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Can Akula do a Jobs with SKS?

Santosh Tiwari/New Delhi 15 Nov 12 | 02:18 AM

His former colleagues might have succeeded in pushing him out of microfinance, but it is difficult to push microfinance out of him. SKS Microfinance Ltd, the company Vikram Akula conceived, built and took to heights of stock-market glory and then to its painful depths, all in a little over a decade, still lies in his heart, an unceremonious exit a year ago notwithstanding.

The storyline pretty much resembles that of Apple co-founder Steve Jobs, who was fired from the company in 1985. Jobs had described being fired from Apple was the best thing that could have happened to him as the heaviness of being successful was replaced by the lightness of being a beginner again.

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His return to Apple in 1996 and what he did to the company since is the stuff of dreams.

Can Akula do a Steve Jobs and get the beleaguered microlender back to its peaks? Rule it out at your own peril.

Akula, now running an agricultural research and application firm called AgSri, was seen at the World Economic Forum India event last week, and is visibly in a state of mind, similar to that of Apple-less Jobs.

Akula said, though he had no plans to re-enter microfinance immediately, “right opportunity in the right context" would bring him back to the financial inclusion sector, which he says is his passion. Of course, learning from past mistakes and applying them effectively is what he seems to be preparing for.

On November 23, 2011, Akula, founder and chairman of the only listed microfinance institution, resigned from the board of SKS in the wake of huge losses suffered by the Hyderabad-based firm. The company appointed P H Ravi Kumar, independent director, as the interim non-executive chairman. Akula remained a consultant to the company until the end of March 2012 to assist with the transition.

Currently, though out of SKS management, Akula hardly forgets his baby, which he nurtured to grow to a huge organisation from a humble beginning.

Ask him about SKS and he tells you, trying unsuccessfully to hide his eagerness, the existing management would take it to where it has to go and his job is to focus on other subjects. The interesting part is that Akula is holding 0.84 per cent (906,734) shares in SKS according to the shareholding pattern filed with BSE at the end of the quarter ended September 30.

Quite similar to Jobs’ experience, Akula also single-handedly influenced one of the world’s largest microfinance markets in a major way.

Before he entered the sector, microfinance in India was largely the preserve of non-governmental organisations (NGOs), which used financing as a livelihood-enhancing tool.

While some of these NGOs realised that aid funds were drying up and began turning to non-banking financial companies in order to access commercial funding from banks, it was Akula who gave this access a completely different meaning. 

His international education and connections were probably the reason why he felt he could emulate the highly successful private equity path of Compartamos of Mexico. SKS, initially established as an NGO, worked with donor funds.

The process of turning it into a commercial entity started in 2003. Over the four years that followed, a series of private investors, excited by the company’s phenomenal rate of growth, put equity capital into the lender. Its portfolio increased from just over $20 million (Rs 109 crore today) at the end of March 2006 to around $960 million by March 2010, a compound growth rate of 161 per cent per annum. The number of its borrowers grew from just 173,000 in March 2006 to 5.8 million in March 2010 — a compound annual growth rate of 140 per cent. The path for an initial public offering (IPO) had been obviously paved. 

But instead of being alarmed at this pace, other players in this sector, with their eyes too on IPOs, felt they needed to emulate this.

In fact, calculations by Micro-Credit Ratings International Ltd (M-CRIL) show that growth of MFIs in India during 2009-10 was 61 per cent in terms of the number of borrowers and 88 per cent in terms of portfolio. In this scorching pace of growth across the nation, livelihood ideas were of course the first casualty.

Scant attention was paid to what productive use the borrowers could put these loan funds to. Administrative costs came down as volumes increased, and borrower research was given the go-by.

Weighted average return on assets of the 10 largest microfinance institutions (MFIs) in India during 2009-10 was as high as 7.9 per cent, and 6.8 per cent for the larger sample of 65 MFIs studied by M-CRIL, compared to 2.1 per cent in 2005. 

Instead of passing on the benefit of lower costs to poor borrowers, as was envisaged by the visionaries of this industry, microfinance companies started rewarding investors and employees better.

In a true mainstream financial sector style, more hours were spent on board meetings discussing sweat equity formulas than new livelihood concepts. A study that documented and analysed the equity valuations of MFIs worldwide found the median price to book value ratio of equity transactions involving Indian MFIs (at 5.9) to be by far the highest for microlenders in the world. Investors were swayed more by the expectation of future profits than by historical returns.

And the gains to be made from 140 million financially excluded families made investors’ excel sheets look attractive. The Andhra Pradesh Ordinance of October 2010, which was brought in to protect borrowers and put severe restrictions on MFIs, pricked this bubble of greed and brought on the crisis in the Indian microfinance sector.

Akula stepped down because of the growing rift between him and the top management. 

According to a senior official, SKS has signed "certain agreements with Vikram relating to confidentiality, non-competence, etc". Akula has also not been given any severance package. 

While no official statement was issued on the circumstances that led to Akula's resignation, the board apparently was not satisfied with his involvement in the company at a time when the firm was facing a crisis with mounting losses, deteriorating asset quality, poor loan recoveries and the absence of fresh funding. 

SKS was the fastest growing microlender in the country till 2009 and its IPO, first ever by a microfinance firm and the only one till date, was a grand success. The issue was oversubscribed 14 times and SKS raised over Rs 1,600 crore. 

However, the company’s earnings shrank after October 2010 when the Andhra Pradesh government introduced the new legislation, curbing microlending activities in the state. In July-September 2011, SKS’s net loss had widened to Rs 385 crore from Rs 219 crore in the previous quarter.

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