What Does the SKS IPO Mean for Poor People?
Microfinance Gateway Staff & Microfinance Insights
Industry Voices Weigh In
SKS is currently the largest MFI in India with nearly seven million clients. By generating US$350 million through an IPO which got underway July 28, SKS plans to become the largest MFI in the world by 2012 with 15 million clients. To learn more about what the SKS IPO means for clients in India, the Microfinance Gateway teamed up with Microfinance Insights to conduct one-on-one interviews with industry experts in India. Here we bring together these various viewpoints to offer further industry perspectives on what the public offering means for poor people. Click here to listen to an audiocast of the article.
The largest microfinance institution (MFI) in India, SKS, successfully went public on July 28, but the microfinance industry remains deeply divided about the implications of this development. With their roots in an industry that began as a poverty-reduction tool, many MFIs originated as non-profit organizations to ensure financial inclusion for the poor. Following the Compartamos IPO in April 2007 in Mexico, SKS is only the second pure MFI to go public. This recent development is seen as heralding a fundamental change in the microfinance industry’s mission and vision. With the SKS IPO being oversubscribed, a clear signal has been sent that lending to basket weavers, small farmers, and vegetable vendors can be profitable.
With news headlines such as Is SKS a giant squid, “an angel” or just a business?, the media debates in India spurred by this development question the identity and purpose of an MFI. It’s clear that private investors view large MFIs as profitable businesses, but what do donors, practitioners, and clients think?
Will the poor benefit?
Proponents of the IPO see long-term benefits in reaching a critical mass of people so that ultimately interest rates can be lowered.
Photo Credit: Shehzad Noorani
“Scaling up can result in economies of scale, resulting in lower interest rates for clients. Indian MFIs only cover a small part of the demand, and many people are still not being served. In order to include them in the financial system, the microfinance sector needs to grow and develop. An IPO can help to achieve this,” says Anneloes Mullink-Bos, an Investment Officer at the Netherlands Development Finance Company.
Mullink-Bos adds that in the short term, an IPO is about creating value for shareholders and that poor people will not benefit, however in the long run, MFIs will gain a more diversified shareholder base which will probably lead to the development of new products.
Profiting off the poor?
Many industry analysts believe that the best way to meet borrower demand and generate capital in a sustainable manner is through a public offering. However, the concern is that lending standards could be lowered to generate the profits promised to investors, and that high valuations might force MFIs to compromise on the double bottom line.
If the IPO is perverted to achieve highly-inflated valuations and increase the personal wealth of promoters and top management through dubious means, then the label of ‘making money off the poor’ becomes credible. Samit Ghosh, CEO of Ujjivan Financial Services, Bangalore
Dell Foundation’s Geeta Goel says microfinance should integrate its social mission into its operations and measure it objectively: “MFIs need to ensure a fair practice to the clients – competitive interest rates, transparency, client-centric products and services, and a strong process of customer redressal. Educating investors about client needs and market nuances, like any other industry, is the responsibility of the management and promoters.”
“An IPO provides access to the large public capital market,” explains Samit Ghosh, CEO of Ujjivan Financial Services. “Unfortunately, if it is perverted to achieve highly inflated valuations and to increase the personal wealth of promoters and top management through unprofessional and dubious means, then the label of ‘making money off the poor’ becomes credible.”
On the other hand, an MFI that goes public will have to respond to its shareholders which may make it more accountable to its double bottom line. P.N.Vasudevan, Managing Director of Equitas, argues that going public will increase accountability to, as well as transparency and responsibility toward, clients. Once they are exposed in the market, “they cannot hide,” he says
Camilla Nestor, Vice President of Grameen Foundation, says that IPOs and other financial tools can provide much needed capital, but MFIs also need to adopt performance metrics like the Progress out of Poverty Index (PPI) that analyze social indicators: “Benefit to the poor has to be our first priority,” she says.
Nestor adds that IPOs are not the only way to grow: “Many MFIs globally have demonstrated an ability to scale without an IPO through mobilizing savings or capital-markets issues that tap either local or international debt markets. As for equity, we think there is the potential to demonstrate an equity investing model that secures truly double bottom-line returns (rather than a focus on profits at the expense of the poor).”
