The two faces of Microfinance

The spat between SKS founder Akula and sacked CEO Gurumani shows an industry in flux

SKS Microfinance founder Vikram Akula and sacked CEO Suresh Gurumani are a study in contrasts. A Fulbright scholar, Akula spent nearly two decades working in rural India — manifested in his now-famous khadi kurtas. With nearly the same number of years at Standard Chartered, PricewaterhouseCoopers and Barclays, Gurumani is more comfortable in conservative suits.

From career graph to attire, the disparity is wide ranging. Unsurprisingly, the “interpersonal differences” were laid bare, first in the boardroom and later in public. Less than two months after a successful debut on the bourses, SKS — the country’s largest micro-finance institution (MFI) — sacked Gurumani.

The chronology of events stands thus: Gurumani was paid a one-time bonus of Rs 1 crore in April 2009, just five months after joining the company. On July 16, the SKS board approved a proposal to raise Gurumani’s remuneration. September 7, Akula was appointed executive chairman. On October 4, Gurumani was sacked.

Yet, it was not merely a clash of personalities. It was a clash of philosophies: Akula’s traditional approach vs Gurumani’s modernism. This led to a difference in approach — the Grameen Bank model vis-à-vis retail banking — to growth at MFI, throwing into stark relief the differences between the two. This only intensified after Akula’s elevation to executive chairman from non-executive chairman. “When you are designing new products, you need people like M R Rao (Gurumani’s replacement), who knows how MFIs work,” said Dilli Raj, chief financial officer at SKS.

The conflict came to the fore after the IPO, during which Gurumani was at the helm of affairs at SKS. Industry insiders say Gurumani was brought into the company to give it a corporate identity, after private-equity investors Sequoia Capital, Vinod Khosla, Small Industries Development Bank of India, Bajaj Allianz, Yatish Trading, Kismet Capital, Sandstone Capital, Silicon Valley Bank Unitus and Catamaran Management Services (started by Infosys Chairman N R Narayana Murthy) put money in the company.

It was Akula’s charisma and marketing skills that catapulted him into the list of the world’s 100 most influential people in 2006 by Time magazine that attracted PE investors to the MFI industry for the first time. “There were not too many MFIs in India around 2005. Investors felt it was a good investment opportunity and believed in the business model,” said Shashi Shrivastava, vice-president at Grameen Capital India, an MFI advisory firm.

A banking and financial sector veteran with 22 years’ experience, Gurumani quit Barclays to join SKS in 2008. The chartered accountant’s imprint was evident when, in 2009, SKS became the first MFI in the country to raise funds through non-convertible debentures and set a trend for the sector. After Vinod Khosla invested in the company, Akula started projecting Gurumani as the point-person to showcase it as an institution. But, the enchantment with Gurumani was short-lived.

“Post-IPO, the dynamics of the sector changed. The board felt that M R Rao, with four years’ hands-on experience and I, having spent 20 years working in this sector, would be the best team to lead SKS into its second phase of growth,” Akula had told the media soon after the sacking. Indeed. Akula, who had been running SKS for more than a decade, was instrumental in turning it into the biggest MFI in the country. Profits soared from Rs 2 crore in FY07 to Rs 80 crore in FY09 and Rs 174 crore in FY10. He founded SKS as a non-profit venture late 1997 with $52,000 raised from 357 people.

Akula is also credited with salvaging SKS from the verge of collapse in 2004, while struggling with a $45,000 debt, and grappling with an exodus from top management. Subsequently, he went to work at McKinsey in the US, albeit for a brief period, but made a comeback in 2005. It was no surprise, therefore, that Akula was reluctant to adopt the changes prescribed by Gurumani.

In the face of mounting competition in the MFI sector, SKS was keen to diversify its portfolio to secured-lending products like gold loans and housing loans. On a pilot basis, SKS has already launched a housing-loan scheme with support from HDFC. “A person who knows the (secured-lending) field is best suited to handle such a project. Suresh is from a retail banking background,” said Raj.

Large MFIs in India that started operations in 1997-1998 follow the traditional model along the lines of Grameen Bank in Bangladesh. Under this, credit approval decisions are taken at the branch or local level. Those that started after 2005, however, follow a retail banking model, taking advantage of a better information technology network. Gurumani was pushing for the retail-banking model because of rising delinquencies in the sector. Non-performing assets, which were at 0.2 per cent two years ago, have now risen to 1 per cent.

The models may vary, but the target is the same: eradicating poverty profitably. Profitably is the operative word, as is evident from the sale of shares ahead of the SKS IPO by Akula, Gurumani and some other employees, netting a ten-fold profit. It was the IPO, however, that changed the landscape for Gurumani and SKS. And, possibly, for the sector as a whole.