“We have given the poor a chance,” said the CEO of SKS Microfinance in an interview to CNBC-TV18. You usually don’t hear such things from the CEO of a company that is going public. But then Vikram Akula is not your typical black-jacket CEO variety, he prefers sporting bright cotton kurtas, avoids jargons like “inorganic growth going forward”. He is more likely the type who eats organic rice probably grown in the most arid parts of Andhra Pradesh where SKS operates.
Vikram Akula flung to fame when he rescued the poor in the Telengana region from the exploitative tactics of local moneylenders. His idea was pure and his execution impeccable. Lend money to those who need it but can’t borrow. Since 1997, SKS Society, a not-for-profit organization, has been lending money as low as Rs 100 to a maximum at Rs 15000 to millions of people. In CK Prahalad’s parlance, SKS was targeting the bottom of the pyramid. Over the years, his business grew big. Very big. Big enough to help millions, big enough for politicians to wonder how he did it and big enough for South Bombay bankers to salivate. Now, SKS is India’s largest non-banking finance company, bigger than many govt and private banks, and has a portfolio worth 1 billion dollars.
So far so good. Now SKS wants to grow bigger and needs more capital. So Akula has brought his baby to the shrine of capitalism – the stock markets. SKS is offering 1.68 crore share to the public to raise Rs 1500 crore through an Initial Public Offer (IPO). Stock market pundits are all singing rah-rah about the uniqueness of the business model, the untapped potential of the microfinance industry and the top notch quality of management. True, SKS Microfinance is a kickass stock to buy, even if it is a tad expensive off-the-counter, but that’s not where the problem is. The problem is what Vikram Akula stands for or atleast stood for. The vision of what began as a noble social initiative whose objective was to cater to the financial needs of the poor in a sustainable (not profitable) and professional manner seems muddled now (Remember, SKS Society started in 1997 as a not-for-profit firm). So muddled that skeptics have a reason to questions Akula’s intention in the first place. Some reports say that the initial investment of the promoter was anywhere between Rs 24 to Rs 137 per share. Now, Akula and others have sold to investors at a whopping Rs 636 per share. That was just one-fourth of his stock options that fetched him 26 times returns.Frankly, it does not bother me so much that Akula personally got a great deal. Here was an entrepreneur who had an idea started a business, created value and cashed out when the opportunity arose.What bothers me is ‘why’ SKS Microfinance wants to access the capital markets, and ‘how’ it has transformed into a capital hungry leviathan that is seeking profits. More importantly, my angst is its eagerness to allow private equity players and other market investors such as Sequoia Capital to become part owners of the company. I am told when the issue hits the market; Sequioa will sell 10% of its holding.Don’t get me wrong, I hold no grudges against the Sequioas of the world, in fact, quite the contrary. They do a fantastic job finding the right business, fund it, watch it grow and sell for a profit. So their objectives are very clear.
But what is SKS’s objective? The larger question – Is the goal of a microfinance venture making profits? Vikram Akula, in an interview to CNBC-TV18, defended saying, “We believe that if we use the commercial approach you can actually raise more capital and disburse to more people. We have disbursed over last 5 yrs, 3.2 bn dollars (Rs 14,000 cr). We feel that this in fact is the best way to put most money into most hands of people.”
That’s one view, here is the other: The Financial Times reports that Muhammad Yunus, the Nobel Peace Prize-winning founder of Bangladesh’s Grameen Bank, has criticised the commercialisation of the industry, saying profit-oriented microlenders are little different to the loan sharks they once set out to replace.Meanwhile, I came across some more information that disturbed me. One more part owner of SKS, Unitus Holding, originally a microfinance funding company sacked its employees and unwound its microfinance operations after Vikram’s IPO plans got finalized. Some of its Directors, I hear, will directly gain in their personal capacity from the public issue, as promoters.
