India’s Microfinance Industry Trying To Scale

Recently, Hyderabad-based SKS Microfinance, the world’s and India’s largest microfinancier listed on India’s National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). This was the first ever microfinance institution (MFI) listing for the Indian market. SKS focuses on providing microfinance products through a group lending model to India’s impoverished women for access to agriculture, livestock purchases, and other micro business ventures. It was founded in 1997 by Vikram Akula as a nonprofit venture with funding of ~$50,000. By 2001, it had over 2,000 borrowers in rural India.

However, Akula was convinced of the possibility of deploying a commercially viable business model for a social cause and converted SKS to a nonbanking finance corporation (NBFC) and thus to a for-profit entity in 2005. His model also gained acceptance by investors such as Sequoia Capital, which invested in the business in 2007. SKS ended last year with over 5.79 million active borrowers. For the year, they recorded an asset base of $897 million and a gross loan portfolio worth $653 million. Analysts project that the company’s client base will grow to 6.8 million with a gross loan portfolio of $929 million by the end of this year. SKS is aiming to reach 15 million customers by the end of 2012 and eventually address over 50 million borrowers in the country.

SKS had ended last year with revenues of Rs 958 crores (~$212 million) and earned profits of Rs 174 crores (~$38.55 million). It had recorded significant growth over the previous year’s revenues of Rs 554 crores (~$123 million) on which it had earned profits of Rs 80 crores (~$17.72 million). In the recently reported quarter ended June 2010, SKS had reported revenues of Rs 284 crores (~$63 million) with profits of Rs 101 crores (~$22.5 million) on Rs 4,578 crores (~$1 billion) loans outstanding.

SKS relies on technical investment to manage their growth. They were among the first to develop  an industry standard technology platform that enabled them to scale rapidly and are now investing in an IT backbone that will include a data backup center and connectivity services to deliver critical services across their branches, efforts that are critical to their growth rate.

Many believe that the company’s for-profit motive might cause it to digress from its core business of serving the rural sector. However, as the SKS founder rightly put it, to address the over 150 million poor households in India, there is “an urgent need to scale more rapidly, and only commercial capital will meet their funding requirements.”

MFIs make profits from lending their available funds at higher interest rates to the needy. While they justify these rates with the higher costs and risks involved, even the Reserve Bank of India, India’s central banking authority, has expressed concerns over the absence of transparency involved in rate determination. But, I believe that SKS has found the path to the fortune at the base of the pyramid.

The stock was offered at a price of Rs 985 (~$21.87) per share. However, it listed at a premium of 5.2% at Rs 1,036 (~$23.00). The stock is currently trading at Rs 1,402.30 (~$31.15) with a market capitalization of ~$2.2 billion.

Following SKS’s IPO success, the country’s second-largest MFI, Spandana, and the third largest one, Share Microfin is looking to list as well. As of July end this year, Spandana had disbursed loans of Rs 4,205 crores (~$932 million), compared with Rs 2,234 crore (~$495 million) of loans disbursed by Share MFI. Share MFI is the third largest MFI and had posted profits after tax of Rs 108.72 crore (~$24 million) for the last financial year ended March 31. Share MFI is evaluating merger options with the fifth largest MFI in India, Asmitha, that has loan outstandings of close to Rs 1,800 crore (~$399 million) and will help Share MFI expand its scale of operations.

With more MFIs evaluating IPO options, the Indian MFI industry will gain significantly by getting access to much needed capital while maintaining their core business of serving the rural poor at a faster pace. I am firmly of the opinion that microfinance needs to be a for-profit industry, and the more success companies like SKS, Spandana, Share, and so on achieve in the financial marketplace, the more liquidity will become available to the rural (and urban) poor. Ultimately, value-oriented capitalism is the only sustainable solution to development economics problems, and it is my firm belief that Vikram Akula has led the industry down the right path, even though Professor Yunus has vehemently criticized him for doing so.