Microloans as Coca-Cola?
People require not just microfinance but also knowledge, collective institutions and their enterprises being linked to themarket in a sustainable way.
Vijay Kumar, Director of the National Rural Livelihoods Mission, Delhi
Vikram Akula, founder of SKS, has been quite vocal about his business philosophy: getting a loan, he says, should be as easy as buying Coca-Cola. For Akula, growth is the fastest and most effective way to alleviate poverty for the most people.
While many analysts agree that scale will lower costs and improve access to finance overall, others don’t buy the argument that this is the way to address the key question: how to alleviate poverty.
Vijay Kumar, Director of the National Rural Livelihoods Mission at the Ministry of Rural Development of India, questions whether microloans benefit the poor and help remove poverty. In his view, the key is to help create viable enterprises of the poor—something that’s actually countered by the high-cost financing that is currently offered by MFIs. “People require not just microfinance but also knowledge, collective institutions and their enterprises being linked to the market in a sustainable way – there has to be a holistic value-chain approach. MFIs are not equipped to do that,” Kumar says.
Gil Crawford, CEO of MicroVest Capital Management, a company that invests in MFIs worldwide, supports commercial microfinance if it leads to better institutions that provide their clients with diverse products at lower costs. “The IPO is an appropriate growth mechanism for SKS. However, I have concerns that we may see lending standards slip and consumer protections erode in a rush to cash in.”
Are MFIs facing an identity crisis?
In recent media interviews, Muhammad Yunus has argued against the SKS IPO, saying that commercialization of microfinance will encourage profiteering and dilute the original commitment toward the poor. However, there’s currently no consensus in the microfinance sector about the balance to be struck between profit-making and public serving the needs of poor people.
Photo Credit: Shehzad Noorani
Justin Oliver, who heads IFMR’s Center for Microfinance Research in Chennai, India, believes that the poor are better off with SKS offering them services than they would be without any financial services at all. “I view [MFIs] in the same light as a commercial bank which makes a lot more money than SKS and provides quite poor service.”
Oliver explains that, “Some institutions will be more development-focused, and others will be for-profit institutions that happen to have the poor as their customers. It would be a problem if these institutions really move to be profit-maximizing and provide worse services to the poor at higher prices.”
The IPO route is also seen as an aspiration for some MFIs that want to expand. In fact, smaller MFIs such as Suryoday Microfinance based in Pune, India, are “elated” to see an organization “make it big,” as its CFO V.L. Ramakrishnan, points out.
And while the media is making a noise about the overflow of private capital in the Indian microfinance industry, Shashi Shrivastava, Vice President at Grameen Capital India, argues that for most MFIs, it’s a struggle to find capital and that local and regional organizations especially need equity.
Intellecap Chairman Vineet Rai says microfinance as a poverty alleviation tool is more perception than truth. “It’s an efficient lending mechanism with a certain kind of client. However, creating a quality product is an integral part of the business model.”
Responding to critics who question the commercialization of SKS he says that, “People need to accept that there will be change in this field; hence to the critics I would plead an acceptance to change.”
The industry may continue to change but practitioners remain largely committed to the idea of microfinance as a poverty-fighting mechanism. Meanwhile, Vikram Akula maintains that SKS will continue to grow until it removes poverty altogether.
The unfortunate happenings in Andhra Pradesh have brought to light the extent to which MFIs now work for profit and profit alone. In an agrarian rural environment already hampered by the ill-effects of globalization, marketization and consumerism, the rural deprived are also waking up to call of consumer products. Consumption needs are on the rise and funds provided are often not utilized for productive needs. We need to return to the concept of productive utilization of money and creation of income. There is a need to provide financial literacy education and guide the deprived out of the debt trap. The institutions working in this sector have to think in terms of value addition to society rather than just profit. RBI has to come with concrete regulations to ensure that the deprived are not cheated.
Anitha P federal bank, kerala India
18 Nov 2010
Don't disturb the equilibrium
I just attended the MF India Summit and the overriding theme was SKS - its IPO and practices. I have a opinion which i wish to share: the very basic assumption that MFIs have to be pro-poor and help poverty alleviation is the bedrock of our disappointment with SKS. I do not understand why SKS tries to justify it's yield in excess of 20%, while still saying that they are pro-poor and helping millions.What they are doing is commendable (providing access to expensive credit to million of poor) but let us not confuse their mission as being primarily geared towards poverty reduction.
