The buzzword in stock market today is Microfinance entering Capital markets. SKS Microfinance is going to raise Rs. 163 Crore through its IPO which is in news for few weeks. The Hyderabad based institution will be priced at Rs. 985 per share and the shares were oversubscribed by 13.7 times.
CRISIL reports that the company is today’s largest MFI in India in terms of total value of loans outstanding (Rs. 29,367.20 million), number of borrowers (6.78 million), and number of branches (2029 branches in 19 states).
The microfinance concept in India took off after adapting ‘Social Collateral’ concept by Grameen Bank, Bangladesh. This includes lending to Joint liability group ( For e.g: if Rs. 10,000 is given to a group of 6 women, each woman has to make a monthly payment of Rs. 150/- if one fails, entire group defaults and interest rates are affected).
This model ensured credit discipline through mutual support and peer pressure, focusing on income generating loans and lending exclusively to women (to reduce the chances of default). Microfinance institutions in India since then started growing. SKS Microfinance, Spandana Spoorthy, Share Microfinance, Asmitha, etc were few of them who are today’s market leaders.
Today SKS has come to investors to raise capital tomorrow another will come. I am happy that in the end this is fighting poverty in India. But the question raised by Muhammed Yunus(Father of Microfinance) is
“you are promising your investors that there is a lot of money to be made and that is a wrong message because lending to poor is shown as an opportunity to make money”.
Vikram Ahuja (Founder of SKS) reaffirms about the prospects of high and assured returns which will bring funding to the sector whose needs are gigantic.
One of the major problems today in microfinance is multiple lending. Person A borrows from a MFI (Microfinance Institution) then as he’s unable to repay so he refinances his current debt with another loan from another MFI and the story continues. These MFIs charge around 24% interest charges given the risk associated with sub-prime lending. The need of the hour is to curb multiple lending and bring transparency to the system. Otherwise in near future it will create a bubble (similar to housing bubble that created problems we’re facing today)
So what can be done?
It is right that MFI still required capital to lend to these people but the answer do not lie in capital markets. The answer is Money market. Yes MFI should be given access to money market which will help them to get fund at cheaper rate. Following the Bangladesh model, RBI should institutionalize all the lenders. This will also help us to curb the parallel economy (Black money) building a better nation tomorrow.