Bloomberg News

SKS to Add Financial Services to Microfinance as Founder Quits

November 24, 2011

Nov. 24 (Bloomberg) -- SKS Microfinance Ltd., an Indian lender to the poor backed by Sequoia Capital, plans to branch out into financial services including life insurance targeting the country’s rural regions after its founder quit.

“Going forward, we will look at elements other than microfinance that are relevant for financial services in the rural areas,” said P.H. Ravikumar, who took over as interim chairman after founder Vikram Akula stepped down yesterday.

Akula has struggled to revive earnings at the company, modeled on Nobel laureate Muhammad Yunus’s Grameen Bank, after the southern Indian state of Andhra Pradesh unveiled tougher collection rules for microlenders. He presided over an 88 percent drop in the company’s shares since it began trading in August 13, 2010, and three straight quarters of losses.

“SKS needs to find a new business model if it is to maximize shareholder value,” said Sanjay Sinha, managing director Of Micro-Credit Ratings International Ltd. in Gurgaon. That’s because the revival of microfinance in India “could be a long-term rather than a short-term prospect” until federal regulations are in place for the sector, he said.

Shares of the company fell 2.4 percent to 112.65 rupees at 11:20 a.m. in Mumbai, after surging as much as 5.5 percent. The benchmark Sensex fell 1.1 percent.

Akula’s exit may also have been dictated by the fact that he was not in favor of the conversion of the microfinance company he founded, said Sinha. Akula, 43, will be a consultant to SKS till March 2012, according to a statement from the company yesterday.

Beyond Microfinance

The company, based in Hyderabad, plans to raise 9 billion rupees ($172 million) selling shares by March and use the proceeds to fund its microlending business, Ravikumar said. The company posted a second-quarter loss of 3.85 billion rupees.

“I have witnessed first-hand the amazing impact SKS has had in India,” Vinod Khosla, founder of Khosla Ventures and a SKS shareholder said in the statement. “But a lot more needs to be done.”

SKS wants to target marginally higher income families in rural areas and generate revenue from other services, including housing finance and becoming business correspondents for banks, said Ravikumar, a director on the board for the past five years. It will take about six months to put plans in place, he said.

Akula’s exit follows the ouster of Chief Executive Officer Suresh Gurumani in October last year. It’s the company’s second high-level departure since its listing last year.

SKS began operating in 1998 as a nongovernmental organization led by Akula, a doctorate in political science from the University of Chicago. Akula, a former McKinsey & Co. consultant, studied the training of unskilled workers at McDonald’s Corp. and Burger King Holdings Inc. in 2005 and used the learnings for loan officers at SKS.

Farmer Suicides

Microlenders, including SKS, which offer loans to the poor starting from $100, saw their collections plunge after Andhra Pradesh in October 2010 capped the interest microfinance companies can charge and barred them from coercing borrowers to repay debt following suicides by farmers unable to pay debt.

India’s government is considering a bill that will have the Reserve Bank of India regulate the industry. The Micro Finance Institutions (Development and Regulation) Bill will make it necessary for all micro lenders to register with the central bank, create a reserve fund from profits, and audit their results each year.

Sequoia, which backed LinkedIn Corp. and Google Inc., owns about 14 percent in SKS, according to data compiled by Bloomberg.

--Editors: James Gunsalus, Arijit Ghosh

To contact the reporters on this story: Ruth David in Mumbai at rdavid9@bloomberg.net; George Smith Alexander in Mumbai at galexander11@bloomberg.net

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net


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