Why SKS's Dr Akula has become Drakula for many

There’s something about success that invites envy and attempts to pull you down. This is one part of the story of Vikram Akula, chairman of SKS Microfinance, India’s only listed company that makes micro-loans to the poor. It has been in a spot of bother ever since it raised around Rs 1,650 crore through an initial public offering (IPO) of shares in July-August 2010. Within a month, investors hit the jackpot, as SKS shares, issued at Rs 985, hit Rs 1,491 around end-September 2010.

[caption id=“attachment_8894” align=“alignleft” width=“380” caption=“SKS Microfinancehas been in a spot of bother ever since it raised around Rs 1,650 crore through an IPO in July-August 2010.Lucas Jackson/Reuters”] [/caption]

It has been a downhill ride ever since, for everything fell apart quite quickly. First, Akula fell out with his CEO Suresh Gurumani in a public spat that told investors that all was not hunky-dory in this pioneering microfinance company. The company said the board decision to sack him was unanimous. Akula said that there were “ inter-personal conflicts between Gurumani and other members of the management, including some of his direct reports”.

Gurumani himself told Mint that “he was keen on putting in place controls and more risk management structures, but some members of the board worried that these measures would be too costly.”

That’s surprising, since just a few weeks before he was sacked, the board was actually discussing raising his remuneration. Akula said that was because they didn’t know about plans to induct someone more suitable for the post - Chief Operating Office MR Rao.

If the Gurumani exit came as a shock for the markets that were raising a toast to Akula, his ex-wife suddenly surfaced in the media to pitch in with devastating comments on him. Malini Byanna told The Economic Times that “one of the reasons for her divorce from Akula was because of certain activities and requirements that were illegal and unethical.” She was talking of the activities at SKS Foundation, a non-profit organisation in which she and Akula worked together. Funds were being moved between programmes to apparently cover up for some losses at SKS Microfinance, which, at that time, was still a non-profit programme. It became a for-profit organisation only around 2003, when it was converted into a private limited company.

Even as the market was digesting the exit of the CEO and his ex-wife’s charges, Akula received another bodyblow from his cash-cow: Andhra Pradesh. In October 2010, and even a bit before that, the Andhra Pradesh media was circulating stories about how borrowers were being harassed and hounded by microfinance’s payment collectors - one 10-year-old girl was allegedly abducted to get her mom to repay a loan. With as many as 30-40 suicides also being reported, the state government stepped in to limit the political damage and circumscribed the operations of all microfinance outfits.

The new law proposed a registering authority for microfinance institutions (MFIs), capped the total interest payable at two times the initial loan, forced MFIs to give monthly lists of borrowers detailing the sums lent and interest charged, and banned them from giving second loans to borrowers - often the mainstay in microfinance.

The results have been disastrous for all MFIs - with collections dropping like a stone. A JP Morgan report last week raised the red flag on SKS’ future, and Credit Suisse shifted the stock to ‘Underperform’ and pencilled in a loss of Rs 310 crore in 2012-13 due the possibility of high loan losses in Andhra Pradesh. “We expect the non-AP (loan) book to stay flat and AP book to be largely written off over the two years,” said Credit Suisse.

Not surprisingly, the SKS Microfinance share has been massacred. The company has destroyed shareholder wealth in almost unprecedented proportions. From the time the share hit a high of Rs 1,491 last year to now, when the price is around Rs 325-360, over Rs 8,000 crore of investor wealth has vanished. Dr Akula, toast of investors in August-September 2010, is now Drakula, the man who sucked the blood out of their investments.

The travails of a fickle stock market need not detain us here, for if the going gets better a few months down the line, everything will be forgiven. But it is important to understand what Vikram Akula, who has a doctorate from the University of Chicago (hence Dr Akula), has attempted to do and why he has partially failed - for now at least.

When it comes to microfinance, there are basically three routes you can take. One is to go the NGO route - where you collect donations and promote self-help groups to collectively finance their own economic needs. Next, you can become a low-cost bank or non-banking finance company (NBFC), raise deposits and give out loans. Akula decided to take the third route: raise capital from the market, and borrow from banks to on-lend to the poor.

This is why he has been criticised, both by NGOs and those on the Left. How dare he make money from the poor? Mohammed Yunus, former head of Bangladesh’s Grameen Bank, attacked it as “ mission drift .” Raising capital from the markets is anathema. “This is pushing microfinance in the loan-sharking direction,” Yunus told AP. “It is endangering the whole mission.”

But Yunus’ position is not universally shared. There are critics even for his MFI model of raising deposits and lending to the poor. Milford Bateman is a Left-leaning author whose book Why doesn’t Microfinance Work?: The Destructive Rise of Local Neoliberalism excoriates MFIs for trying to push loans and finding a capitalist way of poverty reduction.

In the Andhra case, the problem was that there were too many MFIs chasing borrowers over and over again. As Bateman points out, “Andhra Pradesh is now second only to Bangladesh as the most microfinance saturated place on earth, with a full 17% of the population in possession of a microloan account.” His figures relate to last year, but they give the picture. “The number of multiple loans was already a huge 82% in 2006, and it’s known to have risen even further since then…”. When hypercompetition skews the microfinance market, one should expect trouble. It’s came in October 2010, when the Andhra government stepped in, club in hand.

But Akula’s position is not without backers. David Roodman, who runs an open blog on microfinance, has criticised Yunus for his scathing rejection of equity in favour of deposits. “Savings deposits cannot substitute for risk-absorbing, profit-claiming equity capital of the sort SKS has just raised. It is muddled to compare them in this way.”

Akula himself is very clear why he took the route he did (raising equity, instead of deposits). He argues that doing things the NGO way means living off donations - and hence not scalable. Trying to raise deposits is an option, but that means becoming a quasi-bank - which brings its own regulatory hurdles and stifling rules. Raising humungous capital from the market freed him from both and he could scale up to huge size. He told Business Standard: Most NGOs can cover 20 to 30 villages, SKS Microfinance services over 7.3 million families, “three times the size of Grameen”.

He may still come to rue that statement, since scaling up too fast and too much means he may have compromised on several aspects of risk-containment. His loan recovery system may also have lacked refinement. When a state is crawling with loan peddlers and recovery agents, something was bound to go wrong somewhere. They did.

But Dr Akula is not microfinance’s Drakula. He has showed us a new way to scale up the business. He is also derisking his business by creating new collateral-based loans (against gold, et al). He is hopeful of bouncing back. Once the regulators get their arms around the idea, once proper systems and supervisory essentials are in place, equity may well prove to be a superior way to marry profit-motive with poverty alleviation. But the jury will remain out on that for a while.