 "I'd love to return to a leadership role at SKS: Vikram Akula")
With SKS Trust Advisors on Sunday nominating him as its representative on the board of Hyderabad-headquartered SKS Microfinance, which had ousted him two years ago, Vikram Akula, once the poster boy of microfinance, could be heading for a long-drawn battle for return in the saddle. The trust, which increased its stake in the company last week to become its largest stakeholder, is flexing its newly-found muscle and has asked for a commensurate role on the board. It has also asked for regularisation of Akula's appointment at the ensuing annual general meeting. However, the company has got permission from the corporate affairs ministry to postpone its AGM, scheduled in September, by three months. It is also shifting its registered office to Maharashtra. Akula, who has broken his silence after long persuasion, speaks about his mistakes, challenges and plans in an exclusive interview with Surajeet Das Gupta.
The trusts are now the largest shareholder group in SKS and have asked you to come back to SKS...
Yes, the trusts have nominated me to the board of SKS Microfinance. I am truly honoured that they have asked me. I have accepted it. Now, it is up to SKS Microfinance to respond to their request. On my end, I would love to return to a leadership role at the company. After all, financial inclusion is my passion and I have spent nearly 15 years building SKS.
If I come back to SKS, I want to separate my personal wealth from the goal of creating a private-sector model of microfinance. I truly believe such a model will help promote financial inclusion. But people get distracted if my personal wealth is tied up with that broader goal. So, I thought the best way to deal with this was to sell my shares, so I won't have any personal financial benefit from my potential involvement in SKS. I would work on a voluntary basis. In fact, I actually incurred a loss by selling the shares.
Have you had any discussion with any of SKS' PE investors?
Yes.
Are you ready to fight a battle to get back into SKS?
The work SKS does for financial inclusion is important. The trusts are committed to this. So, I don't see why the SKS Board would not want to work collaboratively with the trusts. But, if the SKS board does respond favourably, I am sure the trusts are ready to take whatever steps are needed.
Many say your problems started after you decided to go for an IPO and scale up. Is this the right assessment? Could you have scaled up without an IPO?
My vision was to create a model of microfinance that could scale. It is estimated that India's unbanked population needs credit of about Rs 2.5 lakh crore. To get that quantum of funds for the sector, I believed we had to follow a commercial model that would be able to tap funding from capital markets, unlike a non-profit model that depended on donations. Donations are limited. On the other hand, funding from capital markets is virtually unlimited. That is why I set up SKS on a commercial model and pursued an IPO. It was not about making money.
I thought it would be the best way to access the huge quantum of funds needed for financial inclusion. My goal was to blend philanthropy and capitalism, meaning I wanted to harness the power of the market - of private capital - to help bring about financial inclusion in rural India.
Having said that, I could have been more careful about the type of investors I brought in. I could have been more careful about the type of senior management I brought in. Somewhere along the road, I lost the ability to control the philosophical direction of SKS. Perhaps, if I had stayed on as CEO for those last two years, instead of returning to the US and moving to a non-executive board role, things would have worked out differently.
How would you do it differently? What type of investors and managers would you bring in?
If I could do it over again, I would bring in more people like Vinod Khosla (who is a shareholder), who led our Series-A round of investment. Such people understand the importance of balancing social impact and profitability. Likewise, I brought in a senior management team from mainstream banking and insurance. At that time, I thought it was the right thing to do, because we had become a large financial institution. But, in retrospect, I know that microfinance is radically different from mainstream banking and requires a skill set different from mainstream banking. It involves intensive customer interaction and a high degree of transparency with borrowers. There's a certain ethic to it. I could have had more people in senior management with deep understanding of the microfinance ethic before I let go of the reins.
Do you think private equity investors - such as Westbridge and Sandstone - that invested in SKS pushed too hard for growth and profitability?
All I can say is, in social enterprises, investors have to take a long-term view. I am all for creating shareholder value, as long as it is done in a way that ensures borrowers receive high quality, transparent financial services. If you do that, everybody wins - both borrowers and shareholders. But if you try to manage for the short term, it can have unintended negative consequences.
The Andhra Pradesh government accused SKS and other microfinance institutions of coercive recoveries, even abetting suicide. Were coercive recoveries an unintended consequence in the case of SKS?
First of all, the state government itself has a lot to answer for in the way it created a crisis in the microfinance industry. It bulldozed an important effort for financial inclusion, instead of developing smart legislation and appropriate regulation that would both protect clients but also ensure continued access to finance. As it relates to SKS' tactics, I would not like to discuss specifics. Hopefully, everyone has learnt that coercive collection tactics are not consistent with the broader mission of microfinance to help the poor rise above their circumstances. What I can say is that I made my views clear, where I had outlined a plan for pausing lending and retraining all of our staff and then retraining all our borrowers to get our system back on track.
