The Hindu Business Line : Lend credence

SKS Microfinance, says its founder Vikram Akula, is today the largest MFI in India and fourth largest in the world after Grameen, Asa and Brac. His relentless argument is that in order to reach the poor masses, MFIs will have to scale up and this can be done only by going commercial. He estimates that about 90 per cent of Indian MFIs serves fewer than 10,000 clients each. "There are only about 2 per cent of Indian MFIs that serve over one lakh clients, and the entire industry serves about 22 million." While the founder of Grameen Bank, Mohammed Yunus, remains an inspiration, he says, "No doubt Grameen is a remarkable organisation with 7 million clients. But it took them 35 years to do that. At that pace can you imagine how many generations it will take us in India, which has over 150 million poor households? On the other hand, if you look at Coke, Starbucks or McDonald's, they scaled up very rapidly. So I looked at how they scaled, and can we apply those lessons?" - Rasheeda Bhagat

Rasheeda Bhagat

After graduating in Philosophy from the Tufts University in the US in 1990, when he told his parents he wanted to work with an NGO in an interior village in Andhra Pradesh, they were understandably “very upset. Particularly my mother, because the whole idea of going from Andhra to New York was for better prospects and now this kid wanted to go back to India, and that too villages.”

But Vikram Akula had decided to do so even as a teenager when, on a visit to India, after a lavish wedding meal he saw two poor kids of his age collect leftover food and devour it.

“This was a jarring experience and I wanted to do something about it,” recalls the founder and chairperson of SKS Microfinance, which today has a customer base of over 4.7 million women all over India.

But the NGO too didn’t take him seriously and gave him immunisation work in interior villages, primarily because he could speak Telugu.

While doing such jobs for nearly two years he learnt about “poverty and development; the most important lesson being on economic intervention — that if you put money in people’s hands, they will improve their lives, health, send kids to schools.” But the NGO chief advised him that to do anything meaningful he should return to the US and do a Masters.

He went to the Yale University for a Masters in social sciences and returned to India, this time as a Fulbright Scholar, and worked on a Rs 1 crore Jawahar Rozgar project to give agricultural loans specifically focused on microfinance in 30 villages. He experienced how microfinance could have tremendous impact on people’s lives. But the problem was the tiny reach; “it hit me when people would come from remote areas and say, ‘Can you start this programme in our village?’ and we’d have to say ‘no’.”

An early heartbreak

But what really broke his heart was when a woman in a torn saree asked for a loan and had to be turned down as funds were running out. “When I said ‘No’ she looked me in the eye and said something I will never forget: ‘Am I not poor? Do I not deserve a chance too?’ She wasn’t asking for subsidy or charity; she was simply asking me for a small loan. Here I was thinking I was doing something great. But she put me in my place and made me realise that if you do this only in a handful of villages, you don’t make a difference. It’s like sending one kid to school and holding the other back.”

Self-introspection sent him back to the University of Chicago for a PhD where he agonised over how microfinance could work in a manner where nobody seeking an opportunity was turned down. “Basically I was seeking an answer to the poor woman’s question,” he says.

The essential thing to do was scale up; Akula estimates that Rs 2.4 lakh crore is required to lift the estimated 80 crore poor Indians out of poverty. The three main problems in the way, he says, are lack of access to funds, lack of capacity to reach all villages and the phenomenally high cost of microfinance (tiny loans require a huge infrastructure for training, monitoring, collection, ).

“So I came up with three ideas: a commercial approach to access capital, best practices from the business world to scale, and technology to overcome cost constraints. And like any good academic I went around telling people what to do. But nobody listened.” After several conferences and people telling him it’s not going to work, he decided to do it himself. And thus was born in 1998 SKS Microfinance as an NGO; he needed Rs 2 crore to make it an NBFC. “I had no money as I had just come out of University and tried to get a loan from my parents and friends but failed, so we started as an NGO.”

He waited till 2005, “when the market was ready for a commercial model of microfinance”. SKS then turned into an NBFC “with the unabashed goal to be extremely profitable”, and till August 2009, had disbursed Rs 8,500 crore in loans; last year it lent Rs 3,600 crore, and over the last three years it has been growing at an annual compounded rate of 128 per cent! In 2006, at 37, this soft-spoken man, who speaks Telugu with a heavy American accent, had made it to Time magazine’s list of 100 people who shape our world!

Extremely profitable

The SKS model is “extremely profitable”, and has to be, argues Akula, if venture capital, private equity and commercial banks, which “look at our business as sub-prime, unsecured lending to poor illiterate women with no credit history, are expected to come on board. You can’t scale up microfinance to the extent required with social capital because that kind of money does not exist.” He says SKS is the largest MFI in India and fourth largest in the world after Grameen, Asa and Brac.