It would be wise of SKS to acknowledge that it is a for-profit exercise that maximizes shareholder value by providing credit to poor people. Andif some study validates that it has been able to bring a few out of the poverty trap, then that must be considered a by-product of what SKS does,and not its mission.
Here are some of my other learnings from the summit:
1. Unless transparency comes into everything a MFI does,it is going to be difficult to determine what MFIs are actually doing and what their impact is.
2. SKS is a profit-earning enterprise,and last year alone at least 20 MFIs with a considerable borrower base had a yield of 30 percent and more.This points to the fact that they are successful and that their profits are drawing capital from profit- oriented organizations.
3. MFIs have diverse goals and approaches. Let the extremely profit-oriented and socially-oriented MFIs compete and give more options to the end user.
4.Finally, we have to recognize and make clear the distinction between players operating in the microfinance space. Let SKS be treated as a corporate,big,organized moneylender in the space and let us all not mistake them as saviours of the poor.
Rohit Raina MicroShield India
21 Oct 2010
MFIs are Licensed and Advanced Versions of Moneylenders
I was an employee of an MFI and would like to share my experiences with these institutions. In my opinion, MFIs suck the blood of poor people. They do not operate according the Grameen bank model. They are purely commercial, collect interest that amounts to more than the principal and 70 to 80% of loan recovery is done via harassment of the customers. In many cases, they lend to upper class people because this provides more assurance that they will get their money back.
PRASHANTHKUMAR SAJJANAR NAARM, Hyderabad India
07 Oct 2010
MFIs a Must
Every poor person should have access to loans. Similarly, every poor person should have a place to keep his savings and the option of transferring money or sending remittances. Currently, there are countless options for keeping money safe and withdrawing or transferring at will. But the most trusted ones are private and public sector (PSU) banks, as well as a few other formal institutions that offer these services to the poor. However, in terms of availability, PSU banks, regional rural banks (RRBs) and coops are not as accessible as one would hope.
Furthermore, the Know Your Customer (KYC) norms are only helping bankers, most especially PSU banks, harass customers and ensure that huge numbers are not able to avail of even basic banking services. Becoming a bank customer should be without any kind of frills or requirements (proof of address or identity, for example). Anyone should be able to simply walk into a bank and open an account. KYC norms are scaring customers away from savings accounts. How can these institutions even begin to think of catering to the credit requirements of the poor? The moral of the lesson is that MFIs are essential to enable the poor to make financial transactions. The utility of MFIs is indisputable; if MFIs were not around, no one would lend to the poor.
India
02 Oct 2010
Compartamos No. 2?
As I argued elsewhere, this debate will certainly continue. It reminds us of the Compartamos (Mexico) case some years ago.
The debate between Yunus and Akula, which occurred at the Clinton Global Initiative, shows the many sides of the issue.
Unfortunately, it is difficult to take either side! I accept Yunus' argument in the sense that the poor should not be a target for profit-making. But given that the large majority of the poor (in many poor countries about 80%) are still excluded from modern financial services, how can we reach them quickly unless private investors are attracted and involved? So to a certain extent, I can also understand Akula's logic. But then how much should such investors be attracted? For example, to what level can they raise credit interest rates? The real problem is that there is no 'benchmark' to setting these levels, which actually depends on individual countries' circumstances. Previously, Yunus had tried to set such a benchmak (the MFI 'Certification' proposal) but I'm not clear who endorsed his 'formula'. The second problem with Akula's (commercialization) case is - who will monitor how the generated profit is actually used to expand microfinance outreach (since this - i.e using profits to expand outreach - is one of the claims put forward by commercialization advocates)? Are governments, or Central banks, strong enough to do this monitoring?
So I think this issue is open to discussion until a kind of consensus is reached. Can this kind of debate lead to that consensus?
Getaneh Gobezie
Independent Rural finance Consultant
(e-mail: getanehg2002@yahoo.com)
A demand side inquiry into the IPO issue would be useful in order to understand the dynamics of a microfinance institution with a given mission in the capital market. Another article with interviews that focus on the demand side question is therefore not a bad idea.
