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Prince of poverty leaves behind questionable legacy

What went wrong at SKS?

Namrata Acharya  |  Kolkata 

Vikram Akula was the golden boy of microfinance when he launched his company SKS. How did things go so horribly wrong?.

Vikram AkulaThe story of Vikram Akula is almost like a classic Greek tragedy with epic peaks, troughs and betrayals that could easily make up a Hollywood movie. Akula remains a controversial character, whose very name incites admiration and criticism in equal measure. Some say that he gave birth to the microfinance industry as we know it in India. say that his model of lending, pioneered by his company SKS Microfinance, gave birth to an almost unquenchable thirst for profit, driven by a business model that has no place in ameliorating the state of the poor in India. Regardless of how people feel, one thing remains clear: Microfinance will never be the same without him.

Around a week ago, SKS reported that Vikram Akula stepped down as Chairman of SKS in order to pursue a career in mobile banking. However, all indications suggest that there was something entirely different going on in the company. The seed of dissent at SKS became public, when last year Akula sacked CEO Suresh Gurumani, who was brought in SKS to give it a corporate identity. It is believed, Gurumani wanted to deviate from the traditional MFI model, and replicate a modern-day technology-driven retail banking structure in SKS.

* The year 2010 saw the highest Private Equity Investments in microfinance with 22 deals worth Rs 632 crore. However, post-October 2010, there have been only five private equity deals worth Rs 180.6 crore 
* Indian MFIs witnessed an extraordinarily high growth rate from 2004-2009 of 91 per cent in number of clients and 107 per cent in terms of the outstanding portfolio size. In a later report, MFIN stated that the total amount of new lending for November 2010-March period was Rs  2 crore as compared to about Rs 3,000 crore in the same period a year earlier
* Recovery dropped from 100 per cent prior to October 2010 to less than 5 per cent in the last one year in Andhra Pradesh

To understand what was happening in SKS recently, one has to take a peek at data from Bombay Stock Exchange which reveals that as of September 2011, Indian promoters held just 11.55 per cent stake in the company, while foreign promoters held a 25.29 per cent stake. The public held 63.16 per cent. In other words, promoters have, in effect, little control over SKS on Monday. Data from SKS website shows that Akula has no shareholding as a promoter in SKS but still wanted to steer the ship that he had built from scratch. “The company was making huge losses, and investors were not getting returns as promised. They obviously didn’t like Akula’s intervention in running SKS, even when his stake was negligible, while he felt that the company’s achievements were to his credits and its failures were someone else’s fault,” said an industry insider who prefers to remain anonymous.

Ultimately, the institutional investors whom Akula inducted into SKS with much fanfare, proved to be the Frankenstein’s monster that ousted him. Sources say that Paresh Patel is the CEO of Sandstone Capital and Sumir Chadha, Managing Director of WestBridge formerly Sequoia Capital, both of whom are SKS board members, were the most vociferous against Akula in the last board meeting. (Both Patel and Chanda could not be reached for comments.) "The company needs a strategic redirection, and we will announce the plans soon," said Dilli Raj, Chief officer, SKS, as an explanation.

But the sharpest critic of Akula is his ex-wife and co-founder of SKS, Malini Byanna who has accused him of a whole host of questionable practices related to SKS. Akula refused to talk to Business Standard, except to say, "I am legally advised that I am not in a position to discuss, comment on, or respond to your queries. Consequently, I regret my inability to respond to your questions beyond saying "I am unable to comment.”

How could a ‘golden boy’ of a promising industry purportedly offering succour to the masses in the form of loans that sidestepped usurious moneylenders who held rural India to ransom, fall from grace so quickly?

It was 1995, when, Akula, a Fullbright scholor, and a researcher in poverty, travelled to remote villages in a motorbike meeting with borrowers, disbursing micro loans, and collecting repayments for the non-pro·t organisation, Deccan Development Society. In his book, A Fistful of Rice, Akula describes himself as an “idealist student” then, taken aback by poverty in India. “The degree of poverty in these remote Indian villages was unlike anything I’d ever seen in the United States. Children with spindly legs and hungry eyes played in the mud alongside mangy stray dogs and farm animals…But I felt like I was really making a difference, really helping to end poverty in India.” he says in his book. In fact, Akula’s upbringing validates his perception about deprivation, though more than a decade of MFI profusion, and hungry eyes and spindly legs have not vanished. Having grown up in New York, and educated at Tufts, Yale and University of Chicago, Akula was better suited as an academic who coined the term “goat economics” or profit-oriented MFI model.

Almost 35% of outstanding loans today are estimated to be rotten (Rs crore)


2004-05 1,500**
2005-06  2,700**
2006-07 4,400**
2007-08 9,500**
2008-09 18,500**
2009-10 24,000**
2010-11 30,000**
Present size  20,000**
*estimated    ** informal estimates
Source : Crisil/ MFIN

In 1997, Akula founded SKS, as a non-profit organisation with funding from close to $52,000 raised from 357 people. By 2004, Akula was almost bankrupt due to mounting debt in starting SKS, as well as legal expenses incurred due to his divorce case with former wife Malini Byanna. Akula was left with no option but to leave SKS to his managers in Andhra Pradesh and work at McKinsey in the US to generate cash. In 2005, he came back to India and converted SKS it into a for-profit company and got to work, making SKS into a loan machine.

