Category Archives: Capital Markets

When microcredit turns into a very profitable business

The Indian leader in microcredit SKS made its IPO

In five years, the small NGO has become a juggernaut of microfinance with 6.8 million microentrepreneurs. At the risk of forgetting his mission to fight against poverty.

“We are taking the poor to capital markets and capital markets to the poor,” said SKS Microfinance, the Indian leader in the sector, on Wednesday (July 28th), the day of the IPO of 22% of its capital. An operation that should bring him 350 million dollars (268 million euros).

In five years, the one that was a small non-governmental organization (NGO) has become a juggernaut of microfinance with 6.8 million microentrepreneurs this year, against 200 000 in 2005. Its founder, Vikram Akula, often dressed in a kurta Nehru’s traditional Indian garb believes that the IPO will lift thousands of women out of poverty by giving them access to more capital. He is no less a savvy businessman, who has sold for $ 10 million a portion of his shares in SKS.

A graduate of the American University of Yale, he was inspired by McDonald’s methods to train his employees and reduce costs. At SKS, we are talking about “customers” rather than microentrepreneurs, and “marketing strategy” to compete with the 1,200 organizations in the sector. These management methods enabled the company to post revenues of € 159 million and a return on equity of 24%, in the fiscal year ending March 31, 2010. What to attract investors.

The market for the poor, or the “bottom of the pyramid” as the economists call it modestly, is the new stock market eldorado. Companies such as SEIL Microfinance and Capital Trust saw their share prices rise by 494% and 618% respectively last year.

The eradication of poverty is the “one” of the stock market pages of Indian economic dailies, less for a question of philanthropy than the return on investment. Between 2004 and 2009, the sector experienced an average annual growth of 107% of its outstanding debt, and 91% of the number of borrowers, according to the study published in March 2010 by the Intellecap Institute. With average repayment rates of 99% and interest rates ranging from 20% to 30%, microfinance organizations generate substantial profits. They now need capital to continue their expansion.

The Indian authorities do not allow them to collect savings, forcing them to finance themselves from banks or investment funds. “The only way to attract capital is not just to be profitable, but extremely profitable,” SKS founder Vikram Akula told Mint daily.

But is profit-seeking compatible with the goals of poverty reduction? Asked by The Wall Street Journal, Muhammad Yunus, Nobel Peace Prize and Grameen Bank’s founder in Bangladesh, regrets this new step taken by SKS: “Microcredit should not be presented as an opportunity to make money. This IPO sends a bad message. ”


At SKS, the answer is that only a good return on investment can attract money from populations excluded from the banking system. But such an influx of capital in such a short time makes some fear the formation of a bubble, similar to that of the subprimes that the United States experienced in the fall of 2008. Only three states in the south of the country. Andhra Pradesh, Karnataka, and Tamil Nadu account for half of the sector’s growth, and the penetration rate is already very high.

“Microfinance organizations distribute microcredit without worrying about the creditworthiness of the beneficiaries, or whether they already have other loans elsewhere, as is often the case,” said Sanjay Sinha, director of the consulting firm Micro-Credit Ratings International.

The beneficiaries repay their old loans with new ones and enter a spiral of hell overindebtedness. In Kolar district, Karnataka, residents in 2008 violently attacked microfinance organizations, which they said were responsible for ruining villagers. A quarter of the borrowers had more than six loans from different organizations.

A credit bureau has just been set up by leading Indian microcredit organizations to regulate the sector. For example, it prohibits granting more than four loans to the same beneficiary- consolidate loans via Bushrelativesforkerry. It is still necessary that all the organizations subscribe to these rules so that they are respected, which is not yet the case.

“We are in the same situation as at the end of the Mughal empire,” said Sanjay Sinha, “because he wanted to expand his empire, Aurangzeb lost control over his territory.” If the empire of microfinance collapses in India, the poor will be the first victims.