An initial public offer by India's SKS Microfinance is likely to set the stage for more such offers in the world's largest microlending market, but it has also sparked a debate on the ethics of profiting from the poor. The IPO, a first in India and one of only a handful by microfinance institutions (MFIs) around the world, is expected to raise about $250-$350 million for SKS and its private equity investors.
It has drawn keen interest from countries with major microfinance industries such as Bangladesh, Mexico and South America, as well as the private equity firms who have recently piled into the sector. But it has also drawn sharp criticism from some MFIs and non-government organisations who do not favour going to capital markets or the strong flows of private equity that have pushed up valuations.
"The job of microfinance is to alleviate poverty, so the question to ask is: who's going to benefit from the IPO?" said Olivia Donnelly, executive director of UK-based Shivia Microfinance, a non-profit firm that focuses on India and Nepal. "It's OK to do an IPO because you need to scale up, or upgrade your IT systems, but is it correct to make millionaires out of shareholders when your borrowers are so poor?"
Microfinance has been around since the 1970s, but jumped into the spotlight in 2006 when the Nobel Peace Prize went to Bangladesh's Muhammad Yunus and his Grameen Bank, which pioneered giving tiny unsecured loans to the poor to buy cows or sewing machines. Some Indian MFIs including SKS have switched to a for-profit model and registered as non-banking financial corporations.
MFIs' expanding client base and near-zero defaults have drawn investors ranging from Singapore's Temasek, CLSA Capital and International Financial Corp to private equity firms Sandstone Capital, Unitus and Matrix, which have put money in SKS, Share Microfin, Spandana, Ujjivan and other MFIs.
Advocates say rapid growth and the drying up of traditional sources of capital have driven MFIs to consider other options. "When we are growing 75 percent year-on-year, the sort of equity we need to maintain 15 percent capital adequacy ratio cannot come from old-fashioned sources such as philanthropists or banks," said Vijay Mahajan, president of lobby group MFI Network.
"So we've had to move to new sources like PE, the capital market and debt instruments. This is something to be celebrated." Sumir Chadha, managing director of private equity firm Sequoia Capital India, which holds more than a fifth of SKS, said the IPO would improve the reputation of microfinance lenders.
"MFIs tend to be regarded badly. It is very frustrating. This IPO will dramatically increase visibility and bring in greater trust for the entire MFI eco-system," Chadha said. Earlier this year, India's finance minister said non-banking financial corporations (NBFCs), including some like SKS, can be granted banking licences, signalling a greater role for MFIs.
But India's central bank has pulled up MFIs for their high interest rates - about 25-27 percent. That is about double the rate at which they borrow from banks, but still lower than moneylenders. There is also criticism of high valuations, which private equity has helped push to about 5.9 times book value, or nearly three times the global average, J.P. Morgan and the World Bank's Consultative Group to Assist the Poor (CGAP) said in a report.
Listed MFIs, including Mexico's Compartamos, have outperformed mainstream banks, but valuations of Indian MFIs are "unsustainably high" and not justified by their recent growth or current and future earnings expectations, it said. Delinquency levels, kept low because borrowers must repay funds before getting access to more funds, may not be sustainable. Overheating was already evident in some southern Indian states, the report said, and profitability will also decline as operating costs rise as MFIs expand outside the southern states.
Private equity's role in MFIs has also been criticised. "PEs can bring greater efficiency, development plans and good management, but they can also create tension because investors tend to want to exit in three to five years," Xavier Reille, a co-author of the report, told Reuters from Washington.
"There may be potential rifts because with such high valuations, you obviously want to sell even higher. And the high multiples may discourage fresh capital from coming in," he said. SKS has drawn investors including Sequoia, Kismet Capital, Unitus, venture capitalist Vinod Khosla and Infosys Technologies founder N.R. Narayana Murthy.
Vikram Akula, a former McKinsey consultant, has been named one of the most influential people by Time magazine, and SKS, which he first founded in 1997 as a non-profit, is today India's largest MFI with about 5.5 million clients. But activists and NGOs see no reason for cheer.
"MFIs are ignoring their social mission. They have a duty to educate their clients and not lend money for buying a TV or pay dowry just to add to their loan books," said Shivia's Donnelly. "It's the wrong path to take. It's sub-prime all over again." There are few regulations and no accountability, they say. "MFIs talk about their valuations, but no one talks about social performance: are we really lifting people out of poverty?" said Royston Braganza, chief executive of Grameen Capital India.
With about half a dozen big Indian MFIs contemplating IPOs, SKS' offering will be a milestone, the J.P. Morgan/CGAP report said, and could help advance a stalled microfinance bill in India. "Depending on the outcome, it is quite probable that the spotlight on Indian microcredit will intensify, while triggering renewed discussion around MFIs' profitability and social impact."
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