Mumbai: An initial public offer (IPO) by SKS Microfinance Ltd is likely to set the stage for more such offers in the world’s largest microlending market, but it has also sparked a debate on the ethics of profiting from the poor.
IPO, a first in India and one of only a handful by microfinance institutions (MFIs) around the world, is expected to raise around $250-$350 million (Rs1,110-1,554 crore) for SKS and its private equity (PE) investors. It has drawn keen interest from countries with major microfinance industries such as Bangladesh, Mexico and South America, as well as the PE firms who have recently piled into the sector. But it has also drawn sharp criticism from some MFIs and non-government organizations who do not favour going to capital markets or the strong flows of PE that have pushed up valuations.
“The job of microfinance is to alleviate poverty, so the question to ask is: who’s going to benefit from the IPO?” said Olivia Donnelly, executive director of UK-based Shivia Microfinance, a non-profit firm that focuses on India and Nepal. “It’s OK to do an IPO because you need to scale up, or upgrade your IT systems, but is it correct to make millionaires out of shareholders when your borrowers are so poor?” Microfinance has been around since the 1970s, but jumped into the spotlight in 2006 when the Nobel Peace Prize went to Bangladesh’s Muhammad Yunus and his Grameen Bank, which pioneered giving tiny unsecured loans to the poor to buy cows or sewing machines.
Some Indian MFIs including SKS have switched to a for-profit model and registered as non-banking financial corporations (NBFCs). MFIs’ expanding client base and near-zero defaults have drawn investors ranging from Singapore’s Temasek, CLSA Capital and International Financial Corp to PE firms Sandstone Capital, Unitus and Matrix, which have put money in SKS, Share Microfin, Spandana, Ujjivan and other MFIs.
Advocates say rapid growth and the drying up of traditional sources of capital have driven MFIs to consider other options. “When we are growing 75% year-on-year, the sort of equity we need to maintain 15% capital adequacy ratio cannot come from old-fashioned sources such as philanthropists or banks,” said Vijay Mahajan, president of lobby group MFI Network.
Sumir Chadha, MD of PE firm Sequoia Capital India, which holds more than one-fifth of SKS, said the IPO would improve the reputation of microfinance lenders. “MFIs tend to be regarded badly. It is very frustrating. This IPO will dramatically increase visibility and bring in greater trust for the entire MFI eco-system,” Chadha said. Earlier this year, finance minister Pranab Mukherjee said NBFCs, including some such as SKS, can be granted banking licences, signalling a greater role for MFIs. But India’s central bank has pulled up MFIs for their high interest rates—about 25-27%. That is about double the rate at which they borrow from banks, but still lower than moneylenders.
PE’s role in MFIs has also been criticized. “PEs can bring greater efficiency, development plans and good management, but they can also create tension because investors tend to want to exit in three to five years,” Xavier Reille, a co-author of the report, told Reuters from Washington.
SKS has drawn investors including Sequoia, Kismet Capital, Unitus, venture capitalist Vinod Khosla and Infosys Technologies Ltd founder N.R. Narayana Murthy.
Vikram Akula, a former McKinsey consultant, has been named one of the most influential people by Time magazine, and SKS, which he first founded in 1997 as a non-profit, is today India’s largest MFI with about 5.5 million clients. But activists and NGOs see no reason for cheer.
“MFIs are ignoring their social mission. They have a duty to educate their clients and not lend money for buying a TV or pay dowry just to add to their loan books,” said Shivia’s Donnelly.
“It’s the wrong path to take. It’s sub-prime all over again.” There are few regulations and no accountability, they say.
“MFIs talk about their valuations, but no one talks about social performance: are we really lifting people out of poverty?” said Royston Braganza, chief executive of Grameen Capital India.
With about half a dozen big Indian MFIs contemplating IPOs, SKS’ offering will be a milestone, the JPMorgan/CGAP report said, and could help advance a stalled microfinance bill in India.
“Depending on the outcome, it is quite probable that the spotlight on Indian microcredit will intensify, while triggering renewed discussion around MFIs’ profitability and social impact.”