Listing trend isn’t a betrayal but a natural evolution, say practitioners.
Three years ago, Compartamos Banco, the Mexican microfinance institution (MFI) and bank, charted an unprecedented course. It went for an initial public offer (IPO) and got listed on the Mexican stock exchange.
Today, its stock is traded, fetching good returns. And, the company continues to do what it has been doing since its origin in 1990 — giving small loans to low-income women to help them start enterprises and get out of poverty.
Mohammad Yunus, the celebrated parent of microfinance, had criticised the IPO. It made little difference either to Compartamos, which continues to call itself ‘Tu especiallista en microfinanzas’, or to others now preparing to follow its footsteps.
In India, SKS Microfinance has pioneered the entry of MFIs into the stock market. This week, its shares began trading. The firm, which lends to the rural poor, especially women, giving Rs 2,000 at a time, raised around Rs 1,650 crore through its IPO, which was subscribed 13.6 times.
Also in the queue are MFIs such as Share and Spandana, while Basix and Bandhan have expressed their desire to toe the SKS line the moment their net worth allows them to do so in a year or two. The trend has triggered fears that MFIs in the country will set aside their pro-poor agenda and start raising interest rates to ensure that investors reap more profits.
Reasons
SKS has said the amount raised from the IPO will fund its expansion, as it will now be able to open more branches and introduce new products. While Compartamos, with just one million customers, was charging 86 per cent interest at the time the IPO in 2007, SKS, with 60 million customers, is charging 28 per cent.
Major MFIs in the country feel that fears about the poor being sidelined by investors is exaggerated. The example of Compartamos itself is being cited as an example of how IPOs do not turn MFIs into monsters.
They say MFIs in India have little alternative but to go for IPOs if they are not to remain stunted in size and their range of products. “It is inevitable,” says Vijay Mahajan, the founder of Basix, a non-banking finance company . “If an MFI like SKS, with Rs 4,000 crore outstanding, were to drastically reduce its pace of growth to, say, 50 per cent, it will still need additional equity of about Rs 2,000 crore. Is there anyone who will give the money once the equity requirement goes beyond $100 million?” he asks.
“It is a myth that companies starts maximising profits after listing,” he adds. He says shareholders are not going to decide the company’s agenda. “In the case of SKS, for instance, the founder, Vikram Akula, has zero shares and only some stock options. Others are private investors. But that does not mean Akula has no say. Once an organisation becomes large, there are so many stakeholders. It is then an interplay of all these.
And, one lists the company to raise capital. Out of the resources, first one pays employees and taxes, and then you get a profit,” he says.
He cites the example of HDFC. “It has been trading for three decades but it still is a model in whatever it does.”
He says Basix would also like to get listed once it achieves a net worth of about Rs 400 crore, likely in a year.
Brij Mohan, who has been on the board of many MFIs, says he once opposed the idea of MFIs seeking capital from the market. However, he now feels it may not really harm the poor clientele of MFIs.
“We should wait and watch to see if stock markets help MFIs increase profits of investors or their poor customers. It is worth seeing if the MFI increases rates to help investors or achieves profits through sheer scale,” he says.
Study valuation
A study by CGAP, an investor in Compartamos, examines the ethical question of the Mexican MFI’s IPO and gives it a clean chit.
It said if it charged 86 per cent interest, it was not because it wanted more profit but to meet costs, given its small customer base. And, if its funds doubled at the time of going for an IPO, it was not because of anti-poor policies but because it had started taking deposits.
It said the huge profits Compartamos made from the IPO (36 per cent) went mainly towards its running costs. These were high due to the small customer base and the loans.
The promoter continues to have an edge over others on share equations and the MFI’s goals and concerns remain unchanged, it concludes.
Similarly with SKS, which sold 16.8 million shares and raised Rs 1,650 crore, the promoters still have an edge in the matter of ownership. And they always will, asserts Mahajan.
Chandra Shekhar Ghosh, founder of Bandhan, echoes the views of Mahajan. He says domestic finance is too small compared to the growth of the MFI.
In fact, the biggest equity funding so far by the government was to Bandhan by the Small Industries Development Bank of India (Sidbi), a measly Rs 50 crore. The second biggest was Rs 18 crore to Basix.
If the government were to give a Rs 10,000 crore equity fund to Nabard and Sidbi to pass on to MFIs, and if MFIs were allowed to take deposits, things would be different, said Ghosh. The latter alone would cut the cost of funds by half and bring down interest rates, he says.
Bandhan is expecting a fresh equity infusion of Rs 100 crore from a foreign investor that will take its net worth to Rs 400 crore. “We will be in a position to look at the market option then,” he said.
SKS, which serves seven million customers across 19 states, has seen an expansion from 80 branches in 2006 to 2,000 this year. Revenues have grown at a compounded annual growth rate of 213 per cent from 2006 to 2010, while profits have shot up 264 per cent.
An expert on microfinance, not wanting to be identified, said: “The discourse on the IPO is ignoring the reasons which are driving MFIs to the capital market. Whether it is for good or bad, the lack of funds that is driving MFIs in search of it should be fixed first.”
