Bharat Financial Inclusion: The death of a success story

The groundwork for the merger of Bharat Financial Inclusion (BFIL), earlier called SKS Microfinance, with Mumbai-based IndusInd Bank ends a chapter in microfinance in which the former had played a pioneering role but survived challenges.

However, at this point, its choices are still being debated.

Some say BFIL should have continued its efforts to secure the small finance bank licence despite failing to do so in 2015, instead of offering itself to the largest bidder.

Others take a sympathetic view of its decision, considering the near exhaustion of management capital and recurring external business challenges.

Started in 1997 by Vikram Akula, son of a US-based surgeon who had migrated from a village in Telangana, the Swayam Krishi Sangam (SKS) was transformed into a for-profit microfinance institution (MFI) in 2005 because its founder sought to circumvent the limitations of scalability and sustenance experienced by a non-profit organisation. 

This was the first big departure made by SKS from a not-for-profit microlending initiative of organisations such as Deccan Development Society in Medak district, with which Akula worked in the initial days after returning to India.

Two years later, SKS secured the first round of equity of $11.5 million from funders led by Sequoia Capital, and in the following year raised $75 million, the largest-ever funding secured by a microfinance organisation to date. 

Soon, Catamaran Ventures, a venture capital firm floated by Infosys founder N R Narayana Murthy and others, invested in the MFI.

SKS was the first microfinance organisation in Asia, and the second in the world, to have raised private capital to fund microlending activities in place of the bank-funded model under the self-help group (SHG)-bank linkage programme, then prevalent in India.

The then state of Andhra Pradesh (AP), comprising three regions of Telangana, Rayalaseema, and Coastal Andhra, provided a fertile environment for expanding private microlending activity because the women SHGs’ movement was strengthened by state governments, and had brought millions of rural women into the fold of joint liability groups, creating far greater demand for credit than what the banks were willing to offer. Lending to joint liability groups was the core business model adopted by SKS.

By the time the company went for an initial public offering to raise about Rs 1,500 crore in August 2010, SKS’s customer base rose to 6 million with outstanding loan disbursals of more than Rs 5,300 crore. 

About 36 per cent of the company’s debtors were in AP. “This was history in the making in Andhra Pradesh because an outsider who had no powerful connections in either of the two large political parties of that time was able a create a $2-billion company,” an industry observer said.

However, the situation went into reverse after the state government took action against MFIs for their supposedly high-interest rates, coercive recovery practices, multiple-lending to the same family without bothering about the repaying capacity, and other “excesses” committed by MFIs after a spate of suicides by borrowers. 

As a result, SKS lost almost all of its AP exposure of more than Rs 1,400 crore as MFI activity halted. The portfolio outside AP, which was Rs 3,900 crore at its peak, had slipped to about Rs 1,500 crore.

According to senior IAS officer Reddi Subrahmanyam, who led the operation against MFIs (there was also an Ordinance barring MFI activity in October 2010), some microlenders had charged 36 per cent on loans when even dairy, which was the most profitable of all rural economic activities at that time, was offering not more than 16 per cent returns on investment. 

Following the AP crisis, the Reserve Bank of India came up with guidelines for MFIs in the country in the following year.

During the period of crisis, differences between Akula, who was executive chairman, and the board widened on issues of governance and transparency, leading to his resignation in 2011.

 

Later the SKS Trust, which had held close to 13 per cent, exited the company because it did not get a seat on the board.

Three large MFIs, including Spandana also went out of business.

“SKS survived the AP crisis because of its strong equity base. In the microfinance sector there is a gap in supply and demand and space for experienced players. However, better capitalised companies will be more successful in the sector,” Biksham Gujja of Vaya Trust (SKS trust), who played a key role in SKS, told Business Standard.

In June 2016, the management had renamed the company Bharat Financial Inclusion and made it into a profitable one. However, after demonetisation the company again reported losses.

 

Antique Stock Broking has listed three events that shook investor confidence in Bharat Financial — the AP crisis in 2010, the denial of the small bank licence in 2015, and demonetisation.

BFIL/SKS Microfinance financial journey

-- 1997: Founded as SKS Microfinance by Vikram Akula; becomes the first company to raise private capital for microlending activities in Asia

-- 2005: Becomes for-profit microlender in 2005; within two years, Akula raises more than $100 million in private equity (PE) and venture funding to scale up operations 

-- August 2010: Becomes the first stocklisted microfinance company in the country, raising Rs 1,500 crore through initial public offering, subscribed 14 times; provides a window of exit for PE investors in a shortest possible time.

-- October 2010: Andhra Pradesh (AP) government’s clampdown on MFI activity wipes out SKS Micro’s AP business, impacts its operations in other states

-- November 2011: Akula resigns from the company due to differences between him and board members

-- December 2012: Reports profit after reporting losses for seven consecutive quarters after the AP crisis.

-- June 2016: Changes name from SKS Microfinance to Bharat Financial Inclusion 

-- March 2017: Hit by note ban, reports losses in two consecutive quarters starting March 2017