SKS Microfinance, the largest and fastest growing micro-lender in India, raised Rs16.29 billion ($342 million) in an initial public offering after pricing its shares at the top of an indicated range. The book was 13.7 times subscribed by investors interested in microfinance.
The SKS Microfinance IPO was a test case in more ways than one. In recent years many have come to view the microfinance (MFI) business as risky, if not suffering from an outright bubble. Near 100% loan growth year after year is unsustainable they say, claiming that the breakneck expansion has come at the cost of prudence and valuations have gone through the roof. Some have criticised the 'for-profit' MFI for betraying microfinance's original purpose of helping the poor get access to credit.
To start with the last point, commercial MFIs had their origins in the self-help groups of rural women who pooled their savings and used them as collateral to borrow from banks. Even today, self-help micro credit organisations, with an outstanding loan portfolio of $4.9 billion, account for twice the market share of the commercial MFIs. But, given their restrictions on borrowing and lending, they are growing at half the pace of the MFIs and will soon be overtaken by them. Rural credit needs are vast and can only be effectively met by the economies that result from scale.
SKS started as a charity house with a not-for-profit business model in 1993, and registered as a non-deposit-taking non-banking finance company in 2005. It now has more than 6.8 million borrowers, has disbursed more than $3 billion and has had a 99% repayment rate. And it has accomplished this without diluting its first principles, its adherence to the original Grameen Bank model of group lending. As the company's CEO Suresh Gurumani said: "There is a huge unmet demand for capital in predictable and affordable ways. What we do in microfinance is sustainable because we rely on the group to take the credit risk, to effectively underwrite the loan. We don't do any credit assessment."
The basic borrowing group of five is self-selecting. SKS imparts fundamental financial literacy, but it is the group that approves each loan. In turn, the group guarantees that the loan is used for the purpose contracted and stands as guarantee for its repayment. SKS follows a staggered pattern of disbursement. The initial loan of Rs10,000 ($215) to each member is repayable in 50-weekly instalments. The successful completion of the first cycle entitles the group to avail a second loan, this time Rs16,000 and so on up to Rs30,000 in year five. "This allows the group to assess each member's use of the money and the peer pressure to qualify for the next loan ensures credit discipline," said Gurumani.
The process is self correcting as over a period of time defaulters get weeded out of the network ensuring that loan repayment rates remain extremely high. The small size of loans too protects against over-borrowing and defaults. Of course, there is a risk of the borrower taking multiple loans from competing MFIs. To address this risk, the biggest MFIs have created a self-regulatory body called the Microfinance Institutions Network (MFIN) which pools information on individual loans and operates a credit bureau.
To a great extent, MFIs have accomplished what the government's plan for financial inclusion through rural banking has so far failed to accomplish. The objective was to provide financial services to 55.7 million 'unbanked' rural households by 2012. But, without actively encouraging savings or investment, extending banking services to the poor has achieved little. By March 2009, barely 11% of the 8.9 million rural accounts public and private sector banks had opened were operational.
SKS sold a 21.6% stake, or 16.79 million shares, of the company. About 44.3% of the shares were new and 55.7% were secondary. Of the total, 60% were offered to qualified institutional buyers (QIBs), including anchor investors, 30% to retail investors and 10% to non-institutional investors, primarily high-net-worth individuals.
Around 11.76 million shares allocated to QIBs and non-institutional investors were priced at Rs985 per piece, the top end of an indicated price range starting from Rs850. The price represents a valuation of 3.8 times its estimated post-money book value for the fiscal year to March 2011.
The remaining 5.03 million shares in the retail tranche were priced at a Rs50 discount of Rs935 per share.
SKS secured an initial $64 million from a group of 18 anchor investors who agreed to buy 18% of the total offering at the top of the indicated price range of Rs850 and Rs985. The anchors include JPMorgan Chase, Morgan Stanley, and India’s ICICI Prudential and Reliance Mutual Fund. They are required to hold the shares for at least 30 days.
Given the perceived risky business model of MFIs and their grass-roots customer base, very few microfinance players in the world have tapped the equity market for working capital. The previous IPO made by a pure microfinance institution was the share sale of Compartamos Bank in 2007. The largest micro-lender in Mexico raised $467 million by selling 30% of its equity capital.
Citi, Credit Suisse and Kotak Mahindra were bookrunners of the SKS deal.
For more on microfinance in India, see the August edition of FinanceAsia magazine.