Building Social Business: A quick Review

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Last year I got “Building Social Business” by Nobel Laureate Muhammad Yunus. I knew him as an economist and Founder of Grameen Bank, Bangladesh. But after reading this, I got more interest on his writing. During the recent NE Book Fair I purchased his Biography and now searching “Creating a World Without Poor”

Let’s have a quick overveiw on “Building Social Business”: Micro credit pioneer Professor Yunus introduced a new business model and termed it as ‘The New Kind of Capitalism that Serves Humanity’s Most Pressing Needs’. Professor Yunus unearth the idea Social Business when the capitalism witnessing its worst form. His idea of social business is quit different from conventional money making businessmodel as well as NGO and CSR (Corporate Social Responsibility).

NGO and other charitable organizations are mainly dependable on the donation, so as soon as the donated amount is utilized they have to wait for another donation. In this way they are fully dependable on the will of the donators. But in social business model, the company revolves the invested amount. This recycling process gives maximum outputs (social outputs) and after a certain period of time the investors can get back their invested amount. This also encourage the maximum investors to invest on the social business ventures to change the world not to make money.

The Social Business is aimed to address a particular social problem like poverty, illiteracy, health, malnutrition etc, not to maximize profit. Professor Yunus has given the example of Grameen Danone. The ventures was started by Grameen and Danone group to address the malnutrition of Bangladeshi children. The company is providing low cost Shakti Doi to the poor children of Bangladesh at a affordable price. Grameen group has started many other ventures on Social Business model to address the social problems. The Social Business runs on ‘no loss, no dividend’ basis, where the owner or the investor gets no profit and get-back the invested amount over a certain period. Professor Yunus said that there a numbers of people in our society, whose are concerned about the poverty and other social problems and they have a burning desire to work for development of the society and alleviate poverty. The owner or the investor of a Social Business Venture get mental satisfaction in lieu of financial gain. Professor Yunus also urges that the concept of Social Business has opened a new avenue for investment diversification. Professor Yunus also proposed a separate stock exchange for the social business. He is optimist that people will purchase a share through social stock exchange to change the society not to gain financial benefit.

Professor Yunus has taken seven principles of Social Business:

1. The business objective is to overcome poverty or one or more problems (such as education, health, technology access, and environment) that threaten people and society- not to maximize profit.

2. The company will attain financial and economic sustainability.

3. Investors get back only their invested amount. No dividend is given beyond the return of original investment.

4. When the investment amount is paid back, profit stays with the company for expansion and improvement.

5. The company will be environmentally conscious.

6. The work force gets market wage with better-than-standard working conditions.

7. Do it with jay!!!

Though the book talks about business and all, yet the reader gets a satisfaction and eagerly waits for the next chapter. The language and description is vivid. Interestingly the writer catches up readers state of thinking.

Published in an online journal on 4/2/12

Vikram Akula Stepped-down: End of an Era

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Vikram Akula Stepped-down: End of an Era

On 23rd November’2011 Indian corporate history witnessed two major handing over and taking over. Tata group find out the successor Cirus P Mistry and secondly, Vikram Akula steps down from the position of founder and chairman of only listed Microfinance Company of the country. The poster boy of Microfinance Vikram Akula resigned from his current position Founder and Chairman of SKS Microfinance and his resignation was also granted by the board. Addressing the media Dilli Raj, CFO of SKS Microfinance told that Mr. Akula has resigned from the position voluntarily and his resignation was accepted by the board with immediate effect. The sources informed that he will continue to serve the company as an advisor till March’2012, Mr. Dilli Raj also informed that Vikram Akula has signed Non Compete and other agreements to maintain the confidentiality of the company. (The circumstances don’t tell as voluntary.)
Let’s have a quick look on Vikram Akula and SKS Microfinance:
Vikram Akula holds a Master Degree in International Relations from University of Yale and a PhD in Political Science from University of Chicago. He started his career as a community organizer of SGHs in Andhra Pradesh. He founded SKS Microfinance as a Not for Profit organization to uphold the economic condition of poor. He worked with the organization till 2004 in the same year he joined McKinsey & Company in Chicago as a management consultant. He rejoined SKS Microfinance in 2005 and converted the organization to a profit making company. In 2010, SKS Microfinance emerged as the largest Microfinance Company and the only listed Microfinance Company in the country. The company launched the IPO (Initial Public Offer) at Rs. 985 a share with a discount of Rs. 50/- for the retail investors. SKS Microfinance got a huge response from the market. The company raised a fund of Rs. 1654cr from the IPO; it was oversubscribed by 13.69 times. The major fund houses i.e. Reliance Capital, ICICI Pru and some big FIIs, including Goldman Sachs. The Catamaran Management Services, a fund house run by NR Narayana Murthy, also invested in SKS Microfinance. Vikram Akula was named by TIME magazine as one of the world’s 100 most influential people. But finally couldn’t influence the board members of own company.

