guaranteeing another's
loan. Borrowers must also pass financial literacy training they receive before
receiving loans. The process has enabled collateral-free loans with a
re-payment success rate of 99%, SKS says on its website.
But the success also changed the ownership. This year, Akula sold about 950,000
of his SKS shares to Tree Line Asia, a hedge fund based in Hong Kong and
Singapore. It left him with only 6% of the capital - too small a percentage to
be even considered a small promoter of the IPO.
Akula's decision to cut his stake in the company he started led analysts to
wonder if his principles are clashing with those of board-appointed chief
executive officer Suresh Gurumani, previously a senior banker with Barclays and
Standard Chartered.
The potential conflict of outlook increases in a philanthropy-based business
looking for profits in a risk-filled environment - the risks ranging from mass
defaults, to impoverished borrowers taking small loans from more than one
lender, to regulators keeping a stricter eye on MFIs due to their market being
the weakest sections of society.
The SKS ownership pattern, compared with Grameen Bank, speaks for itself. Poor
borrowers still hold 94% of Grameen Bank's equity, while SKS has private
capital that hugely dilutes the original small-scale equity holders.
In the process, SKS has grown more in five years than Grameen Phone in three
decades. But whether such big money in a small-money market will continue to
boom in the next few years or risk going bust in a subprime-type crisis, is a
question subscribers to the IPO must answer for themselves.
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