Stirred, But Not Shaken

Tuesday, June 14, 2011

Vikram Akula’s SKS Microfinance , once the showcase company of the Indian microfinance sector, is having to re-design its business as well as salvage its reputation.

Less than a year ago, in August 2010, the company was riding high, having become the first microfinance institution, or MFI, to go in for an initial public offering which was received with much enthusiasm and oversubscribed nearly 14 times. Yet its fourth quarter results, for the year 2010/2011, report a loss of Rs 70 crore.

Worse, its reputation, along with that of the entire microfinance sector, has taken a battering, following suicides by poor borrowers in Andhra Pradesh allegedly due to coercive loan recovery methods resorted to by some MFIs, who had begun to resemble the very village moneylenders they sought to replace.

The Andhra government responded by restricting MFI activities, while the Reserve Bank of India too recently brought in regulations. The forever-clad-in-kurta Akula firmly denies any wrongdoing on SKS’s part. “Whatever happened was due to external factors and was not reflective of any fundamental flaw in our model,” he says. But he has also realised the need to look for new growth avenues. He is considering a four-way diversification of his business. Apart from microfinance, SKS will also provide gold loans (loans against gold), extend housing loans, besides loans to buy mobiles, and to replenish local grocery stores in a supply arrangement with the cash-and-carry chain, Metro. “The pilot projects have been yielding very encouraging results,” he says.

But are external factors solely to blame for SKS’s decline? Not everyone agrees. “The IPO, the firm’s aggressive growth preceding it and the way it attracted others to follow suit laid the road to the current crisis,” says Sanjay Sinha, Managing Director, Micro-Credit Ratings International Ltd, an agency that rates MFIs. In an open letter to the Consultative Group to Assist the Poor, a World Bank resource agency on microfinance, he wrote: “The success of the IPO itself became a problem, tempting SKS promoters to take ill-timed management decisions, which invited further scrutiny and precipitated the Andhra government’s intervention.”

Source: Business Today (link opens in a new window)