Founder Falls

On November 23, the man who founded and nurtured India’s most highprofile microfinance institution, or MFI, quit. Vikram Akula stepped down as SKS Microfinance’s chairperson and board member. How did Akula, who earlier never seemed willing to give up control, leave?

Akula himself refuses to say a word. Many in the industry, however, claim they are not surprised, saying deep differences had developed between Akula and some members of the board and the management. The new non-executive chairman, P.H. Ravikumar denies it, insisting there were only “strategic differences”, and these too arose after that watershed event in the history of microfinance in the country – the passing of a law by the Andhra Pradesh government in December 2010, severely restrict- ing the activities of MFIs in the state.(See“I won’t paint a rosy picture”.)

The law, initially brought as an ordinance in October, was prompted by reports of coercive loan recoveries by some MFIs, which allegedly even led some debtors to commit suicide. It decreed that all MFIs working in the state would have to register themselves with multiple state government bodies, declare their interest rates upfront, stop seeking weekly repayments, and much more. While borrowers in Andhra Pradesh, which accounts for around one-third of the country’s `20,000-crore microfinance industry, assumed that paying back loans was no longer a priority, banks across the country took fright and curtailed lending to MFIs considerably. The result: large numbers of MFIs tumbled into red.

SKS Microfinance, for instance, posted losses of `384.54 crore in the July-September quarter against a profit of `80.54 crore in the same quarter the previous year. It had launched a highly successful initial public offering, or IPO, in July 2010 and listed a month later, but the share price, around `785 last December, has now touched a 52-week low of `90.20.

“The Andhra Pradesh Act very clearly brought out the risk of being a single product company,” says Ravikumar. “SKS will no more be only an MFI but will look to offer a range of rural financial services” to get back on track. Indeed, several other MFIs have been trying to diversify in the last year. See Desperately Seeking Revival, BT, Oct 30, bit. ly/mfinchanges.

Some industry insiders have welcomed Akula’s departure. “Akula’s resignation is welcome as he stood for the ‘for-profit’ model of microfinance, which in many ways has led to the destruction of the reputation of MFIs in India,” says David S. Gibbons, the Canada-born founder and Chairman of leading microfinance entity, Cashpor India. “Great damage has been done to the sector and the poor by the crisis in Andhra Pradesh, for which both profit-maximising MFIs like SKS and the state government have to share the blame.” Others felt, given SKS Microfinance’s current situation and erosion in share value, Akula was rightly held accountable.

No doubt, under Akula, SKS Microfinance grew rapidly, at one stage approving 100,000 loans a week. But some maintain this set a dangerous example. “The SKSIPO and its aggressive growth preceding this attracted others to follow suit and laid the foundation of the present crisis,”says Sanjay Sinha, Managing Director, Micro-Credit Ratings International, an agency that rates MFIs. Still others believe the draconian law alone cannot be blamed. There were problems with the way SKS Microfinance was run. “One cannot discount internal governance issues,”says M.S. Sriram, adjunct professor at Indian Institute of Management, Ahmedabad.

“There was a promise made when the IPO was launched that an advisory board headed by Infosys Chairman Emeritus N.R. Narayana Murthy would be set up. What happened to it? Now both the public faces of the IPO (former CEO and managing director Suresh Gurumani and Akula) are out.”

While companies in other sectors are lauded for doing so, an MFI wooing private investors and seeking aggressive growth – as SKSMicrofinance under Akula did – soon starts to face an image problem. “There is something odious about wealthy private investors and MFIstaff making money from the poor, many of whom do not have a stick of furniture in their rooms and live under leaking roofs,” says Gibbons. Akula, he feels, “was right in believing that the poor are bankable, but wrong to think private investors are needed to reach them”.

With Akula’s departure, SKS Microfinance is ready to launch itself headlong into its new strategy, offering small housing loans and other fee-based services alongside microfinance. Sinha sees this as a reflection of the compulsions of being a listed entity. “Being a listed entity SKS is forced to look at maximising shareholder value. This is not just a case of mission drift but one of a mission change. It is seeking to move from being a microfinance specialist to a regular non-banking finance company,” says Sinha.