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this podcast is brought to you by Indian
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knowledge at Warton please visit
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knowledge. won. up.edu India for more
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information India imagine was the theme
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of the 2008 Wharton India economic Forum
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that was held in Philadelphia recently
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the dayong event attracted several
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leaders including apj Abdul Kalam former
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president of India as well as CEOs of
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Indian companies nonprofit groups
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Consulting and private Equity firms
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Indian knowledge at Wharton brings you
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one-on-one conversations with these
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leaders we're going to speak today with
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Vikram akula founder and CEO of SKS micr
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Finance vickram thanks so much for
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joining us today thank you for having me
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I'd like to start by asking how you got
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involved with micro Finance can you tell
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us a little bit about how and why sure
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uh I was born in India but grew up in
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the states and uh I'll go back to my
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childhood here I used to go back to
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India quite a bit during school holidays
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and I would see the extreme poverty we
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have in India and then come back to a
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suburb of America and it was that jux
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position of extreme poverty on the one
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hand and extreme wealth that made me say
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Okay I want to do something to try and
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eradicate this kind of poverty so upon
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graduating from college I went and
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worked with an NGO basically as a field
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agent as a loan officer doing micro
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finance and I saw the tremendous impact
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that micro Finance has on the lives of
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the poor
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um but I also thought that you could do
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it in a more scalable Manner and that's
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when I left that NGO to set up SKS uh
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The Entity that I now run let's talk a
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little bit about the constraints that
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face you in the world of micr Finance
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for example lack of capital is always a
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problem lack of capacity is another
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issue and of course micr Finance has
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huge transaction costs what kind of
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Innovations has SKS brought about to
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tackle these issues
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yeah these these this is what I call the
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three C's the lack of capital the lack
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of capacity and the high cost of doing
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micr finance and in my analysis these
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are the three constraints that prevented
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micr Finance institutions from scaling
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up R rapidly so what we've done is three
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things against these problems that we
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think can overcome those constraints the
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first is to use a for-profit model to
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overcome the constraints of capital the
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second is to use best practices from the
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business world to overcome the
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constraints of capacity
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and the third is to use technology to
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overcome the constraints of costs to say
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a quick word on each we believe that
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even though most microfinance
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institutions are nonprofits and even
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though Professor yunice who's a mentor
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of mine talks about micr Finance as a
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social business meaning not paying
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dividends we feel that in fact you have
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to structure things in a for-profit way
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you have to pay investors High dividends
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because otherwise there's no way you're
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going to kind of access the capital the
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kind of capital that poor people need so
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we're structured as a for profit and
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that's been able that's enabled us to
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tap into commercial capital and provide
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an unlimited amount of um Finance to the
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poor on the second dimension of capacity
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if you look at most micr Finance
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institutions they're structured as NOS
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they're small they think about you know
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thousand clients or maybe 10,000 clients
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whereas a business whether it's
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Starbucks or Coke or McDonald's thinks
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about millions or tens of millions so
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what we've done is we've looked at those
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types of companies and adopted the
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techniques that they've used within micr
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finan and that's given us an extremely
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fast growth rate and finally when it
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comes to technology um we've developed
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an automated management information
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system because at the end of the day
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you're doing millions of very tiny
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transactions and there's a high cost to
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doing that unless you use technology
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you'll never be able to bring down the
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cost and to scale rapidly just to go
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back to that last point do you use
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mobile phones to manage transactions
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sure we're doing a a pilot project right
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now with mobile phones and clearly we
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think Mobile Banking is the future
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because doesn't make sense to try and
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build a retail you know brick and mortar
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infrastructure in rural India from a
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cost perspective it makes no sense at
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all and mobile technology today is
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robust enough that you can actually very
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easily do Banking and we actually have a
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very successful pilot that we've done
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the problem is the regulatory
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environment and the Central Bank in
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India has not understood Mobile Banking
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in its full potential and therefore
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there are regulations that make it
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prohibitive for us to do this and if
