‘Our mission is giving loans to the poor’

Vikram Akula, CEO of India’s fastest growing microfinance institution, speaks to Ramesh Kandula in Hyderabad about his poverty alleviation plan

Vikram Akula aims to make the deprived self-reliant with the help of technology

He has been named by Time magazine as one of ‘The People Who Shape Our World’ for 2006. Vikram Akula, the Founder and CEO of SKS Microfinance, one of the world’s fastest growing microfinance institutions, is not resting on his laurels. The Hyderabad-based social entrepreneur wants to make a difference to the lives of seven lakh women by helping them become economically self-reliant by March next.

What distinguishes this doctorate holder from University of Chicago are his efforts in infusing cutting edge technology innovations to, in Time’s words, "make venture capital available to more of the 800 million people in India". The Tufts University graduate, who is an MA in International Affairs from Yale University, returned as a Fulbright scholar to India to coordinate a project on providing microfinance to marginal farmers.

He started Swayam Krishi Sangham (SKS) Microfinance in 1998 with a clear understanding that technology could be used to automate the extremely manually intensive processes of microfinance, which enabled rapid scaling. Today, SKS’s highly standardised processes, which, among others, replaced passbooks with smart cards, have attracted the attention of the likes of Vinod Khosla, Founding CEO of Sun Microsystems, with Rs 11.2 crore funds.

Excerpts from the interview:

Today, SKS is the fastest growing microfinance institution in India. It is one of the top five largest microfinance organisations in the nation, and has provided over Rs 320 crore in loans to nearly 260,000 poor women in impoverished regions of India. Last year, SKS achieved nearly 161 per cent portfolio growth, with a current portfolio of Rs.110 crore and a 98 per cent on-time repayment rate. Its goal for this fiscal is to scale to 700,000 clients by March 2007.

SKS is focused on rapidly expanding into as many geographic markets as possible. Our objective is to achieve the "7 by 7 by 7" goal: 700,000 customers and Rs 700 crore disbursement by March 2007.

In order to do this, SKS is in the process of launching new operations in 14 new areas spread across its existing five states (Andhra Pradesh, Maharashtra, Karnataka, Orissa, and Madhya Pradesh) and in six new states (Rajasthan, West Bengal, Uttar Pradesh, Bihar, Jharkhand and Chattisgarh).

In 2005, SKS became registered as a limited liability "Non-Banking Finance Company" (NBFC). This conversion from non-profit to for-profit status facilitates the growth by allowing the organisation access to commercial and international capital markets, which lends to stronger financial sustainability and increased commercial credibility. This increased access to funds ultimately aids SKS to reach a greater number of poor.

All investments in SKS are ploughed into institutional growth, developing our capacity to provide financial services to the poor all across India. Our limited profits (less than 2 per cent) are also used to this end.

The SKS mission is to provide financial services to the poor in a sustainable manner. Microfinance, as an industry, serves to provide access to finance (in India, this is most commonly loans and insurance) to the segment of society that has traditionally been left out of the financial sector – the poor.

At SKS, we have focused on doing so in a sustainable manner – both financially and operationally. This has translated to an approach concentrated on the use of global best-business practices, specifically standardisation and automation to focus on: rapid scale, better customer service and innovative use of technology.

In 2000, SKS conceived of a way to automate the last mile of delivery through the use of smart cards and palm pilots. The project would replace passbooks with smart cards and collections sheets with PDAs. The expected benefits were two-fold. First, the cards would be used as electronic passbooks, transmitting transaction data electronically and thus lowering the cost of delivery, reducing the scope for error and fraud, and enhancing the efficiency of the MIS. Second, the card was to be a cash substitute, allowing SKS to reduce cash in transit (providing further cost gains) as well as providing the borrowers more convenience and more products. SKS is now piloting the SKS Card project as a mag stripe VISA card and intends to roll this application out enterprise-wide by the end of this fiscal.

SKS offers a range of working capital and consumption loans. Our working capital products provide financing for various income generating incomes, in the areas of trade, service, agriculture and production. Loans are used for everything from buying buffalo (to selling milk) to opening kirayana shops. These loans have a flat rate of 12.5 per cent and a total effective rate of 25.6 per cent. Our consumption loan, or emergency loan, is an interest-free loan. This loan serves to provide cushioning during difficult times.

Our near-perfect recovery rates are a result of our group-lending methodology. We use a system based on trust. That is, we built our group lending system based on the trust that exists among the poor. Specifically, we adopted the joint-liability model first developed by the Grameen Bank of Bangladesh. Within each of our centres, you’ll typically find 40-60 members, divided into groups of five. These five-member groups serve as guarantors for one another, so if one member can’t pay, the others will make up the difference. If that five-person group cannot pay, the entire center comes forward to pay the remaining amount. In this way, members are held accountable for each other. This system based on trust—we take no collateral whatsoever—boasts a 98 per cent repayment rate, a rate unheard of in the commercial banking world.

SKS has conducted research which demonstrates the average return on investment (ROI) for our borrower ranges from 29 per cent-236 per cent. As a result, borrowers increase income by about 10 per cent annually (compared to a comparable group that did not have access to SKS services). This translates to moving out of poverty in about six years. That said, microfinance is not a silver bullet. It is only a first step in the development process.

In October, Rahul Gandhi was on a tour of South India to look at self-help groups and other economic and social development initiatives that had been successful in this region. As he wanted to learn about different approaches to gauge their applicability in UP, SKS, as a leader in the retail microfinance space, was a natural choice. While here, he spent time observing weekly centre meetings, group formation and training sessions and income-generating activities that have been started by SKS borrowers. Rahul was extremely impressed with both SKS operations and the entrepreneurial spirit of our women borrowers.

Since the inception of SKS in 1998, I have been actively engaged in a dialogue with politicians and bureaucrats on promoting policies that will positively impact the poor. When it comes to microfinance, Government efforts—whether the SHG movement of NABARD or the support SIDBI has provided to MFIs—have largely incubated the MFI movement. Now that it has been incubated, private microfinance institutions are well positioned to carry this forward, as has been demonstrated by SKS. The private sector and the government will have to work together to bring about development. Neither can do it alone.

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