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BW Businessworld

Souring Of A Dream

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I must say I have always had mixed feelings about the microfinance industry. At a conceptual level, it is an elegant solution to the credit needs of the extremely poor. If — and it is a very big ‘if' — it can be implemented properly, it has the scope of alleviating poverty like few other tools. It can certainly help the rural poor who have little access to the formal banking system and have to depend on the village moneylender and his usurious rates of interest.

On the other hand, most microfinance organisations have been embroiled in one controversy or the other. In some cases, the enormous rates of interest and the methods of collecting them have made news. In others, the staggering salaries that the top management get while ostensibly working for the poor, has brought a degree of scepticism about the sector.

Microfinance in India is a for-profit business with the aim of providing credit to the very poor. It is, therefore, both a business that needs to run on sound financial principles, as well as one with a worthy social goal. These two characteristics often pull a microfinance organisation in opposing directions — and create enormous conflicts. One of the criticisms levelled against most microfinance institutions is that they charge rates of interest as high as those of traditional moneylenders. Of course, in their defense, microfinance organisations point out that rates of interest being charged depend both on the rate at which they raise finance themselves, as well as the risk they are taking — that is, the rates of default — and are therefore realistic. But then, that is an argument that  moneylenders too make.
Vikram Akula is India's most high-profile microfinance proponent, and his SKS Microfinance had the backing of some of the best names in the investment community. When it went for its initial public offering (IPO), it was lapped up by investors. But soon things started going wrong. The rather public sacking of the professional CEO led to bad publicity. Then, the Andhra Pradesh government's ordinance on curbing microfinance companies was a big blow to Akula and his company. The recent results that SKS has declared show a company on its way down. Deputy editor Srikanth Srinivas went to great details to piece together this story of a dream that went sour.

(This story was published in Businessworld Issue Dated 30-05-2011)