Wednesday, December 15, 2010

SKS Microfinance, Akula's story - for-profit vs non-profit Microfinance..

The story of an Indian, brought up in US returning to India to seek his roots and seeking to establish his conviction that only a for-profit microfinance institution can help remove poverty in India made interesting reading. Dr Vikram Akula's dogged pursuit to see that SKS materialises in spite of many ups and downs in his personal life, is exceptional. Set up in 1997, SKS is a story of courage and conviction..

The main argument against his way of functioning has been that SKS has been charging almost 28% interest when conventional banks charge only around 16%. Akula's argument is that it is much less than what money lenders do in the countryside. Even when an illiterate farmer is taking a loan from the bank, at 7 to 12 %, the costs resulting from visiting the banks a number of times, the loss of wages on those days and the costs of greasing the palms of the banker and any middlemen all adds upto more than 30%. The same big banks who are crying foul at this rate of interest from the MFIs, have no qualms in charging upto 36% on loans advanced against their credit cards.

The high rate of interest is a major bone of contention between the father of microfinance, Nobel laureate Dr Mohammed Yunus from Bangaladesh and Vikram. Dr Yunus believes Microfinance is more of social entrepreneurship than a for-profit enterprise.

The point being raised by Akula in his book is that as a non-profit enterprise, microfinace institutions can never be able to serve the masses in any big way as to change the poverty scene in the country. If it is a for-profit initiative, there is nearly $ 250 billion waiting out there in the hands of venture capitalists to be invested which can have a significant impact. No doubt last year SKS made profits of Rs. 85 crores and has reached out to 6 million people.

SKS Microfinance has 5.8 million clients (2010) in 1,627 branches in 19 states across India and total assets worth $897.9 million (Sept.'09.) SKS charges an annual effective interest rate ranging from 26.7% to 31.4% (Mix Market.) Wikipedia, Dec 2010.

Just when SKS and other Microfinance companies were helping to emancipate rural India from the clutch of cruel moneylenders, societal inequalities, and poverty by giving womenfolk enough financial independence, the spate of suicides in Andhra Pradesh and the passage of state legislation by Andhra to regulate the functioning of MFIs by way of curtaling on interest charged is very disturbing to say the least. One cannot say whether bringing regulations to the field is desirable or not, but it raises doubts on the institutions and their ways of functioning.

Dr Akula has focused on Prof Prahlad's "Bottom of the pyramid" by taking advantage of some of the best practices from the Industry in getting the required capital, reducing costs, increasing capacity.

1. To get the required capital, Akula has turned to the for-profit business model to tap into commercial capital which is available in large numbers.

2. To reduce costs he has adopted modern technology aids like mobile phones, palmtops which feed into a Management Information System as finally each day there are millions of tiny transactions and unless the cost of these transactions are managed well, it is not possible to run the operations at all.

3. To increase capacity he has standardised many of the procedures and has eliminated collecting change, visiting customers who are on the route of travel and so on.

Targeting the middle class and the rural population at the bottom of the pyramid, using the Hybrid Value Chain as propounded by Hau Lee in his recent HBR article September 2010, Nokia and Airtel have been able to sell mobile phones and mobile telephone services at cheaper rates to the people, Metro cash-n-carry is able to sell its wares to the same people who are running provision sores in remote areas at cheap rates, Bajaj Allianz and ING have been able to sell their insurance products to cover the risk of the poor illiterate people of Andhra. Mobile banking has been experimented here. These are unheard of in any part of the world ! SKS has also opened up schools which give English medium training for the students helping lift the society from years of bondage and slavery.

When advances/loans given in the conventional banking system to educated urban, citybred individuals has only roughly 74 % repayment history and every year the Govt pumps about 20-30,000 crores of the common man's and farmer's tax money into banks to take care of the non-performing assets of their rich urban cousins, the MFIs with a 96% repayment history are doing yoemen service in holding down the budget deficit wasted on the rich city dweller. This is a real boon for the country and economy. The poor rural population are more sincere than the urban people. SKS Microfinance of Akula has a history of 99% repayment.

The recent suicides and non-payments related to micro finance institutions in Andhra are reported to have been orchestrated by the money lenders to scare off prospective customers and to create a bad image for MFI in the Indian public.

Only future can tell whether Akula was in fact moving in the right direction or whether the politicians from AP have derailed this mass poverty eradication process spearheaded by a single person working against the might of Indian corruption and feudal mindset.

And the debate continues, for-profit versus non-profit MFI ..... Dr Vikram continues to remain the voice for the silent farmer who finds he is discriminated against in his own land to which he has given his life and in whose bright future he places his future.

george easaw

Ref : A fistful of rice - Vikram Akula, Harvard University Press, 2010.

Good reviews on the book " A fistful of rice" by Vikram Atula, are given in the links below ..

On youtube an interview with Akula

1 comment:

  1. Very interesting read Sir ...

    Fascinating to know that there is someone thinking out-of-the box strategics than the gurus ( Yunus and Prahlad ) themselves.


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