India’s first microfinance listing from SKS Microfinance captured the attention of investors, boosting the company’s ability to provide essential loans to India’s poor and proving there is a place for the altruistic microfinance sector in the commercial equity capital markets.
Asking equity investors to fund small loans to poor women does not immediately sound like a recipe for a successful IPO. SKS Microfinance’s Rs16.5bn (US$357m) IPO in early August was the first time a microfinance institution had approached the stock markets, and the deal needed to overcome a fair amount of cynicism and controversy.
SKS was cautiously optimistic when it opened the books for its IPO in the last week of July, but it need not have worried. Any concern that investors would pass on an altruistic business being transformed into a profit-making entity was quickly dispelled, allowing the company to reduce its dependence on bank funding and expand beyond its client base of 7m poor women.
“My goal, corny as it sounds, is to eradicate poverty. It’s immaterial how much money investors make so long as our clients do well,” founder Vikram Akula told Reuters at the time.
The Indian microfinance industry has grown quickly over the last few years, drawing inspiration from Nobel Prize winner Muhammad Yunus’ Grameen Bank model. However, these institutions differ in size and reach, with some serving a few thousand clients in their immediate geographical areas and others reaching out to hundreds of thousands, even millions, in a large geographical region, through numerous branches.
SKS is India’s largest micro-lender with revenues of Rs10bn for the year ended March 2010 and profit after tax of Rs1.75bn. In 1996-97, Akula raised US$52,000 in seed funding from 357 family members and friends to start SKS as a non-profit organisation. In 2005, SKS converted into a non-banking finance company, under the jurisdiction of the Reserve Bank of India. It standardised its lending practices and invested in technology over the years to make its business more efficient.
The company provides loans of between Rs2,000 (US$44) and Rs12,000. SKS has a standardised structure through which it only gives income-generating loans, steering clear of consumer loans to buy gold, television sets or clothing, for example. The loans are given to women so they can start and expand simple businesses and increase their incomes through jobs ranging from raising cows and goats, in order to sell milk, to opening village tea stalls.
Only women are given loans because SKS believes they will use their resources more productively than men; they are more likely to invest most of their income back in their households; and they are more likely to avoid risky ventures and instead use loans to undertake small, manageable activities.
The company’s policy has worked remarkably well, giving it a non-performing loan ratio of less than 0.5%. It is also a profitable business. In the states of Andhra Pradesh, Karnataka and Orissa, SKS offers loans at an effective interest rate of 26.7% per annum. In other Indian states, SKS charges 31.4% because of higher operational costs. The company’s effective cost of funding from banks is about 17% and it has high fixed costs because it services clients on a weekly basis.
SKS also has some well-known investors on board. Venture capital firm Sequoia (which was an early entrant in Google and Yahoo) is the largest shareholder in the firm, while other major stakeholders include Kismat Capital, Mutual Benefit Trust and Sandstone.
However, Akula‘s firm has also attracted criticism from opponents, who argue that altruistic institutions have no place in a profit-driven world, where companies put the interests of their shareholders ahead of their customers. That group includes microfinance pioneer Yunus, who has likened profit-making microfinance institutions to loan sharks.
The debate had little impact on demand. SKS’s IPO attracted subscriptions equal to 13.7 times the number of shares on offer. The institutional tranche was around 20.4 times covered, while the retail portion was 2.8 times subscribed, making it one of the most popular IPOs this year. SKS priced its IPO at the top of the Rs850–Rs985 range for a valuation of 4.2 times 2010 book – higher than its banking sector peers – and still the stock made a stellar trading debut on August 16. It touched a high of Rs1,159 for an 18% gain from the IPO price on its first trading day, and closed at Rs1,164.53 on August 19. The stock made further gains since and was trading around Rs1,380 in mid-September. Citigroup, Credit Suisse and Kotak Mahindra were joint books for the IPO.
Its success is set to spur two Indian MFIs to tap Dalal Street. Spandana Sphoorthy Financial and Share Microfin have already started marketing their IPOs, which may have sizes of as much as US$500m each. Citigroup, Morgan Stanley and JM Financial are close to the IPO mandate for Spandana, which is already on the road meeting investors, while Goldman Sachs and Kotak Mahindra are close to securing the Share Microfin deal. Both deals may hit the markets in the first quarter of 2011, confirming the microfinance sector as a growing part of the Indian equity market.
Shankar Ramakrishnan