For love or for money? SKS Microfinance IPO stirs debate about profiting from the poor

By Erika Kinetz, AP
Wednesday, July 28, 2010

SKS launches India’s first microfinance IPO

MUMBAI, India — An Indian company that makes tiny loans to villagers aims to raise up to $354 million in an initial public offering, a move critics fear will encourage India’s largest microfinance lender to put shareholders above the poor it serves.

SKS Microfinance’s share sale, launched Wednesday, has already drawn the ire of one of the leading lights in the field. A publicly traded company’s traditional obligation is to make money for its shareholders, while the mission of microfinance — loans typically under $200 for starting businesses that banks won’t make — is to lift people out of poverty.

Some say those are irreconcilable objectives. Others argue it is possible to serve two bottom lines simultaneously, reaping both financial and societal rewards. Either way, SKS’s IPO — the first in India and the third worldwide — is likely to set a trend. Other Indian microfinance lenders are watching and waiting to see whether they too should tap capital markets.

“This is pushing microfinance in the loansharking direction,” Muhammad Yunus, who was awarded the Nobel Peace Prize for his work at established microfinance lender Grameen Bank, told The Associated Press. “It’s not mission drift. It’s endangering the whole mission.

“By offering an IPO, you are sending a message to the people buying the IPO there is an exciting chance of making money out of poor people. This is an idea that is repulsive to me,” he said. “Microfinance is in the direction of helping the poor retain their money rather than redirecting it in the direction of rich people.”

Advocates of commercialization say tapping capital markets and the deep pockets of private equity investors is the only way to get enough funding to sustainably serve billions of people without access to credit. Demand for microfinance funds in India in 2008 exceeded supply by $47.1 billion.

The backers of SKS include venture capital funds Sequoia Capital and Sandstone Capital, George Soros and Infosys chief mentor N R Narayana Murthy, considered an august and ethical figure in India’s business world.

SKS set a price band of 850 to 985 rupees ($18.20 to $21.10) per share, valuing the company up to $1.6 billion. It has already raised 3.0 billion rupees ($63.7 million) from anchor investors including Goldman Sachs and JP Morgan.

That’s a lot of zeros for a company that started out as a non-profit, and today aims to be the Coca-Cola of financial services, with a mission to lift 6.8 million families out of poverty one 2,000 rupee ($43) loan at a time.

It has grown at breakneck speed — looking to Starbucks and McDonald’s for inspiration — adding 55 branches and over 200,000 borrowers a month in the year ended March. Its 21,154 employees today serve 90,000 villages, perhaps the hardest 3 percent of India’s population to reach.

The company is now looking to monetize that distribution network.

SKS has tied up with Nokia, Bharti Airtel, and German food wholesaler Metro to provide customers with loans to buy their products. It has also sold 12.5 million life insurance policies for Bajaj Allianz and Birla Life.

SKS maintains there is no way it could have helped so many people so quickly without tapping commercial funding.

SKS declined to comment for this story, saying it was legally prohibited from speaking to international media on the eve of its public offering.

“What we have done as a new generation of microfinance has actually shown that through a commercial approach you can actually raise significantly more capital and put more money into the hands of more poor women,” chairman Vikram Akula — who made over $10 million from selling a stake in the company in April — told India’s CNBC-TV18 Wednesday. “In so doing, we actually think there is no conflict between the social and the commercial.”

Others disagree. There have been political protests against microfinance groups seen as usurious in Andhra Pradesh state and religious leaders in Karnataka state last year issued a decree against paying back loans, resulting in massive defaults.

SKS charges, on average, 28 percent annual interest, which the company says allows its borrowers to make post-interest returns of 30 percent to 250 percent on their businesses.

SKS’s rates compare favorably to village moneylenders, who demand 36 percent to 72 percent interest — or higher. Grameen Bank charges an average of 18.5 percent, ranging from zero to 20 percent. Grant-based microfinance lenders in India also charge around 18 percent, according to research and ratings agency CARE. If SKS’s clients could get an unsecured personal loan from an Indian commercial bank — which most of them can’t — they’d pay 16 to 17 percent.

Xavier Reille, lead microfinance specialist at the World Bank-hosted Consultative Group to Assist the Poor, argues that an IPO is a fine way to get more money to more poor people, if you have good enough governance to prevent profiteering.

“Will the client benefit?” he said. “I’d like to see if that will happen in the next two or three years. I want to make sure the clients’ interests are represented on the board.”

As SKS has grown and attracted more commercial funding, its borrowers have seen their ownership stake fall from 40 percent to 11 percent of the company, post-IPO.

Grameen Bank, in contrast, is wholly owned by its borrowers.

Grameen’s Yunus says there is a more equitable way to grow: turn to the poor for financing.

Grameen funds its loans by taking deposits — a practice Indian regulators don’t allow.

“The whole thing is to allow microfinance institutions to take deposits. It is a legal question. If you amend the law — which was done for us — you take money and lend it to poor people,” Yunus said. “There is plenty of money in the villages.”

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