Microfinance has become a big deal for India’s poorest

Shoba Narayan (Writer)

For all the controversy surrounding SKS Microfinance’s initial public offering (IPO) last week, its shares were fully subscribed. SKS is India’s largest and arguably most successful micro-lender. It began as a non-profit organisation in 1997, lending as little as US$10 (Dh36.73) to women weavers, cow herders, farmers and electricians before reinventing itself as a profit-making concern in 2005. When the company announced a few months ago that it was looking to raise $350 million from the market, it disconcerted people – and not just those in the development sector. Micro-lending pioneers such as Muhammad Yunus criticised the SKS stock offering as profiteering from the poor.

Other liberals complained that SKS’s successful IPO would change the character of those attracted to microfinance. Instead of social entrepreneurs and do-gooders, the money would attract profit-hungry bankers. As the controversy surrounding the IPO increased, the entire Indian microfinance industry went through what seemed like collective soul-searching and hand-wringing. Market-loving capitalists passionately defended the issue, stating a successful IPO would encourage more microfinance companies to flourish and do good. Still others took the middle ground.

“Why this discomfort [with the IPO]?” asked Monika Halan in a column in Mint, a business daily affiliated with The Wall Street Journal. “If capital markets are an efficient way to move money to their best use, why baulk at the SKS issue? Does that mean that hospitals must not list, or educational institutes or media?” Chitradurga district in interior Karnataka seems an odd place to contemplate not just the fall-out of the IPO, but also the future of Indian microfinance.

Five hours by road from the state capital Bangalore this picturesque hamlet with its undulating hills, verdant paddy fields and rocky outcrops is known more for its silk weavers and cotton fields than for anything remotely resembling big business. Yet it is here that 10 women sit on a summer’s eve contemplating their finances and the possibilities of what their bank might do for them. It is a powerful indicator, not just of India’s successful model for women’s self-help groups that flourish across the country, but also a measure of how deep micro-lending and micro-credit enterprises have penetrated into rural India.

Until recently, most of these women sitting under a tree did not have a bank account. They are illiterate housewives who work a few hours a day, plucking cotton or weaving silk. The leader of the group, a woman named Lakshmi, has a small tally book in her hands in which she records the money each woman has contributed. The amounts are small – sometimes $10 and sometimes as little as $1. When done consistently over a couple of years, however, it adds up. Now, these women have a collective bank account that they can use to dispense money for medical and other emergencies.

Over the past two years, these 10 women have amassed more than 10,000 rupees, or just under Dh800. They are now contemplating applying for a small business loan to start a weaver’s co-operative. Perhaps they can link up with another co-operative in a nearby village that supplies organic honey to Bangalore city at handsome profits. Bangaloreans seem willing to pay a lot of money for local crafts, one woman says. Maybe we can weave silk bags and send it to Bangalore, says another. The group laughs at the thought of city dwellers paying big bucks for their work.

But it is a huge leap of faith for these small-town housewives, one that Vikram Akula, SKS’s polarising and maverick founder, would relish and point to as an indicator of the success of his micro-lending model. Mr Akula doesn’t make it easy for his defenders. His personal life is a mess – he is locked in a bitter custody battle with his ex-wife Malini Byanna. The corporate governance of his company has been questioned.

Most galling of all, at least for those in the non-profit world, Mr Akula stands to make about $60m from the IPO. “Vikram is going to make an unseemly amount of money off the backs of cow herds. Isn’t it ironic?” muses a competitor. These questions raise the delicate balance that microfinance treads in the world. Even though most microfinance institutions are intended to make profit, they are perceived as beacons of good. But the point is that micro-lending in India has grown at 45 per cent so far this year.

Most microfinance companies have very few defaulters, which shows that the women who make up most of their clientele want these services. While microfinance interest rates of 30 per cent are high compared with regular banks, they are far lower than the 100 per cent loan sharks would charge these women. The high rate of return also suggests the borrowers use this money wisely and make a profit from it. The sector has been growing exponentially.

While Mr Yunus’s Grameen Bank took 30 years to build up its portfolio, newer entrants such as SKS and Spandana have achieved the same result in five years. In fact, Spandana, India’s second largest microfinance company, is planning its own IPO. If SKS and Mr Akula can address the questions swirling around his company it will be cause for celebration, not just of a successful IPO but also for the deep penetration of micro-lending institutions into rural India, as the 10 women sitting under a banyan tree in Chitradurga district demonstrate.

Shoba Narayan is a journalist based in Bangalore and the author of Monsoon Diary