SKS: A Hot Potato Called Microfinance Institutions

Sep 2010
Mumbai, India, September, 13 2010 - Vikram Akula was a star at the last Davos. Not all think that he will be as sought after when the world’s political and business elite meet next time. The past shadowed Akula before the listing of SKS, the micro finance organisation he founded. After the listing that made Akula richer by more than $100 million, micro finance as an activity is under attack.

Five years ago, few had heard about SKS. Today, its market capitalisation is more than that of an old, a mid-sized bank like Federal with a loan book that’s six times bigger than SKS. Who are these guys? They borrow from banks at 13%, lend to the poor at 26-27%, spend around 8% to deliver the loans and land up with an interest margin of 5-6% — almost double the margin that banks make.

When someone talks of giving small loans to help poor villagers — people who have been fleeced for centuries by local moneylenders — the person is immediately on a high moral ground. It’s unacceptable when the same person cuts deal with private equity investors, makes promises on the floor of the stock exchange and makes millions when shares get traded.

The press turns more sceptical, politicians spot someone new who can be milked, academics question the very ethics of such a business model and a regulator, already battling on too many fronts, steps in with sweeping recommendations. There are suggestions that the returns on capital and equity of microfinance institutions (MFIs) should be frozen, and banks lending to MFIs should not be allowed to treat such loans as priority sector advances — a reason why banks do the business.

The decision to treat MFIs as priority sector, or not treating them as one, is the prerogative of the government and the Reserve Bank of India. If MFIs can access capital markets to raise cheap finance, if they have mastered the art of recovering loans from villagers and can reach where banks can’t, do they deserve preferential treatment? Many will say ‘no’, and there may be some logic to it. One can even argue that private equity investors, with their small-time horizons and aggressive expectations, should be told to hold not more than 15% or 20% of the equity of MFIs.

But what is difficult to defend is the rather scary idea of freezing the return on capital for an activity that’s just like any other business and runs like a non-banking finance company. After all, MFI isn’t a power utility firm with a 100-year licence to supply electricity in a specified area. At 26% interest, loans from MFIs are at least 10 percentage points cheaper than what a village money lender would charge.

And few remember that some years ago, a committee constituted by RBI had recommended that banks should be allowed to lend to money lenders so that the latter can bring down the interest rate charged to the final borrower. Understandably, the report was never discussed later.


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