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Microfight
Can microlenders serve shareholders and the poor? The loans that microfinance companies make may be tiny but their ambitions can be vaulting. Take SKS Microfinance. Already India’s biggest microlender, with 6.8m clients and 5.8m active borrowers in the year ending on March 31st (see chart), it intends to become the world’s largest by 2012, with 15m clients. To fund this growth, it hopes to raise nearly $350m by selling a 21.6 per cent stake in an initial public offering (IPO) which got under way this week.
According to the Consultative Group to Assist the Poor (CGAP), a think-tank housed at the World Bank, the IPO is only the second by a pure microfinance institution, after the offer by Mexico’s Compartamos Bank in 2007. More may follow. CGAP reckons that SKS’s move “should set the stage for future IPOs in the sector.” The omens are good. On July 27th SKS announced that it had raised $64m from anchor investors, including JPMorgan Chase, Morgan Stanley, and India’s ICICI Prudential and Reliance Mutual Fund, at the top end of the expected price range.
Commercialisation appals some. Muhammad Yunus, the head of Bangladesh’s Grameen Bank and the industry’s founding figure, has described Vikram Akula, SKS’s founder, as a “capable young man [who] took a wrong turn when he decided to use microcredit for making money.” But Mr Akula points out that the amount lent by Indian microlenders in 2008 was less than 10 per cent of estimated demand. He reckons that SKS should be doing more microfinance and doing it fast. That means making enough profit to attract capital.
Mr Akula also says that for-profit microfinance need not mean extortionate interest rates for the poor. He argues that by standardising loan-approval techniques and using technology to keep track of disbursements, SKS can keep trimming its costs and reduce the 28.3 per cent annual interest rate it currently charges clients. It remains to be seen whether these intentions investors’ demands for high
returns. A single-minded pursuit of growth may not be in shareholders’ best interest, of course, if it leads to lower lending standards. So far SKS’s repayment rates remain enviably high. Payments were more than a month late on only 0.33 per cent of its portfolio in April. That figure has not budged between 2009 and 2010, even as its portfolio has nearly doubled.
Mr Akula says that SKS has succeeded in keeping delinquency rates low by sticking strictly to its model of group lending. Clients form groups of five, all of whom must approve a loan for any member. All five are on the hook if a payment is late and lose access to SKS credit if one of their member’s loans has to be written off. That gives clients an incentive to ensure that risky borrowers are not lent money and that nobody takes on too much debt. More than a third of those who borrow a very small initial amount from SKS are eventually judged by their peers to be uncreditworthy; over several cycles, only good credit risks remain members.
Growing competition will add risks. Greg Chen of CGAP cautions that borrowers have less incentive to pay back any one lender when more microlenders enter a market. Lenders have very limited information on clients’ borrowing from others, relying for the moment on informal information-sharing. A credit bureau, which is needed, will require Indians to have unique identity numbers. Until then Mr Akula, and potential investors, will have to hope that “nearly 7m underwriters”, as SKS calls its clients, continue to do a good job of screening potential borrowers.
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