While he won’t disclose profit numbers, Akula says venture capitalists and PE investors expect a return of 35 per cent; the banks of course lend around 13 per cent. The SKS women get finance at a steep 28 per cent, and to criticism that this is usurious Akula argues: “I would say we are lower cost than any other source of credit for the poor. On paper they might get money from some sources at 12 per cent. But a World Bank survey of borrowers across India shows that if the several trips to the bank, brokers’ fees, lost wages and food costs are added, the cost of the 12 per cent loan is much higher than our 28 per cent because the money comes to and is recollected at their doorstep”.

On why SKS lends only to women, he says, “For three reasons; from a social impact perspective, if women control resources the entire household benefits; the lending methodology requires cooperation and helping each other out and it works better with women; and women tend to take up less risky activities.

Banks come to us

At a village 80 km from Hyderabad, we (including two CitiBank officers) watch a training session — formation of women’s groups and their elementary education on capital, interest, loan instalments, how to start ventures in poultry, livestock, pappad or pickle making, pottery, vegetable vending, and so on. Many fourth- or fifth-term borrowers — each loan cycle lasts 52 weeks — have started kirana shops and even beauty parlours!

Next we head to the SKS centre where the loan officer enters on the computer the day’s transactions. Each officer typically handles about 500 clients, each with two loans, making it 1,000 transactions a week.

On the high cost of running MFIs, Akula says that in a typical MFI the loan officer maintains manual passbooks, collection sheets and dusty back-office ledgers. “This would mean 3,000 manual transactions a week, and 1.5 lakh over a year; for our 12,000 officers it would mean 1.8 billion manual transactions a year.”

He decided early in the day on computerisation. “There was nothing on the shelf so we had to build a model and we spent Rs 1 crore on the software when we had a Rs 10 lakh portfolio, and everybody said ‘here is a foolish American coming and spending unnecessary money,’ but today people say, ‘Wow, this is a good investment’. You saw the man took five minutes to make 150 entries of meetings at three centres. And manual errors are eliminated too.”

Initially it was a Herculean task to get SIDBI, venture capitalists like Vinod Khosla, Sandstone Capital and banks to lend money to SKS. But once his “for profit” model started delivering great returns there were more takers “and you saw today that banks come to us, we don’t go to them.”

On the future, Akula says credit for income generating activities is not enough as people have a range of credit needs in housing, education and so on. And SKS is getting into that. “Also, the exciting thing about capital is that now we don’t have a limit and can answer that woman’s question — ‘Do I not deserve a chance’ — with a confident ‘How much do you need and where is your village?’”

It has taken him nearly 18 years to do that, and though he has no clue about the woman’s whereabouts he cheerfully says: “I bet we’ve probably lent to her daughter-in-law!

Response can be sent to rasheeda@thehindu.co.in

At a glance

Poverty alleviation: The data clearly show that microfinance can lift people out of poverty. Studies have shown that where people have access to microfinance, the movement out of poverty is much faster than otherwise.

Mohammed Yunus: He is my inspiration and a pioneer for a generation of us. That what we do is different (commercial) is not a discredit to him; it says 35 years ago microfinance was much more difficult. It is incumbent upon us, the younger generation, to take that model and push it to the next level.

Reading: I'm now reading `Three Cups of Tea'. My favourite writer is Frederick Niche; he is powerful, provocative; but Gandhiji's writing is clearly the most influential for me.

Music: Hip hop, R&B

Food: Eat everything and am adaptable because I travel a lot, but I love chicken biryani.

Religion: Not ritualistically religious but spiritually inclined. Have a very secular, humanist approach to religion.

Relax: Anything related to sport relaxes me. Play basketball, once a week, used to play tennis in the University and do it even now.

Fitness: Work out in a gym a couple of times a week.

India's future: See in the rural poor a tremendous entrepreneurial spirit, dynamism and resilience. The kind of struggles they face, and yet persist, makes me very hopeful.

Challenges: From my sector, clearly access to finance for the poor. Three essential components of good society are economic development, health and education; we have to do something radically different for education.

Last word: I'm single again, so you can drop that somewhere!

Related Stories:
SKS Micro to offer rural housing loans
SKS Micro plans to double loan disbursals in 2009-10
SKS Microfinance to scale up non-financial products distribution

More Stories on : Gender | Rural Development | Regional Rural Banks | Rasheeda Bhagat

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