Akula should be credited with propelling a genuine revolution in lending, and for people who were used to paying upwards of 300% in interest in the hinterland, he was their messiah. Time Magazine billed him as one of the world’s 100 most influential people in 2006, and Akula came be known as “Starbucks of Mircrofinance” for adopting global business practices in microfinance, according to the SKS website.

Inspired by the Grameen Model of micro lending in Bangladesh, Indian MFIs had been growing by leaps and bounds over the last decade. According to data from, Indian MFIs witnessed an extraordinarily high growth rate from 2004-2009, with an average annual increase of 91 per cent in number of clients and 107 per cent in outstanding portfolio size. Even during the global financial crisis from 2008-2009, the MFI gross loan portfolio grew by 66.20 per cent and the number of borrowers increased by 76.50 per cent. Meanwhile, SKS’s profit multiplied 80 times in just three years between 2007 and 2010, from Rs 2 crore in financial year 2006-07 to 174 crore in financial year 2009-10. With interest rates for most MFIs as high as 30 per cent, some even 50 per cent, along with 99 per cent recovery, the steep profit was anyone’s guess. Meanwhile, Akula was the evangeliser for the industry. “We definitely represent a new generation of microfinance— one that is using a commercial approach to scale rapidly and is keen on not just credit but the full range of financial services for the poor,” Akula once told a magazine. “We have the path to the pot of gold,” he added. “Everyone has approached us, from tractor makers to people selling colour TVs, water purifiers and diapers. We’re creating brand new markets.”

This worked a lot of people up. A business publication quoted David Gibbons, a pioneer in the microfinance and head of Cashpor, an MFI which works in the poorer parts of Uttar Pradesh and Bihar, as saying that at first people like him were happy about the huge increase in client outreach. “Then it became clear that something else was happening. They started targeting upmarket poor in search of larger loans,” he said. Ela Bhatt, founder of Self-Employed Women's Association of India (SEWA) and pioneer in cooperative women , and micro- movements, warned about organizations like SKS creating debt treadmills, where a loan would be taken simply to pay off another. Then, a troubling phenomenon began to appear on the MFI landscapre. May 2010 and February 2011, 203 MFI-linked suicides were reported in Andhra Pradesh, alone, according to data from Society for Elimination of Rural Poverty, Hyderabad.

This didn’t stop SKS from planning an Initial Public Offering (IPO). Some of the high profile investors at the time of SKS’s IPO included billionaire George Soros (who exited recently from SKS), Sequoia Capital, Vinod Khosla, Small Industries Development Bank of India, Bajaj Allianz, Yatish Trading, Kismet Capital, Sandstone Capital, Silicon Valley Bank Unitus and Narayana MurthyCatamaran Management Services. However, Akula had already engineered a sale of part of his stake in SKS to a hedge fund company called Treeline Asia, making a tidy Rs 60 crores, or a 12-fold profit before the IPO itself. It is unclear how much SKS shares he sold after the stock listed.

This was the last straw for many, like the granddaddy and global pioneer of microfinance, Mohammad Yunus, who was aghast. “The concern is that when you put an IPO, you are promising your investors that there is a lot of money to be made and this is a wrong message. Poor people should not be shown as an opportunity to make money out of. If you have a new kind of IPO where you can say that you can help people get out of poverty, it is a social business and if you invest here you never get any return from this then it is good,” Yunus had earlier said. Ela Bhatt thinks it is crystal clear back then and now as to why microfinance has imploded. “The move from public service to private purpose, and super profiteering were the two main reasons for the debacle of MFI industry,” says Bhatt.

Today, the industry is gasping for survival. The Andhra Pradesh Microfinance Institutions (Regulation of Moneylending) Act, 2010 came down hard on MFIs for what it thought was predatory lending practices, but it has also curbed fresh lending and recovery of loans in the state. Thus of the Rs 20,000 crore MFI industry in India, at least Rs 7,000 crore is set to become bad debts in Andhra Pradesh, the state with the highest concentration of the MFI industry. The MFIs will have to raise as much as Rs 5,000 crore by March 2012 as equity on account of these non-recovered loans through equity, according to Alok Prasad, CEO, MFIN. With bank’s reluctant to lend, MFIs across the country are facing the heat of the Andhra Pradesh regulations. Recovery dropped from 100 per cent to less than 5 per cent in the last one year.

Ultimately, whatever one may say about Akula—a visionary or a profit-motivated salesman—fact is that for a man who spent so much of his life promoting an industry, this is not a legacy he will be proud of leaving behind.

Note: One sentence of this article has been modified in the online edition

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First Published: Tue, December 06 2011. 00:52 IST