Frankly, I don’t know what is right or wrong. So I reached out to Deval Sanghavi of Dasra.Deval argues that all social businesses should not have a goal to make profits but instead reach out to a greater beneficiary base in a sustainable manner. “Unfortunately, it is difficult for these organizations to raise large amounts of philanthropic funding therefore encourage investment from for-profit investors who at times decrease the organization’s social impact by demanding a greater ROI. Therefore once these two parties for-profit investor and social business are brought together questions do arise in terms of motives. At that time it is really up to the management team and board to determine which path to take,” he says.I haven’t been able to make up my mind on which side is right. I’ll leave you to do that. But my bigger fear is the fallout of the SKS’ IPO, if it succeeds. Tomorrow, sensing this valuation game every (dare I say) shady real estate company in India, under the garb of a social cause, may float a microfinance company.
We run the risk of several wannabe Akulas putting up a farce of lending to millions of “unbanked” people, wait for the business to gain some critical mass, sell stake to an investor and walk away with a profit. None of this is against the law.
But isn’t there a moral dilemma here?
Vikram Akula flung to fame when he rescued the poor in the Telengana region from the exploitative tactics of local moneylenders. His idea was pure and his execution impeccable. Lend money to those who need it but can’t borrow. Since 1997, SKS Society, a not-for-profit organization, has been lending money as low as Rs 100 to a maximum at Rs 15000 to millions of people. In CK Prahalad’s parlance, SKS was targeting the bottom of the pyramid. Over the years, his business grew big. Very big. Big enough to help millions, big enough for politicians to wonder how he did it and big enough for South Bombay bankers to salivate. Now, SKS is India’s largest non-banking finance company, bigger than many govt and private banks, and has a portfolio worth 1 billion dollars.
So far so good. Now SKS wants to grow bigger and needs more capital. So Akula has brought his baby to the shrine of capitalism – the stock markets. SKS is offering 1.68 crore share to the public to raise Rs 1500 crore through an Initial Public Offer (IPO). Stock market pundits are all singing rah-rah about the uniqueness of the business model, the untapped potential of the microfinance industry and the top notch quality of management. True, SKS Microfinance is a kickass stock to buy, even if it is a tad expensive off-the-counter, but that’s not where the problem is. The problem is what Vikram Akula stands for or atleast stood for. The vision of what began as a noble social initiative whose objective was to cater to the financial needs of the poor in a sustainable (not profitable) and professional manner seems muddled now (Remember, SKS Society started in 1997 as a not-for-profit firm). So muddled that skeptics have a reason to questions Akula’s intention in the first place. Some reports say that the initial investment of the promoter was anywhere between Rs 24 to Rs 137 per share. Now, Akula and others have sold to investors at a whopping Rs 636 per share. That was just one-fourth of his stock options that fetched him 26 times returns.Frankly, it does not bother me so much that Akula personally got a great deal. Here was an entrepreneur who had an idea started a business, created value and cashed out when the opportunity arose.What bothers me is ‘why’ SKS Microfinance wants to access the capital markets, and ‘how’ it has transformed into a capital hungry leviathan that is seeking profits. More importantly, my angst is its eagerness to allow private equity players and other market investors such as Sequoia Capital to become part owners of the company. I am told when the issue hits the market; Sequioa will sell 10% of its holding.Don’t get me wrong, I hold no grudges against the Sequioas of the world, in fact, quite the contrary. They do a fantastic job finding the right business, fund it, watch it grow and sell for a profit. So their objectives are very clear.
But what is SKS’s objective? The larger question – Is the goal of a microfinance venture making profits? Vikram Akula, in an interview to CNBC-TV18, defended saying, “We believe that if we use the commercial approach you can actually raise more capital and disburse to more people. We have disbursed over last 5 yrs, 3.2 bn dollars (Rs 14,000 cr). We feel that this in fact is the best way to put most money into most hands of people.”
That’s one view, here is the other: The Financial Times reports that Muhammad Yunus, the Nobel Peace Prize-winning founder of Bangladesh’s Grameen Bank, has criticised the commercialisation of the industry, saying profit-oriented microlenders are little different to the loan sharks they once set out to replace.Meanwhile, I came across some more information that disturbed me. One more part owner of SKS, Unitus Holding, originally a microfinance funding company sacked its employees and unwound its microfinance operations after Vikram’s IPO plans got finalized. Some of its Directors, I hear, will directly gain in their personal capacity from the public issue, as promoters.