So there, indeed, were lapses?
Again, I can't speak about specifics because of confidentiality obligations, but I can explain how microfinance is supposed to work. In joint liability group lending, as pioneered by Professor Muhammad Yunus of Bangladesh's Grameen Bank, there are two types of groups. There is a sub-group of five women and a larger group of about 50 women. The groups are self-selected. They approve each other's loans and amounts, and they have joint responsibility to support each other if any borrower has difficulty with his or her enterprise. Meanwhile, the repayments are small - weekly repayments that mimic cash flows - and loans are intended only for income-generating activities, so that borrowers can earn enough to repay loans.
The key to making joint liability groups work is proper training of borrowers. But, if an MFI cuts training short and borrowers are not taught how the system is supposed to work, peer support ends up morphing into peer pressure. That leads to problems.
Let me add that I can confidently say, when I ran SKS from 1997 to 2008, we had extraordinarily strong processes and high quality services. For over a decade, there were no allegations of coercive recoveries or group pressure. In 2008, I stepped down as CEO and it was immediately after the period between 2008-2010 that criticism of SKS' tactics began to emerge. As a non-executive board member living in the US during that time, I had only very limited influence over day-to-day activities.
So what did you try to do to stem the tide?
First, in April 2011, I asked the board to make me the executive chair because I wanted to be in a position where I could again have greater influence over day-to-day operations of SKS. I also outlined a plan for pausing lending and retraining all our staff members and then retraining all our borrowers to get our system back on track. However, as you know, unfortunately, I ended up separating from the company soon after I made these comments, and, as a result, got disconnected with the company.
Was there a difference of opinion with the board? Why is it that you did not go public?
Well, it is known that after my separation from SKS, the company embarked on an aggressive diversification effort, such as lending to the poor with gold as collateral - basically pawn-broking. SKS also started marketing complex insurance products. Neither of these activities was within my vision for SKS. Today, of course, we know that RBI has removed lending against gold from the priority sector. And, Irda, too, has its own views on marketing complex insurance products to the poor. I do not know whether any retraining was implemented after I separated from the company.
Do you think MFIs should get into banking to scale up?
Yes and no. Yes because by becoming a bank an MFI can take deposits. That is important both because it gives the poor a safe place to save and it could potentially lower the cost of funds. However, most MFIs do not have the requisite technology and other systems needed to become a well-functioning bank. So, I support the fact that SKS has not applied for a banking licence. What would be great, however, is partnering with an existing financial institution that has applied for or already holds a banking licence so that the strengths of an established financial institution could be combined with the MFI with core competence in field-level financial inclusion.
Don't you think it is ironic the two key people in the world associated with microfinance, Yunus and you, were both pushed out from the institutions they built?
To be thought of in the same league as Yunus is a tremendous compliment. He is a great humanitarian who has dedicated his life to helping eradicate poverty, and I have indeed learned a great deal from him. What has happened to Professor Yunus is a tragedy. His ousting was political in nature because his achievements threatened the political establishment in Bangladesh. To some extent, similar forces were at work in the political backlash against SKS and other microfinance institutions, though the story in India is, of course, more complicated than that. I can certainly say that I am not politically skilled - either in navigating the ferocity of Indian politics or handling the Machiavellian aspects of Indian corporate politics. My skills lie in how best to provide a small loan to a poor person so that he can earn income. Nothing more.
Why was Suresh Gurumani sacked? There were allegation you sacked him?
Let me be clear that this was a decision of the SKS board. It was not my decision alone. A chairperson of the board has no such unilateral authority. I can also make a general comment that whenever a new CEO comes into an established organisation with an incumbent management team, fierce political maneuvering is often unleashed. And, it is very hard for a board to sort through the corporate politics when it is not involved in day-to-day activities.
Where did you borrow ideas about the model of microfinance you pursued?
Before starting SKS, I had worked for three years with a small NGO as a social worker. I learned about the high levels of standardisation and focus on quality that helped Fortune 500 companies, such as Coke and McDonald's and Starbucks, scale to global levels. What I did with microfinance was introduce the same disciplined focus on standardisation and quality.
Did you borrow a lot from the Grameen Bank model?
