Mumbai / Bangalore: In a sign that the fast growing business of lending to the poor is coming of age, the largest microfinancier in India on Friday sought regulatory approval to raise money from the public and existing investors through an equity issue.
SKS Microfinance Ltd plans to raise an undisclosed amount of money through a public issue that will subject it to public scrutiny once the shares are listed.
Microfinance institutions, or MFIs, offer tiny loans to those who have been left untouched by commercial banks. Capital has poured into many MFIs in recent years, and SKS’ own roster of investors include venture capital firm Sequoia Capital and Infosys Technologies Ltd founder N.R. Narayana Murthy through Catamaran Management Services Pvt. Ltd, a fund he has promoted.
The growing role of profit-seeking investors in the microfinance business has led to heated debates on the role of profits in this business. Microfinance pioneer Muhammad Yunus of Grameen Bank has often spoken out against the commercialization of microfinance.
SKS was founded by former McKinsey and Co. consultant Vikram Akula in 1997 as a non-government organization and converted into a non-banking finance company in 2005.
The money raised through the share sale will be used to meet future capital requirements as it grow its business, a company release said.
Akula, who had diluted its stake 6% by selling shares to a series private equity investors, needs fresh capital to grow its business. At the same time, some of the private equity investors plan to cash out their stakes in the company.
Vineet Rai, founder of Intellectual Capital Advisory Services, or Intellecap, an investment bank that serves MFIs, said the SKS public offer is the first such offer by an MFI but not the last, with a pipeline of such public offers.
“Any entity, which is first in its breed, industry or section, to go for an IPO (initial public offering) gives signal of coming of age of that industry,” said Viren H. Mehta, director, Ernst and Young India Pvt. Ltd.
Mehta said a lot of responsibility is involved in being a public company and the activity is not just about raising capital.
In fiscal 2009, MFIs in India added 8.5 million consumers, taking their consumer base to 22.6 million—an increase of 60%. The growth in their loan book was even more spectacular—around 97%—from Rs5,950 crore to Rs11,734 crore.
In terms of consumer acquisition, Spandana Sphoorty Financial Ltd recorded the highest growth rate, 104%. Bandhan Financial Services Pvt. Ltd and SKS expanded their consumer base by 91% and 87%, respectively.
SKS and Spandana grew their loan books by 214% each and Asmitha Microfin Ltd by 111%.
“It is impossible for MFI promoters to keep on diluting their stakes to raise capital. They need to raise fresh equity from the market as it is a cheaper source of long term funds,” Rai said.
MFIs borrow from banks and non-banking finance companies at relatively higher rates and lend them to rural borrowers at even higher rates.
Rai, who runs a $40 million fund Aavishkaar Goodwell India Microfinance Development Co. Ltd, has invested in quite a few MFIs such Equitas Micro Finance India Pvt. Ltd, Grameen Koota Ltd, Suryoday Microfinance Pvt. Ltd and Bhartiya Samruddhi Finance Ltd.
According to the finance ministry, the credit needed for the poor is Rs2.4 trillion, and the available credit is less than one-tenth of around Rs20,000 crore.
Two in five Indians do not have a bank account and 81% of villages do not have a bank within a distance of 2km.
Once an MFI is able to raise long-term capital from public they will be in a position to bring down their loan rates. According to Rai, the lending rates of MFIs have come down to an average of 29% in 2010 from 40% in 2001.
Even though the industry is growing fast, every MFI is not profitable. In fact, one out of three MFI in India made losses in fiscal 2009, says a study of some 230 lenders conducted by ACCESS Development Services, a not-for-profit organization that offers consulting services to MFIs.
The study also shows that a higher proportion, 42%, of small microfinance lenders, or those that have a loan portfolio of up to Rs5 crore, posted losses.
In fiscal 2009, MFIs recovered 99% of their loans, according to the report, which is way above the recovery of commercial banks. But the scene may change as “unbridled expansion tactics”, and competition in some cases result in lenders offering more loans than borrowers could service, and this, in turn, leads to delinquency, said the ACCESS report.