Vikram Akula's SKS Microfinance Pvt. Ltd.: The Making of a Successful Microfinance Institution

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Vikram Akula's SKS Microfinance Pvt. Ltd.: The Making of a Successful Microfinance Institution

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Akula realised that though the microcredit institutions were being run by well-intentioned people, they were poorly managed and the way the non-profit organisations “were doingmicrofinance was incredibly inefficient and hopelessly unscalable.”26 In 1997,Akula decided to start his ownmicrofinance company by “using technology and standardized systems to bring enough efficiency out of each tiny transaction to lower costs”27 modelled on the lines of McDonald's Corp. or Starbucks Corp.After Ford Foundation28 and the Rockefeller Foundation29 in New York refused to support his venture feeling that he lacked the experience ofworking in the tough Indianworking conditions,Akula raised $52,00030 from 300 friends and family members and launched SKS as a non-profit NGOin Hyderabad in 1998 with a single employee. Since the inception of SKS,Akula concentrated on preventingwastage at each step of the loan process. TheWall Street Journal wrote, “Wastewas everywhere. Loan officers had to search for borrowers in fields.

Villagers wouldmake payments in unruly piles of sweaty,wadded-up rupees they keptwedged behind blouses and belts. Someone had to count themoney andthen dole out fistfuls ofchange.”³¹ Akula set some simple rules for SKS borrowers. They were asked tomeet at a certain time and instead of letting borrowers determine the weekly payment, the borrowers were told tomake equated payments everyweek inmultiples of five rupees in exact change. The fast turnaround process enabled the loan officer to cover three villages in amorning instead of one, and deal with 50 borrowers in onemeeting instead of 20.

SKSexpanded rapidly and started attracting capital frombig institutions [Exhibit VIII] likeCitibank. The global director of microfinance atCitigroup, RobertAnnibale said, “We are takingmicrofinance beyond philanthropy. Imay have the smallest business (within Citigroup) but I have the largest potential client group in the world.”³² In India there are restrictions on foreign banks to open local branches and according to TheWall Street Journal, “are under government pressure tomake 32% of their loans to what the government labels ‘priority sectors', including agriculture and rural industry”,³³ Akula provided the foreign banks a back door access to the Indian consumermarkets.As SKS achieved a default rate of less than 2%among its 100,000 borrowers, ‘it was not a hard sell' for SKS to get funds from the foreign financial institutions.Akula convincedCitibank to compensate SKS to find andmanage themicro borrowings ofCitibank. In 2004,Citibank became the first foreign bank to start lending to SKS. Indian banks like ICICI Bank³⁴ (ICICI), India's largest private sector bank in capital,³⁵ provided an open line of credit to SKS. The deal benefited both, the financial institution as well as SKS.According to reports, loans over $10 million provided by ICICI are low-risk and provide a slightly better return than its corporate borrowers. Referring to its involvement in microfinancing, ICICI's executive director, Nachiket Mor said, “This could be bigger than any other business thatwe have got.”³⁶ Over the years SKS has also received funding fromABN-Amro, HDFC Bank,³⁷ HSBC, SIDBI,³⁸ UTI Bank³⁹ and Friends ofWomen's World Banking.⁴⁰

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26] “Entrepreneur Gets Banks To Back Tiny Loans”, op.cit.
27] Ibid.
28] The Ford Foundation is a US charitable foundation created to fund programs that promote democracy, reduce poverty and promote international understanding. It was founded in 1936 with grants from Henry Ford and his son Edsel Ford of the Ford Motor Company.
29] The Rockefeller Foundation is a charitable organisation based in New York City. It was founded by John D. Rockefeller and Frederick T. Gates to “promote the well-being of mankind throughout the world.”
30] “Entrepreneur Gets Banks To Back Tiny Loans”, op.cit.
31] Ibid.
32] “Entrepreneur Gets Banks To Back Tiny Loans”, op.cit.
33] Ibid.
34] ICICI Bank is India's second-largest bank with a balance sheet of $22 billion, a network of 452 branches and offices, 1725 ATMs and 5.8 million customers. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital, asset management and information technology.
35] “Entrepreneur Gets Banks To Back Tiny Loans”, op.cit.
36] “Entrepreneur Gets Banks To Back Tiny Loans”, op.cit.
37] The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an ‘in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of the RBI's liberalisation of the Indian Banking Industry in 1994. The Bank was incorporated in August 1994 in the name of ‘HDFC Bank Limited', with its registered office in Mumbai, India.
38] SIDBI was established on April 2nd 1990. The Charter establishing it, The Small Industries Development Bank of India Act, 1989 envisaged SIDBI to be “the principal financial institution for the promotion, financing and development of industry in the small scale sector and to co-ordinate the functions of the institutions engaged in the promotion and financing or developing industry in the small scale sector and for matters connected therewith or incidental thereto.
39] UTI Bank was the first of the new private banks in India to have begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I), Life Insurance Corporation of India (LIC) and General Insurance Corporation Ltd. and its associates, namely, National Insurance Company Ltd., The New India Assurance Company, The Oriental Insurance Corporation and United Insurance Company Ltd.
40] The InternationalWomen's Conference held in 1975 at Mexico City brought together women leaders from different parts of the world. A group of women opined that poor women are economically active but do not have access to financial resources to enhance their business. Women's World Banking (WWB) was created in 1980 to address this unmet need. Friends of Women's World Banking, India, (FWWB-I) is one of the first few institutions created as an affiliate of Women's World Banking in 1982 with an aim to empower poor and asset-less rural and urban women by improving their participation in sustainable livelihood activities through access to financial services. It is a non-profit organization with a vision to weave together threads of hope and security in the lives of women among the lowest rung of the economic and social ladder, through its microfinance programme.