The year that Was: Vikram Akula's Moment of Reckoning

SKS, like the sector it represents, is at a crossroads today. The company is working to become the world’s largest microfinance institution (MFI) next year by overtaking Muhammad Yunus’ Grameen Bank. SKS is also on the verge of becoming the first-ever MFI in India to go public. Not only is the management divided on how to grow, but is also facing charges of losing sight of its customers in favour of profitability and investor targets. Yunus, widely regarded as the father of microfinance, shivers at the thought of mixing private profits and microlending. “That’s what loan sharks have been doing over centuries.”

For Akula, the answer lies beyond the Yunus school of thought. “Grameen Bank reaches 7 million clients … it took Professor Yunus 35 years to do that … Can you imagine how many generations it will take to reach 150 million poor households? ... We have to scale more rapidly, and only commercial capital will meet our huge funding requirements. The only way to get that is to be ... extremely profitable,” he says. As the forerunner, if SKS fails to find the right balance between creating social value for its customers and economic value for its investors, it may have a ripple effect throughout the industry.

Both Akula and Gurumani are looking to expand SKS’ customer base. Yet they don’t seem to agree on how it should be done. Akula sees potential to innovate and expand across products and services for the poor. So SKS is examining the possibility of using its vast distribution network to sell everything from micro insurance to mobile phones. Gurumani wants to focus on retail financial services. He’s pushed hard for distributing a health insurance product. At SKS, for over a year now there has been a debate about whether or not to sell gold to customers. The predicament remains unresolved, but some see Akula as the last bulwark against the final assault of the bean counters.

This retail push has raised murmurs that SKS is not looking enough at creating socially beneficial products and is trying to push for a consumption wave.

Tarun Khanna, professor at Harvard Business School and an independent director on the SKS board, says many companies use MFIs to get access to a wider customer base. SKS has to be careful about not doing something that violates the trust of the poor customer.

- This article was earlier published in Forbes India magazine dated September 25, 2009.

WHY DID WE DO THE STORY
We got on the trail of SKS Microfinance last year as it moved to becoming the world’s largest microfinance institution (MCI) and was reportedly planning an initial public offering of shares. But as we started talking to, Vikram Akula, we realised a lot was at stake, not just for SKS but for the entire MFI industry. It soon became obvious that there was an internal conflict of sorts between the social mission of providing banking to the unbanked and the inevitable profit motive that commercial capital was bringing in. Private equity investors wanted aggressive growth, while the pro-poor voices such as Grameen Bank founder Muhammad Yunus worried that would dilute the company’s commitment to
alleviate poverty.

As most conflicts go, there was no easy answer to this. Not an easy dilemma to resolve. But a very good story to tell.

WHERE DOES THE STORY STAND
Despite his denials at the time of our story, Akula is well on his way to taking SKS on the IPO route. He, CEO Suresh Gurumani and other senior managers have all cashed out of their shareholdings in the company, leaving SKS primarily in the hands of private equity investors. Vijay Mahajan’s BASIX, Spandana and Share Microfin have all announced plans to raise money through IPO in the near future. On March 26, 2010, SKS filed an early prospectus for $250 million IPO. Akula, who sold his shares for Rs. 60 crore, and other senior managers have stayed on in the management after their exit as investors. However, this has also caused some unease among some potential investors about the long term commitment of this key group.