 "Akula deserves a second chance at SKS")
Vikram Akula, it may be recalled was thrown out of the company he founded soon after it was listed on the bourses.Unlike most promoter owned company, Akula hired a professional, Suresh Gurumani, to run his show just before the company was approaching the market. However, Suresh Gurumani wanted to deviate from the traditional Microfinance Industry (MFI) model and replicate a modern-day technology driven retail banking structure in SKS.
Other issues, including sale of his own stake at a hefty profit, also started cropping up which ultimately led to the removal of Akula from his own company. Marquee institutional investors who were showcased as key investors ultimately opened the exit door for Akula.
But the big question is whether the shareholders of the company have benefited from Akula’s exit. SKS raised Rs 1,650 crore from the markets in July-August 2010 at a price of Rs 985 a share. Soon after listing, the stock shot up to Rs 1,491 but as Akula’s controversy erupted, shares have been falling and touched a low of Rs 54.40 in May 2012. It presently trades at Rs 139. IPO investors along with pre-IPO investors are still out of the money.
The main culprit for the fall in price of SKS is change in norms by the Andhra Pradesh government and not Akula. 203 MFI related suicide deaths resulted in the state government raising the red flag on recoveries. Andhra Pradesh at the time of SKS IPO had the distinction of having second highest MFI penetration in the world, one level below Bangladesh. Increased competition led to multiple loans, rising to 82% of the loan disbursed in 2006. These ultimately led to defaults and aggressive recovery strategies.
SKS rode on the MFI boom in Andhra Pradesh. Its profit had multiplied 80 times between 2007 to 2010 from Rs 2 crore to Rs 174 crore, thanks mainly to Andhra Pradesh and the company’s ability to raise funds from private investors as well as banks. Investors who had bet on the company to ride the MFI boom were clearly in for a surprise, thanks to Andhra Pradesh government and not Akula.
Akula on the contrary had taken the fastest route for growth. For a MFI to grow, either it has to use donation money which it can lend (NGOs style of operations) or bank loans which comes with lot of strings attached or the fastest of them all, with fewer hurdles, the equity route. Akula raised Rs 1,650 crore from the IPO which could have given good returns had the state government not put in restrictions.
Post Akula’s exit, SKS has tried its hand at various financial products including gold loans, mobile financing and insurance. In fact, it was hauled up for unfair practices in insurance. It has tried to become a NBFC like any other but has not been successful. The company has been able to raise fund by securitizing its cash flows but writing off its loans in Andhra Pradesh meant that the company could not show profits.
SKS has cut down its operations from 2,400 branches in FY11 to the current level of 1,255 and employees down from 27,054 to 9,959 presently. Number of loans disbursed has come down from 2.8 million to 0.7 million. Income from operations has thus come down from Rs 1,160 crore in FY11 to Rs 278 crore in FY13.
It is clear that fall in income has been much sharper than reduction in employees. Employee cost which was 26% of total income is now 49%. Finance cost which was 27% of total income too has gone up to 40%. Gross yield which was at 27.04% in FY11 has come down to 19.20%.
To their credit, the new management has increased the non-Andhra Pradesh portfolio and managed to post profits. Though, the growth is not, what can be termed exciting.
Could Akula have done anything different is difficult to answer. But one thing you cannot take away from the man is passion for the industry.
In 1997, Akula founded SKS as a non-profit organization with funding from 357 people totaling $52,000 (roughly Rs 5,000 per person). By 2004, he was almost bankrupt. He left SKS in the hands of his managers and took up an assignment with McKinsey in the US to fund SKS. In 2005, he came back to India and converted SKS into a for-profit company and made it into a loan machine. It is this passion to succeed which separates him from the rest in the industry. Now that he has lost everything, he has all the more reason to prove his worth.
One might say that he has been greedy when he sold his stake at a Rs 60 crore profit, but so have many promoters in India. But he did not take the money away from the company.Akula has been credited for bringing credit revolution in rural India where interest rates were as high as 300%. The moral question of still charging exorbitant rates of 30-40% does not hold good as the few are willing to lend to the poor even at these rates. Further, MFI’s are funded by banks and monitored by RBI.
While MFI NGOs have been able to penetrate 30-40 villages; Akula through SKS has reached over 7 million families. Akula deserves the chance to revive not only his company but also the sector.