NEWSMAKER - Akula shines light on India microlending in SKS IPO

MUMBAI Thu Jul 1, 2010 2:07pm IST

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MUMBAI (Reuters) - As a controversial $250-$350 million IPO draws nearer, Vikram Akula, founder of India's largest microlender, SKS Microfinance, crunches numbers.

India's first microfinance institution (MFI) to tap the capital market has nearly 7 million clients, has disbursed close to $3 billion in total and claims a 99 percent repayment rate.

But critics have jumped on another number altogether.

SKS charges a 28 percent interest rate to its borrowers, mostly poor women in self-help groups who take collateral-free loans of about 12,000 rupees ($261) to buy cows or set up small shops.

Akula, 41, who set up SKS as a not-for-profit body in 1998 and converted to a for-profit model five years ago, gets the acrimony: "There's a tremendous misunderstanding about MFIs; it's very hard for the average person to think of 28 percent interest as right."

"But it is the lowest cost of finance available to the poor, compared to moneylenders and even banks, when you consider the full transaction costs of borrowing," said Akula, dressed in a traditional cotton tunic, trousers and open-toed slippers.

SKS is selling a near 22 percent stake in the IPO and is likely to pave the way for similar offerings in the world's largest microlending industry.

SKS, dubbed by some as the 'Starbucks of Microfinance' for its standardising of the microlending process, already raised $182 million from private equity firms such as Sequoia Capital and venture capitalist Vinod Khosla, raising the hackles of critics who see this as anathema to the idea of microfinance.

The IPO is a logical next step: "Our goal is to tell investors: put your money in the hands of the poor and you will make a lot of money," said Akula, who owns 3.5 percent of SKS. If the IPO sells at the top of the range, his stake would be worth around $55 million.

"My goal, corny as it sounds, is to eradicate poverty. It's immaterial how much money investors make so long as our clients do well," said Akula, whose upcoming book is: "A Fistful of Rice; My Unexpected Quest to End Poverty Through Profitability".

TOUGH LOVE

Microfinance has been around since the 1970s, but hit the spotlight in 2006 when pioneer Muhammad Yunus and his Grameen Bank in Bangladesh was awarded the Nobel Peace Prize.

There are more than 400 active MFIs in India serving about 70 million poor people, according to industry estimates. With a potential base of 120 million unbanked homes, microcredit demand in India is likely to be $270 billion, said CRISIL Research.

But with nearly 40 percent of India's 1.2 billion population living on less than $1.25 a day, MFIs need to access capital, said Akula, a World Economic Forum Young Global Leader.

"I know Professor Yunus is of the view that MFIs should be not-for-profit, but if you're looking to raise $30 billion in India, you can't raise it from social investors alone," said Akula, who majored in English and Philosophy at Tufts University in the United States.

As a community organiser in Andhra Pradesh state in the early 1990s, Akula constantly encountered poor people they could not lend to, and whose only resort was usurious moneylenders.

Akula, a former Fulbright scholar, returned to the United States for a Ph.D at the University of Chicago and sought ways to do microfinance so "you don't have to ever say no to anyone".

"The answer was to build a for-profit MFI with scalable processes and use technology to lower costs," said Akula, who used his training at McKinsey to draw up a new blueprint for SKS.

While most MFIs in India today have a for-profilt model, their rapid growth, NGOs say, has trapped the poor in a debt spiral from multiple borrowings for even television sets.

Akula, named by TIME magazine in 2006 as one of the 100 most influential people, is firmly against lending for consumption.

"It's tough love, forcing the borrower to abandon bad fiscal behaviour that's been entrenched for years. Is it paternalistic? Probably. But it serves its purpose," he said.

SKS' IPO, he hopes, will highlight better business practices.

"We're doing this because it's the right social thing to do, but also because it makes good business sense."

(Editing by Alistair Scrutton and Ian Geoghegan)

(For more business news on Reuters India click in.reuters.com)

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