Yes. The joint liability model developed by the Grameen Bank is a brilliant and elegant innovation. Before starting SKS, I spent some time in Bangladesh with Grameen Bank. The key element was peer group lending, which shifted the onus of credit appraisal to the group. Of course, to be successful, the group members had to be self-selected, have members of similar socio-economic profiles, have a cooperative spirit, and undergo rigorous induction training. If such elements are in place, the Grameen model works remarkably well. At SKS, I tweaked certain elements, such as adding a highly visual component to the training curriculum. And, of course, we pursued a commercial structure to tap capital market funding.
The trusts are now the largest shareholder group in SKS and have asked you to come back to SKS...
Yes, the trusts have nominated me to the board of SKS Microfinance. I am truly honoured that they have asked me. I have accepted it. Now, it is up to SKS Microfinance to respond to their request. On my end, I would love to return to a leadership role at the company. After all, financial inclusion is my passion and I have spent nearly 15 years building SKS.
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You recently sold almost all your remaining stake in SKS - about 900,000 shares, or about one per cent of the company. Why?
If I come back to SKS, I want to separate my personal wealth from the goal of creating a private-sector model of microfinance. I truly believe such a model will help promote financial inclusion. But people get distracted if my personal wealth is tied up with that broader goal. So, I thought the best way to deal with this was to sell my shares, so I won't have any personal financial benefit from my potential involvement in SKS. I would work on a voluntary basis. In fact, I actually incurred a loss by selling the shares.
Have you had any discussion with any of SKS' PE investors?
Yes.
Are you ready to fight a battle to get back into SKS?
The work SKS does for financial inclusion is important. The trusts are committed to this. So, I don't see why the SKS Board would not want to work collaboratively with the trusts. But, if the SKS board does respond favourably, I am sure the trusts are ready to take whatever steps are needed.
Many say your problems started after you decided to go for an IPO and scale up. Is this the right assessment? Could you have scaled up without an IPO?
My vision was to create a model of microfinance that could scale. It is estimated that India's unbanked population needs credit of about Rs 2.5 lakh crore. To get that quantum of funds for the sector, I believed we had to follow a commercial model that would be able to tap funding from capital markets, unlike a non-profit model that depended on donations. Donations are limited. On the other hand, funding from capital markets is virtually unlimited. That is why I set up SKS on a commercial model and pursued an IPO. It was not about making money.
I thought it would be the best way to access the huge quantum of funds needed for financial inclusion. My goal was to blend philanthropy and capitalism, meaning I wanted to harness the power of the market - of private capital - to help bring about financial inclusion in rural India.
Having said that, I could have been more careful about the type of investors I brought in. I could have been more careful about the type of senior management I brought in. Somewhere along the road, I lost the ability to control the philosophical direction of SKS. Perhaps, if I had stayed on as CEO for those last two years, instead of returning to the US and moving to a non-executive board role, things would have worked out differently.
How would you do it differently? What type of investors and managers would you bring in?
If I could do it over again, I would bring in more people like Vinod Khosla (who is a shareholder), who led our Series-A round of investment. Such people understand the importance of balancing social impact and profitability. Likewise, I brought in a senior management team from mainstream banking and insurance. At that time, I thought it was the right thing to do, because we had become a large financial institution. But, in retrospect, I know that microfinance is radically different from mainstream banking and requires a skill set different from mainstream banking. It involves intensive customer interaction and a high degree of transparency with borrowers. There's a certain ethic to it. I could have had more people in senior management with deep understanding of the microfinance ethic before I let go of the reins.
Do you think private equity investors - such as Westbridge and Sandstone - that invested in SKS pushed too hard for growth and profitability?
All I can say is, in social enterprises, investors have to take a long-term view. I am all for creating shareholder value, as long as it is done in a way that ensures borrowers receive high quality, transparent financial services. If you do that, everybody wins - both borrowers and shareholders. But if you try to manage for the short term, it can have unintended negative consequences.
The Andhra Pradesh government accused SKS and other microfinance institutions of coercive recoveries, even abetting suicide. Were coercive recoveries an unintended consequence in the case of SKS?
First of all, the state government itself has a lot to answer for in the way it created a crisis in the microfinance industry. It bulldozed an important effort for financial inclusion, instead of developing smart legislation and appropriate regulation that would both protect clients but also ensure continued access to finance. As it relates to SKS' tactics, I would not like to discuss specifics. Hopefully, everyone has learnt that coercive collection tactics are not consistent with the broader mission of microfinance to help the poor rise above their circumstances. What I can say is that I made my views clear, where I had outlined a plan for pausing lending and retraining all of our staff and then retraining all our borrowers to get our system back on track.
So there, indeed, were lapses?
