SKS Micro Finance on Wall Street Journal

Today’s Wall Street Journal has a story titled “Entrepreneur Gets Big Banks to Back Very Small Loans: Microlending-for-Profit Effort in India Draws Business From Citigroup, HSBC” on its front page (Sorry, cannot link directly. You need a login). In keeping with WSJ’s readership, micro finance is reviewed from a profit and loss angle for much of the article. That probably goes to explain why they use a very (unfortunate) quote from Vikram Akula (“this can work driven only by greed”) to showcase what seems like an efficient and effective micro finance institution called SKS Micro Finance operating predominantly in Andhra Pradesh, India.Nevertheless, there are a few data points in that article that make for an interesting reading:

  • The micro financing approach pioneered by Grameen Bangladesh in the 1970s seems to be blooming. There are as many as 10,000 microlending institutions in the world, serving 100 million small borrowers.
  • Default rates on micro loans: 3%. US credit card default rate: 5%.
  • After being rejected by Ford Foundation and Rockefeller Foundation, Vikram Akula raised $52,000 as seed money from his friends and family to start SKS Micro Finance in 1998. Total Employees: 2 (including the founder). Goal: “..use technology and standardized systems to wring enough efficiency out of each tiny transaction to lower costs.”
  • At the end of this fiscal year (March 31), SKS Micro Finance has 200,000 clients and 2.5 billions of rupees in cumulative microloans. (1 rupee = US $0.02225).
  • SKS Micro Finance uses a loan management software created by friends from McKinsey and KPMG to diversify risks and to make the entire process more efficient.
  • Approached big banks offering to serve as their agent for microlending, finding lenders and managing the borrowing process on their behalf. They now serve ICICI Bank and Citigroup.
  • ICICI has lent a total of $10 million through SKS Micro Finance. The bank also works with about 100 other micro finance institutions in the country.
  • SKS Micro Finance, SHARE Microfin Ltd, and Bhartiya Samruddhi Finance Ltd are some of the fastest-growing for-profit micro lenders in India.
  • Current annual interest rates charged by SKS Finance: 24%. In 1998, it was 36%. This is “less than half that charged by many rural loan sharks.”
  • Much of this interest rate is spent on the high overhead costs that comes from having to process micro payments and clients scattered all over the state. For instance, unlike large commercial banks with established physical branch network, SKS Micro Finance loan officers travel to their clients’ workplace or residence for banking activities.
  • The article ends with the heartwarming story of Laxmi Dobbala and her baby buffalo. Who said Wall Street Journal does not have a heart? ;-)

If you are shocked by the annual interest rates charged by the microfinance institutions, then I can vouch for the article’s claims about loan sharks. Money lenders do charge usurious interest rates for lending to the poor, particularly the rural poor. They even have fancy names for these. (Note to self: I should probably call around and collect a few samples for this article.)

Why are commercial banks dabbling in the microfinance area? Think “Bottom of the Pyramid (BOP).” Wharton Business School Professor C.K. Prahalad, in his book “The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits” presented the concept that the world’s poor form a mass market at what is called the bottom of the pyramid. They have vast buying power that companies cannot or should not ignore. This probably is one other attempt at trying to reach that bottomless profit at the bottom of the pyramid (sorry, could not resist). On a side note: Irrespective of whether you look at it from the business or development angle, the book has some very thought provoking concepts and excellent case studies from all over the world. Highly recommended reading.

Whatever the reason, it is good that everyone is trying to attack poverty from different sides. It is such a complex problem that a point-solution or a single approach may not be sufficient to solve it. So, let us welcome SKS Micro Finance, ICICI, Citigroup, and all the others.

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