SKS Microfinance is the largest venture based micro finance institution in the world. In 2006 Time magazine listed Vikram Akula, SKS Founder & CEO amongst 100 most influential persons on earth.

Launched in 1998, SKS Microfinance has provided over $312.5 million (Rs 1250 crores) and has maintained loans outstanding of $128.5million (514 crores) in loans to nearly 1,063,651 women members in poor regions of India. Borrowers take loans for a range of income-generating activities, including livestock, agriculture, trade (such as vegetable vending), production (from basket weaving to pottery) and new age businesses (Beauty Parlor to photography). SKS also offers interest-free loans for emergencies as well as life insurance to its members. Its affiliate, SKS Education, provides education services to poor children.

Its CEO Vikram Akula & COO( Chief Operating Officer) M R Rao were in Delhi to attend 4th annual Microfinance conference. IndianNGOs.com spoke to them over various issues concerning microfinance.

Transcript of an interview with M R Rao is given below. Rao laughs away the concern that microfinance is a bubble. It is a real & tangible transaction, benefiting millions. More importantly, Rao points out, it helps people bringing into formal banking fold, thereby boosting overall economy. He also notes that present MF Bill ignores NBFCs, even though they together constitute around 70-80% of total microfinance.

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Many companies these days are doing business with Micro Finance Institutions because they find it profitable. What tips would you like to give such companies?

At first they should know whether their product is suitable to NGOs who use micro finance. They should conduct proper analysis to know who are the people taking micro finance. These essentially include small time traders, kirana stores & small time weavers. Your product should address the market.
Second, what is the nature of market you are looking at. Are you looking at a niche market or a mass market. If you are looking at a mass market, you need to pick up big MFIs; but if you are looking at a niche market & small number of products & services are to be sold, then you look at typically smaller ones.

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There is acute regional disparity in spread of micro finance across the country. What are the reasons?

We are present in fourteen states, covering entire South India & many states of North India. Surprisingly, we have not found too much disparity that people talk about. Our portfolio behaviour is uniform across the country. What is different that because there is not much micro finance & SHG culture in northern parts of the country, it takes some time for MF to pick up there.

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As there is little SHG culture in North India, I am sure it was not an easy venture for you in North.

Well, it takes time. We started our operations a year back. First sixth months we struggled. People felt we have come to take deposits, whereas we did not. It takes sometime for first customer to avail a loan & other people to see that instead of taking deposits, we are giving cash. The response is slowly picking up & is sure to go high with time.

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You suggest within two three years we should expect a paradigm shift in micro finance culture in these states.

Absolutely.

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Can you give us some figures how much of micro finance demand these states are expected to generate after two years?

It's difficult to throw numbers at this stage. Take UP, it is densely populated. Today we do not have that much penetration in dense villages of UP as we have in AP or Karnataka. But we have a sizeable mass now & we are very confident that within six months or a year, we are likely to reach critical mass & customer acquisition will shoot up. Women would see their neighbours & relatives benefiting from micro finance loan & they would pick it up themselves. We have seen it happening in bits & pieces in different villages of UP.

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In which villages of you UP you find it happening?

I went to Barabanki a month back. We did not have any presence there six months back. We formed centers in few villages. Today women of other villages, inspired by success of other villages ask us to start operations in their villages.

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People say micro finance is a bubble to be burst out very soon. How do you respond to it?

(Laughs.) It's as real as you can see. We have eleven lakhs customers to whom we have physically given money.

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We mean SKS?

Yes, SKS. These eleven lakhs customers are giving back money to us. It's absolutely real. A bubble is based on eye balls, whereas it is an actual, real & physical transaction. I do not know what bubble people are talking about. You can not get anything more real than it. You are physically giving ten thousand cash to people & they are physically repaying it. I do not where the bubble is or where does this bubble exist.

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What is your lending profile? How many customers get loans less than say ten thousand?

When someone approaches us for first time, it's usually less than ten thousand. Typically the maximum amount lent is usually twelve thousand. Around 90% of our customers take loan of less than thousand.

