India’s SKS Microfinance: Back From the Brink
Thursday, March 26, 2015
SKS Microfinance Ltd, one of the largest microfinance companies in India, was a model for many other firms in the sector. Established by financial services professionals, the company was once considered the answer to India’s financial exclusion problem. While SKS has been through its fair share of struggles in the last four years, things are starting to look better for India’s only listed microfinance company.
In 1997, Vikram Akula founded SKS and positioned it as India’s largest lender to the unbanked poor. The company went to the capital market through an initial public offering (IPO) in 2010 that was oversubscribed almost 14 times. The company believes that microfinance is an effective tool that can help reduce poverty and spread economic opportunity by giving poor people access to financial services, such as credit and insurance. The company distributes small loans in the range of Rs.2,000 to Rs.12,000 to the poor so that they can start and expand simple businesses and increase their incomes. Their micro-enterprises range from raising cows and goats for milk, to opening a village tea stall.
Immediately after the IPO, SKS terminated the services of its chief executive officer Suresh Gurumani. Akula left SKS in November 2011 amid differences with the top management on the future course of the company.
Besides differences between promoter and top management, SKS had enough issues to handle. Things went out of control when 30 women who were microfinance borrowers ended their lives within a span of 45 days. And 17 out of the 30 were reported to have borrowed from SKS. As a result, Andhra Pradesh, which was the hub of microfinance activity, brought out an ordinance effectively curbing microfinance lending and recovery operations, and, by May 2011, the Reserve Bank of India had issued a notification placing caps on interest rates, margins and specifying minimum tenures for relatively larger loan sizes.
The Andhra Pradesh law made government approval mandatory for every second loan to the same borrower, extended the repayment cycle and barred microfinance institutions from approaching the customer’s doorstep. Loan write-offs in Andhra Pradesh, following a crisis triggered by the contentious state law, brought down SKS’s net worth to Rs.390 crore in March 2013 from Rs.1,795.9 crore in September 2010. The company has written off loans worth Rs.1,362 crore and pared staff in the state to 1,200 from around 7,000. It also scaled down the number of branches in Andhra Pradesh to 120 from 550.
SKS tried to focus on diversifying, slowing growth and building secured lending products like mortgage and gold loans, but could not succeed under pressure from all stakeholders. It also tried to sell health insurance, mobile phones and solar lights, etc., but this did not work. Insurance distribution failed as there were too many bogus claims and policies were sold like a savings product.
Source: Live Mint (link opens in a new window)