R. Sundar Rajan India
20 Sep 2010
Will it truly help the poor?
Mere fund raising will not help the poor. There are plenty of funds available from various sources but proper investment (i.e. need- based investment on the basis of proper assessment) is more important than merely diverting more funds to the poorest. For example, a vegetable vendor or tea stall owner typically needs a maximum loan of Rs.3000 (US$66) to Rs.15000 (US$330) depending on the area. However, the vendor or small business owner will usually avail of more than Rs.50000 (US$1,100) from different sources, which is dangerous. We are all aware that the lack of proper need-based assessment processes resulted in various government-sponsored schemes like 20 point economic programs, the Integrated Rural Development Program (IRDP), Self-Employment Scheme for Registered Unemployed (SESRU) and the Self-Employment Program for the Urban Poor (SEPUP) being abandoned one after the other. Clearly, it is necessary for the big players in microfinance to work with regulators in order to avoid the same fate.
BIMALENDU KAYAL BENGAL WOMEN WELFARE ASSOCIATION India
30 Aug 2010
Note from the Editor
The Microfinance Gateway welcomes diverse views, opinions, and feedback on posted content. For the sake of brevity and context, this article features experts who are either based in India, or have substantial experience working in South Asia. The article is by no means an exhaustive analysis of the impact of microfinance, nor does it claim to be one. By presenting a diverse selection of views, including perspectives that question microfinance as a poverty alleviation tool, it aims to challenge Microfinance Gateway readers to think about the issue and come up with with their own opinion.
United States
30 Aug 2010
Sucking from the Poor
SKS already has huge surplus funds, Now, they want to collect more means. The routing of the money is questionable. I think SKS will be another Satyam company in the near future.
India
15 Aug 2010
Demand side questions
Unlike other IPOs, the SKS IPO falls under the microfinance platform and thus diversified views are inescapable. Since the actual performance of SKS in the post-IPO period remains to be seen, many answers to the interview questions are constrained by ‘if’.
Furthermore, most of the questions pertain to the supply-side mechanism of the MFI–poverty reduction lies on the demand side. In this light, the questions below are meant to shed light on issues from the demand side of the equation:
1. Can microfinance be equated logically with all other finance? Or should we compare MFIs with other industries in general and other financial institutions in particular, taking cognizance of their respective vision, mission and market profile? Do these players (MFIs & other FIs) enjoy the same level playing field for their activities?
2. Every institution or industry has the right to seek capital through IPO for their growth and has the responsibility of honoring their commitment to the investor or equity holders from their earnings. The spectacular performance of the SKS IPO indicates how microfinance is able to attract socially conscious investors and mobilize significant funds from the largely untapped capital market. Return on capital is important to all participants. In this context, will there be any difference in the ‘process of investment and earning‘ (productive investment/ income generation/ profit realization) for MFIs (mostly informal sector with SHG and poor clients) and for other FIs (mostly in the formal sector with non-poor clients)?
3. Taking cognizance of lessons from the regional rural banks in the Indian rural financial landscape, which started in 1975 with the mission of financial inclusion for the rural poor before evolving to include the urban non-poor and ultimately merging with sponsoring banks in the formal sector. This begs the question: Is the ‘regulatory and supervisory mechanism’ adequate enough to prevent MFI mission drift– from development to commercial- in the non-formal sector?
4. At the recent IEA conference in Bhuneswar, the Indian Prime Minster said that the ‘decline in poverty has not been as fast as one would have wished and it remains a major challenge before the country because the poor are still too poor’. Is this situation prevailing a) in spite of aggressive microfinancing by various financial institutions including MFIs with a mandatory target from the supply side or b) because of aggressive microfinancing leading to multiple borrowing with the poor credit-absorbing infrastructural facilities, saturated microcredit market and over indebtedness, on the demand side? As a corollary to the above question, I raise two more:
a)Whether ‘microcredit alone’ being the only portfolio of the IPO-seeking MFI, is adequate to do magic in the poverty sector? Can we establish a causal relationship between microcredit and income generation or poverty reduction?
b) It is an acknowledged fact that microfinance is a package of financial services including micro savings, micro credit, micro insurance, transfer services and other services for the poor. If the MFIs design their portfolio management for microinsurance with or without microcredit and eventually facilitate making a substantial dent in the poverty canvas, will their approach towards IPO be justified without any criticism?