The reason for decline:
1) After the listing SKS Microfinance started facing problems. Fund raising through listing was criticized by Nobel laureate Mahammad Yunus. Professor Yunus has seen it as a doubtful possibility and suggested that the profit should go back to the poor. Vikram Akula was of the view that going public is the only way to raise fund to serve the 3 billion poor worldwide. He started very aggressively. Rapid growth has diverted social obligation to profit maximization.
2) Suresh Gurumani was terminated in October 2010 from the position of CEO of SKS Microfinance four years before the end of his term. M R Rao was appointed as CEO; the company didn’t disclose the reason of Gurumani’s termination. It was guessed that Gurumani was removed by Vikram Akula for his personal clash with Suresh Gurumani.
3) Andhra Pradesh Microfinance Institution Ordinance 2010 was issued by state government in October 2010 to check coercive collection policy after the suicide cases were reported. Repayment collected decreased to as low as 10.7%. The company now has to think to write off total loan portfolio of Rs. 8.22 billion.
4) Andhra Pradesh is proved as the trouble child for Microfinance. In 2005-06 district administration has closed at least 50 branches of Microfinance Company. Market penetration for Microfinance is highest comparing to other states. In Andhra Pradesh, the average debt outstanding per house hold is Rs. 65000/- as compared to a national average of Rs. 7700/- of outstanding microfinance debt per poor house hold. Beside these bare truths SKS Microfinance has the highest exposure to Andhra Pradesh.
Possibility of Re-structuring of SKS Microfinance:
Now this is the big question, whether SKS Microfinance will continue to be in the microfinance business or it will be diversified to other avenues. Founder and Chairman Vikram Akula voluntarily resigned (?) at such a point of time, when the share is traded at 122.4 (all time low 105 and all time high Rs. 1,491.50). The closed at 5% up after the announcement of Vikram Akula’s resignation. Another most important fact is that the board has approved to raise Rs. 900crs through QIP (Qualified Institutional Payment. It is also being heard that SKS Microfinance may enter to Micro Insurance, Micro Saving, Remittances etc. in the rural market. The newly appointed non-executive chairman Mr. P H Ravikumar has a proven track record in agri-banking, during his tenure as Head Agri Business ICICI Bank emerged as the second largest lender to Agri-business sector in India. But the present legal framework of SKS Microfinance will not permit to enter in such business. Hence, the possibility of re-structure of SKS Microfinance can’t be rolled out!
Is this a lesson for other MFI?
The proposed Microfinance (Development & Regulation) Bill will show the future roadmap of MFI industry. Beside the legal and regulatory setback some Microfinance companies are still doing fantastic job. Bandhan Microfinance has already begged the title of largest MFI in the country, legging behind SKS Microfinance. Ujjivan, a Banglore based MFI is working in 20 states since 2006 but not have a single branch in Andhra Pradesh. Ujjivan Microfinance Plus programme is a result of social responsibility. If central government would enacted the bill, SKS Microfinance might be saved!

Transforming Downward Spiral of Microfinance in India

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The Economic Intelligence Unit of The Economist group has published their report Global Microscope on the Microfinance Business Environment 2011. India’s position has been downgraded compared to previous year. The industry in global perspective is on maturing stage, while in India it is facing the threats of existence.

Overcoming the increasing number of Non Performing Loan (NPL); Peru again stands at the top for the third consecutive year for its excellent legal mechanism, sophisticated regulators and most significantly government’s commitment to use microfinance for financial inclusion. Bolivia did excellent job in price transparency and disclosure rules and bagged the position of second top country in respect of business environment, regulatory framework and institutional support for microfinance. Surprisingly, neighboring country Pakistan stands among the top three countries in the list. And, India is on 27th position in world ranking.

M-CRIL, a rating agency stated in their report that India’s microfinance growth has been slow downed to a alarming stage, in FY 2010-11 the growth of borrower base has been decreased to 7.5% from 43% and growth rate of loan portfolio size decreased to 7.2% from 76% comparing to previous financial year.