Frankly, I don’t know what is right or wrong. So I reached out to Deval Sanghavi of Dasra.Deval argues that all social businesses should not have a goal to make profits but instead reach out to a greater beneficiary base in a sustainable manner. “Unfortunately, it is difficult for these organizations to raise large amounts of philanthropic funding therefore encourage investment from for-profit investors who at times decrease the organization’s social impact by demanding a greater ROI. Therefore once these two parties for-profit investor and social business are brought together questions do arise in terms of motives. At that time it is really up to the management team and board to determine which path to take,” he says.I haven’t been able to make up my mind on which side is right. I’ll leave you to do that. But my bigger fear is the fallout of the SKS’ IPO, if it succeeds. Tomorrow, sensing this valuation game every (dare I say) shady real estate company in India, under the garb of a social cause, may float a microfinance company.
We run the risk of several wannabe Akulas putting up a farce of lending to millions of “unbanked” people, wait for the business to gain some critical mass, sell stake to an investor and walk away with a profit. None of this is against the law.
But isn’t there a moral dilemma here?
3 comments:
Interest rates: The Poisonous Fangs of MFIs
MFIs were touted to provide the poor access to affordable credit, reduce poor people’s need to use moneylenders and indebtedness. In short, provide a much kinder, cheaper alternative to the village loan shark. Instead, they evolved as the new class of institutionalized loan sharks which neo-liberals gave respectability to. MFIs did improve access to micro loans but failed in their touted mission to provide affordable and gentler credit and above all, one that lifter people from the clutches of poverty. Objects of institutional financial sustainability exhort them to charge interest rates and fees high enough to cover the costs of their lending and other services.
MFIs argue that they need a spread apart from all costs to provide for contingencies and growth. Fine but the moot question is how much should be this spread.
MFIs argue that economies of scale and competition will drive interest rates down. This remains only a theoretical argument. “Mexican microfinance institutions charge such high rates simply because they can get away with it”, said Emmanuelle Javoy, the managing director of Planet Rating, an independent Paris-based firm that evaluates micro lenders!! If at all, the average Indian MFI interests rates appear more benign than in Latin America or Nigeria, then it simply because other than factors internal to the MFI industry, the sector faces strong competition from governmental and NGO SHG micro-saving programmes in the absence of which, these MFIs would have formed a cartel. Past angry public and government reactions that resulted in a backlash against them, which included the arrests of MFI top leaders, like Uday Kumar of Share Microfinance Ltd as in 2007, keeps their profiteering impulses under check.
The sooner MFIs are seen as profit enterprises, the better. The longer they pretend they are pro-poor, the longer they discredit the NGO sector that gave birth to a Frankenstein. By 2014, they target to reach 110 million borrowers. Remarkably, despite two decades of operations, if statistics are to be believed, these MFIs only reach just 20 million people in the country, a good proportionate of them, multiple counted. Yet, they succeed in gaining an attention, so disproportionate to this miniscule reach. Act now to prevent they becoming an epidemic in the country. Act now, when they are most vulnerable.
And how do know they are vulnerable? Because Vijay Mahajan, the father of MFIs in India tells us so:
“We are facing collapse. Unless something changes on the ground, the industry as we know it is basically gone. ”
Mahajan, we have news for you. The day when the likes of you are gone, that will be the turning point for the fight against poverty!
Read More: http://devconsultgroup.blogspot.com/2010/10/whats-wrong-with-micro-finance.html
Micro-Finance to Face Slow Painful Death. SKS Share to enter Free Fall. Sell, Sell, Sell!
SKS, the Indian micro-finance giant’s IPO was supposed to signal the coming of age of micro-finance (MF). Instead, it contained the seed for the destruction of the entire industry. Their Rs 10 share on listing attracted a premium of Rs 975 and such was the investor confidence, it touched a high of Rs 1,490 in a matter of days. Then hell broke loose with the industry hit by charges of them profiteering and causing farmer suicides. Its reverberations were so strong that it had been felt by the industry all over the world. The stock plunged to Rs 890 before recovering to be a tad over its listing price and hovering around this range for the last one week. Technically and fundamentally, the share looks bearish and ready for a free fall. We expose the dark underbelly of a Frankenstein unleashed by NGOs.
Read more: http://devconsultgroup.blogspot.com/2010/11/micro-finance-to-face-slow-painful.html
Hey Great post.Initial Public Offerings
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