Can we expect the initial successful financial market inclusion of MFIs (SKS) to lead to the successful financial inclusion of the very poor? Let us wait and watch the performance of SKS as it battles poverty in the post-IPO period in the given regulatory environment.
Dr.V. Rengarajan Independent Consultant -Microfinance India
13 Aug 2010
Does growth automatically benefit the poor?
Does a high-growth strategy automatically lead to benefits for the poor? In the 1990s, it was believed that with high economic growth for the country, poverty would automatically come to an end. But the study by Arjun Sen Gupta showed that this is not the case. It showed that the "Trickle Down" theory is not correct. The high-growth period actually benefited those in the higher rungs of society, rather than the poor.
Are we in the microfinance sector taking up the "Trickle Down" theory? Are we thinking that we need to grow aggressively and that this growth will automatically benefit the poor?
What if it will just start benefiting the financiers, promoters and MFIs but not the poor on the ground?
Aside from the high-growth strategy, do we need to do something more to benefit the poor?
This is more a question than an answer.
India
12 Aug 2010
Its Time we Stopped Glorifying Poverty
Every business needs money. Even the poor who take these loans are not seeking handouts, they are looking for loans and with their self respect they have all intentions of paying the loans off.
There is a dialogue from the movie Dayavan: "Koi kaam jisse char aadmi ka bhala hota hai woh bura nahi hota" , translated - Any work that benefits four people cannot be bad.
There is no harm at all if SKS investors make money, after all that what everyone is trying to do.
satish vijaykumar India
11 Aug 2010
MFIs and IPOs
There is nothing wrong with MFIs sourcing funds through an IPO but it is certainly unhealthy for promoters to usurp any gains. But they have redeemed themselves partly by creating a foundation.
souren ghosal NICCO FINANCIAL SERVICES LTD India
11 Aug 2010
Your bias is showing....
If the authors of this piece genuinely wanted to evaluate whether or not ‘the poor will benefit from the IPO’, and not simply provide-to-order another PR piece broadly in favour of commercialization and for-profit microfinance, then they went about the task in completely the wrong way. First, they chose not to make any mention of the negative impact already arising from the clear over-supply of microfinance in many parts of India, but especially in the home state of SKS – Andhra Pradesh. Consider just that the over-supply of commercialized (i.e., expensive) microcredit in the agriculture sector has been pretty disastrous in Andhra Pradesh, just as in other parts of India. Even though assisting the poorest farmers into microdebt peonage is good for MFIs like SKS, Spandana, Share and others, it is manifestly not the best way forward for the poorest farmers. Their tiny subsistence plots are simply not productive enough to service the high interest rates on microloans taken out to increase production or diversify. Cutting a long story short, this is why rural incomes have actually been falling in Andhra Pradesh in recent years, and it is why rural suicides have been increasing and poverty rising in the poorest communities. Indeed, the Andhra Pradesh government was forced to commission a special inquiry into the collapsing agricultural sector, an inquiry that concluded that the over-supply of inappropriate finance (i.e., commercialised microfinance) has actually helped to undermine and destroy agriculture in the state! Some comments on these important developments would therefore have been useful in the article, surely? I mean, if Mr Akula, CGAP and others centrally justify the IPO on the basis that it will increase the supply of microcredit in India, then, if there is one – which there is - you really do need to look at the existing over-supply problem before coming to any sort of a valid judgement here.
Second, rather comically, the authors also chose to omit any reference or signpost to the one remaining interview in the series undertaken by Microfinance Insights on the SKS issue – coincidentally (or not!) this is the one interview, undertaken by myself on the 23rd April, that just happens to argue against the commercialisation of microfinance, and which also challenges the ‘I want to help the poor’ rationale for the IPO so disingenuously put forward by Mr Akula! Surely this is a pretty unethical and Soviet-style tactic to deploy?
Milford Bateman
Milford Bateman Overseas Development Institute United Kingdom