India is next to Yemen where microfinance declined significantly during last year. The political unrest in middle-east had a greater impact on microfinance operation in Yemen. And in India, Andhra Pradesh microfinance crisis has rung the alarm bell for the whole industry.

Andhra Pradesh crisis can’t be marked solely as the failure of Microfinance Industry. There were many factors which are responsible for the crisis.

Let’s have a look – Chronologically

Chief Minister Chandrababu Naidu had introduced a rural lending model called Velegu in 2000. Society for Elimination of Rural Poverty (SERP) was empowered to run the project. It used to form groups having 10-15 women on group guarantee concept and assured them to access bank credit. Bank provided the loan at 12% interest. But during 2004-05 assembly election congress promised to provide loan at 3% and remaining 9% would be refunded by the state government. It was proved as a game changing idea! Rajshekhar Reddy became the chief minister.

The project had itself some major drawbacks:

i) Rs. 50000/- were given to a group for first year, if group successes to repay the first cycle loan, were eligible for a loan of Rs. 500000/- for five years, no top up loans or emergency fund’s provisions were not made available in the project.

ii) Bank hardly released 50% or less loan amount comparing to their eligibility.

iii) The project also didn’t cover-up poorest of the poor of the state. Ultimately they were bound to rush to the MFIs in a large scale. Secondly, banks were more interested to lend MFIs rather lending to SHGs as lending to MFIs were more secure and cost effective. Rs. 2 cr. can be given to single MFI but to 500 SHGs! MFIs became the last resort for the credit hungry poor.

More and more MFI came to Andhra Pradesh; profit maximization became the main motto! The market penetration increased to 823%, each household was serving 8 loans! Credit culture was also intoxicated by ghost loan, benami loan etc. As per the MIX Market report, MFIs relationship with customers became more transactional; while one staff was handling 331 borrowers in 2005 and 436 in 2009.

The Blind watchdog – RBI

RBI, the so called watch dog of financial sector completed its duty by merely warning the MFIs on periodically, no strict step was taken against the greedy MFIs and money lenders. Being the major funding house SIDBI also kept mum! The rapid growth of microfinance had also reduced a local politician’s ability to use rural credit as a tool of patronage and put MFIs in the firing line. Finally the politics triggered the gun; when suicide case was reported by news channels TDP again saw a chance to win the election, in the meanwhile, congress passed the ordinance before the opposition cashes on the matter. Microfinance industry as a whole becomes the scrap goat!

Contribution of microfinance in India can’t be under-estimated. As a whole 30.9 million active borrowers are served by MFIs in India and total outstanding loan amount is $5.1 billion. Microfinance companies are not only providing loans, they are also providing allied services for poverty elevation and livelihood development. According to the report of Micro-credit Summit Campaign, nearly 9 million Indian households, or about 45 million family members, involved in microfinance, saw their daily income rise above the threshold of USD 1.25 between 1990 and 2010.

The road ahead – for Indian Microfinance

The Microfinance (Development & Regulation) Bill has been pending in parliament since 2007. Now the bill is modified and expected be tabled during next session of parliament. The modified bill has provisions to bring the sector into the ambit of organized financial services and other positive changes. Still it has some negative provisions i.e. product cape, margin and interest cape, credit limit case etc.

RBI credit policy in March’2011 capped household income at Rs. 120000/- and credit limit at Rs. 50000/- for all MFI customers, does it reflects the current inflation rate? If RBI doesn’t verify the ground reality, if RBI also follows the path of planning commission (Rs. 32/- as bench mark for BPL), no doubt MFI industry will collapse very soon.

Government speaks about inclusive growth, financial inclusion but in works, there is a big zero. RBI itself estimates that 50% of Indian families don’t have bank accounts. Dr.Ela Bhatt, a Gandhian and lawyer, and referred to as the Mother of Microfinance (she founded Self Employed Women’s Association or SEWA in 1972), was recently appointed to the Board of RBI. Dr. Ela Bhatt says in her speech on 100 miles principle at UNDP meeting- There are six things one needs: roti (food), kapda (clothing), makan (housing), primary health, primary education and primary banking. She also admits the non-availability of primary banking and financial facilities.

Hope to see some positive regulatory changes to rescue the sinking industry!

Published in timesofassam.com on 18/11/11