We are going very fast. In Mar 2006 we had 2 lakhs customers. In March 2007 we had 6 lakhs customers. On 30th Sep 2007 we have 11 lakhs customers. Most of these are in the first cycle of loans. People borrow in different cycles; they first take smaller loans, in later phase their demand goes up.

However, we have women who have been with us for five years & who have been taking up to 25000/-. We have individual products, where women have been asking up to 35000/-.
Demand for credit keeps going up as they continue to remain in system, borrow, invest in business & make profits.

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What is the maximum amount you lend?

For group lending, maximum amount we lend is 25000/-. However, if someone wants more than that, we shift that person from group to individual lending, where maximum is fifty thousand.

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Andhra Pradesh, where you & overall micro finance activities have maximum presence, continues to suffer from poor development indices. Farmers are committing suicide. MF has not helped to eradicate farming community as such.

See, 94% of our customers are not into agriculture occupation. They are not taking loans to invest on farming activities. Only six percent of our customers have borrowed for farming activities. There is lot more in rural areas than just agriculture. People tend to link all activities in rural areas with agriculture only. There are so many other activities, which are benefited by micro finance.

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If India has to become developed nation by 2020 what role can micro finance play for it? How can micro finance influence economy at macro level?

First of all, we have to ensure financial inclusion of all businesses in the formal system. Micro finance precisely does that.

Today a woman borrows money, sets up a tea or kirana stall, runs it well & generates surpluses. Can she pass this surplus to any formal system today. She can't. She does not have bank account & is forced to keep this money with her at home. Most often her husband wastes it away on liquor. She may invest it in gold, but it is a non productive asset.

But imagine if she has access to banking system & she operates a bank account, deposit or withdraw money whenever she wants & money would start flowing into formal economy. We have eleven lakhs women already doing it. There are lots of MFIs doing similar work with lots of customers. Imagine its combined impact on economy. It's incredible.

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What is the total demand & supply of micro finance funds?

Total demand is around two lakhs forty thousand crores. Supply is just twenty thousand crores.

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It's a huge gap. How many years this gap can be filled?

I can't predict exact time period but our sector is growing at a very fast clip. Annual growth rate is about 16%. Lots of people are coming to this sector. Few years down the line, you would see more number of players.

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Micro finance involves very high rate of interest. Can't we do something to reduce it?

Our cost of borrowing is close to twelve percent. Interest rates are going upwards for last one year. We have not increased interest rates. We physically deliver cash at the door steps of the customers. Our loan officer typically travels thousand kilometers a month. About 13-14% of our cost is operational cost. 11-12% is our interest cost. How can anybody reduce costs than.

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What interest rate do you charge? What interest rates other MFIs charge?

We charge between 24-28%. Others also operate around same band.

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What's the vision of SKS for next few years?

We want to touch five million customer base by 2010. We are planning to expand & penetrate deeper. We are already into fourteen states. There are so many states to be covered. Within the states as well, we are within small pockets, we want to penetrate deeper here.

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How do you pick up any state or area for your operations? What are the considerations?

Not just a state, even when we are opening merely a branch, we look at population density, economic activities & law & order situation. If there are too much micro finance activities, we do not enter. If there is no micro finance activity, then also we do not enter. There has to be some level of micro finance operations. People should have some level of awareness about SHG movement.

Next financial year, we are planning to go to Punjab & Haryana.

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How do you view proposed MF legislation, which seeks to give NABARD too much of authority?

This legislation does not cover NBFCs at all. Big NBFCs like SKS, Basix cover around 70-80% of the market & this Bill ignores us. This Bill says that you can accept savings only if you are an NGO. Anybody with five lakhs of capital can form an NGO & start accepting savings. Whereas, an NBFC like us, which is regulated by RBI, which is soon going to have net worth of 200 crores is not allowed to accept savings. It's a strange thing about this Bill.

Ashutosh Bhardwaj
October 2007