Again, I can't speak about specifics because of confidentiality obligations, but I can explain how microfinance is supposed to work. In joint liability group lending, as pioneered by Professor Muhammad Yunus of Bangladesh's Grameen Bank, there are two types of groups. There is a sub-group of five women and a larger group of about 50 women. The groups are self-selected. They approve each other's loans and amounts, and they have joint responsibility to support each other if any borrower has difficulty with his or her enterprise. Meanwhile, the repayments are small - weekly repayments that mimic cash flows - and loans are intended only for income-generating activities, so that borrowers can earn enough to repay loans.
The key to making joint liability groups work is proper training of borrowers. But, if an MFI cuts training short and borrowers are not taught how the system is supposed to work, peer support ends up morphing into peer pressure. That leads to problems.
Let me add that I can confidently say, when I ran SKS from 1997 to 2008, we had extraordinarily strong processes and high quality services. For over a decade, there were no allegations of coercive recoveries or group pressure. In 2008, I stepped down as CEO and it was immediately after the period between 2008-2010 that criticism of SKS' tactics began to emerge. As a non-executive board member living in the US during that time, I had only very limited influence over day-to-day activities.
So what did you try to do to stem the tide?
First, in April 2011, I asked the board to make me the executive chair because I wanted to be in a position where I could again have greater influence over day-to-day operations of SKS. I also outlined a plan for pausing lending and retraining all our staff members and then retraining all our borrowers to get our system back on track. However, as you know, unfortunately, I ended up separating from the company soon after I made these comments, and, as a result, got disconnected with the company.
Was there a difference of opinion with the board? Why is it that you did not go public?
Well, it is known that after my separation from SKS, the company embarked on an aggressive diversification effort, such as lending to the poor with gold as collateral - basically pawn-broking. SKS also started marketing complex insurance products. Neither of these activities was within my vision for SKS. Today, of course, we know that RBI has removed lending against gold from the priority sector. And, Irda, too, has its own views on marketing complex insurance products to the poor. I do not know whether any retraining was implemented after I separated from the company.
Do you think MFIs should get into banking to scale up?
Yes and no. Yes because by becoming a bank an MFI can take deposits. That is important both because it gives the poor a safe place to save and it could potentially lower the cost of funds. However, most MFIs do not have the requisite technology and other systems needed to become a well-functioning bank. So, I support the fact that SKS has not applied for a banking licence. What would be great, however, is partnering with an existing financial institution that has applied for or already holds a banking licence so that the strengths of an established financial institution could be combined with the MFI with core competence in field-level financial inclusion.
Don't you think it is ironic the two key people in the world associated with microfinance, Yunus and you, were both pushed out from the institutions they built?
To be thought of in the same league as Yunus is a tremendous compliment. He is a great humanitarian who has dedicated his life to helping eradicate poverty, and I have indeed learned a great deal from him. What has happened to Professor Yunus is a tragedy. His ousting was political in nature because his achievements threatened the political establishment in Bangladesh. To some extent, similar forces were at work in the political backlash against SKS and other microfinance institutions, though the story in India is, of course, more complicated than that. I can certainly say that I am not politically skilled - either in navigating the ferocity of Indian politics or handling the Machiavellian aspects of Indian corporate politics. My skills lie in how best to provide a small loan to a poor person so that he can earn income. Nothing more.
Why was Suresh Gurumani sacked? There were allegation you sacked him?
Let me be clear that this was a decision of the SKS board. It was not my decision alone. A chairperson of the board has no such unilateral authority. I can also make a general comment that whenever a new CEO comes into an established organisation with an incumbent management team, fierce political maneuvering is often unleashed. And, it is very hard for a board to sort through the corporate politics when it is not involved in day-to-day activities.
Where did you borrow ideas about the model of microfinance you pursued?
Before starting SKS, I had worked for three years with a small NGO as a social worker. I learned about the high levels of standardisation and focus on quality that helped Fortune 500 companies, such as Coke and McDonald's and Starbucks, scale to global levels. What I did with microfinance was introduce the same disciplined focus on standardisation and quality.
Did you borrow a lot from the Grameen Bank model?
Yes. The joint liability model developed by the Grameen Bank is a brilliant and elegant innovation. Before starting SKS, I spent some time in Bangladesh with Grameen Bank. The key element was peer group lending, which shifted the onus of credit appraisal to the group. Of course, to be successful, the group members had to be self-selected, have members of similar socio-economic profiles, have a cooperative spirit, and undergo rigorous induction training. If such elements are in place, the Grameen model works remarkably well. At SKS, I tweaked certain elements, such as adding a highly visual component to the training curriculum. And, of course, we pursued a commercial structure to tap capital market funding.