Making Money While Doing a Good Thing

Microfinance refers to the providing of financial services to low-income clients, especially those who traditionally lack access to banking and related services. This includes not just loans but also savings and insurance. Those who promote microfinance believe that such access helps people out of poverty.

The most famous guy from the world of microfinance is Muhammad Yunus, a Bangladeshi banker, economist and Nobel Peace Prize winner.

SKS Microfinance is India’s largest and the world’s fastest growing microfinance organization. Operating in 19 states, it provides collateral-free loans to the poor. 85% of its borrowers are poor women. It made loans worth Rs 20,000+ crores last year. It provides loans for cell phones, local retail shops, housing loans (via a tie up with HDFC) and life insurance (via a tie up with Bajaj Allianz).

So where does SKS gets the money to lend? From other banks and financial institutions. Also from private equity investors and venture capitalists. Like Sequoia Capital (who have funded companies like Google) and Narayan Murthy.

Impressively, SKS has been able to create a for-profit model of microfinance. Its repayment rate for these unsecured loans is well over 99%!

SKS came up with an IPO recently. It is ongoing as we speak. The issue, if successful, will raise Rs 1,400 crores (at least). Money for future lending as well as to provide a way for some of its investors to cash out.

The IPO has invited criticism of the most ridiculous kind. “Is it correct to make millionaires out of shareholders when your borrowers are so poor?" asks Olivia Donnelly, executive director of UK-based Shivia Microfinance. Huh? To help the poor, one has to be poor? How does a poor person lift others out of poverty?

Conveniently forgotten is the fact that banks will rarely lend to the kind of poor people that SKS lends to. Apparently, SKS elevating some people out of poverty is not virtuous enough. Their employees and founders must remain poor as well.

I am curious how the critics want successful microlenders like SKS to scale up? To get more people out of poverty? If they don’t come with an IPO, how will the venture capitalists get their returns? And if there can be no IPO, why would venture capitalists lend to the next microfinance institution that needs money?

To the critics, it’s OK for SKS to pull people out of poverty but not to get rich itself! Talk about irony.

Comments

Post a Comment

Popular posts from this blog

Student of the Year

Image
As a toddler, my daughter loved Alia Bhatt’s songs, esp. the ones from Student of the Year . (That movie did have many good songs and well-choreographed dances). Fast forward to present day, when she is 12 yo. She rarely watches Hindi movies now, but one of the few ones she likes of late, Raja aur Rani ki Prem Kahani has, yes, Alia Bhatt.   If I had any hopes that there was anything to be read in the name of her toddler-time favorite ( Student of the Year ), they have been dashed. Our conversations come exam time are perfectly captured by this photo and its caption: In fact, the pic below captures how she and I look at her answer sheets – me intently, she with an expression of “It’s over, so why are you even looking at it?”   Of late, we pull her leg and tell her that she isn’t showing any signs of academic prowess, she’d better find a rich guy to marry. Some time later, she showed us this meme on the Internet: “Me No Study, Me No Care Me Go Marry Millionaire If He Die
Read more

Why we Deceive Ourselves

In their book, The Elephant in the Brain , the authors describe this weird aspect of deception that we practice: deceiving ourselves! That is so weird: “If our minds contain maps of our worlds, what good comes from having an inaccurate version of these maps?” The Sigmund Freud school of thought treats self-deception as a defense mechanism, “a way for the ego to protect itself”. The mind seeks to protect itself from anxiety and other negative emotions. Many object to this reasoning: since accurate information is so critical to our survival, surely distorting information would be dangerous. Wouldn’t the goal of protecting our self-esteem have been better achieved by making the brain’s self-esteem mechanism stronger instead? The new school of thought explains self-deception as “primarily outward-facing, manipulative, and ultimately self-serving”. This is based on Thomas Schelling’s work on game theory: “In a variety of scenarios, limiting or sabotaging yourself is the winn
Read more

Handling of the Satyam Scam

The Satyam scam. How does that fit into Montek Singh Ahluwalia’s book on reforms in India, Backstage ? The reason is that, as both NASSCOM and the government of India felt: “(Satyam’s) collapse would create a great deal of disruption for clients worldwide and seriously damage India’s reputation as a reliable source of software services.”   Therefore, the government decided to work with the private sector to “organize a quick takeover by a reputable new buyer, who would quickly restart the company”. But that could not be done overnight. In the meantime, the new board would have to reach out to Satyam’s clients and “reassure them that the company would survive”.   For the new board to have credibility when it made that statement, it had to be staffed with people who understood the private sector, the IT sector in particular, and commanded respect and trust. Deepak Parikh from HDFC was made chairman, and other members of the board included a former NASSCOM chairman, CII member,
Read more