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those regulations get changed then
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clearly this is the investment that we'd
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make and this would be the future of
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micr Finance if you don't mind let's go
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back to that last Point first about
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getting capital from private sources I
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understand that SKS micr Finance has
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received capital from Venture
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capitalists when that happens does that
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change the expectations in any way what
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I mean is do Venture capitalists treat
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you more gently because you're lending
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money to poor women entrepreneurs than
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they would if you were lending to say a
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technology entrepreneur
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so we certainly have uh social investors
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who come at it with a double bottom line
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of making a social impact as well as a
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for-profit impact but we also have
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investors who have a Pure commercial
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interest take for example example
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Sequoia Capital the investors in Yahoo
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Google and so on they're not interested
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in the social purpose they're in there
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because their LPS need to earn a high
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return so they come in at a Pure
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commercial Angle now many people think
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that there's a dichotomy between the
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social purpose and the commercial
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purpose but we actually don't think
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there is a dichotomy we think that if
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you do what's right by the borrowers if
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you charge reasonable interest rates
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provide good service not only is that
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intrinsically the right thing to do but
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that's the way to build a good business
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especially when you're working with the
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base of the pyramid because the base of
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the pyramid customers is extremely loyal
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and if you treat them well they'll stay
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with you if they feel they're being
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exploited or taken advantage of they
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will turn on you in a second now if you
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treat them well it's not only the right
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thing to do but they'll stay with you
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and that becomes comes how to build a
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long-term healthy business and that's
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what our commercial investors want
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typically what are the interest rates
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for micr Finance Loans so we we charge
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an average interest rate of 24% now that
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seems extraordinarily high but let me
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put this in context informally the The
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Village money lender or the loone Sharks
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will charge anywhere from 50% to as high
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as a th% interest so we're charging much
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less than what they charge and I'll also
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submit that our interest rate is
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actually the lowest cost finan in
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available to the poor because even
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though a retail bank might charge let's
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say 12% or a subsidized government loan
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might cost 7% if you actually talk with
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borrowers and ask them how many trips
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they're making to a bank branch what are
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the lost wages the bus fairs what are
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the broker fees and sometimes bribes
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they're paying to access that 7% loan
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they actually end up paying much higher
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than 30% so at 24% we're actually the
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lowest cost financing available to the
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poor and the poor are earning such high
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Returns on their microenterprises that
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they have no problem paying 24% if their
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returns are averaging 100% or so well it
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sounds like the rates of interest you
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charge are less than what some credit
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card companies charge their customers
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but the point you rais is a really good
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one some time ago we interviewed
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Muhammad yunus the founder of gramine
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bank and the Nobel laurate and he told
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us that he thought micr finance
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companies need to be regulated because
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the rates of Interest they charge are so
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high and so urious that they're almost
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as bad as the rates they get from the
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village money lender do you happen to
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agree with that point of view well I
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think the best way to tackle interest
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rates is competition and certainly in
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some areas you've got some mfis that are
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you know really trying to extract and
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charge High interest rates over time
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you'll see competition pulling that down
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now when we compete in different areas
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the first thing you see is the local
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incumbent mfi will immediately drop its
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interest rates and we think that's the
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best way to do it so we wouldn't be in
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favor of Regulation that caps interest
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rates we were afraid that that that'll
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prevent other competitors from coming in
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and prevent the more robust way of
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lowering interest rates having said that
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we think there is a scope for regulation
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when it comes to ethical practices such
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as truth and advertising transparency
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with your borrowers those are the types
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of things that we think will will make a
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big difference to making sure that the
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the sector remains healthy and prevents
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the bad apples from coming in as you've
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gone about trying to build SKS micr
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Finance what's the biggest challenge
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you've faced and how have you overcome
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it sure the biggest challenge so far and
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and clearly the challenge going forward
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is the political environment the fact is
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that um micr Finance is still very much
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understood by politicians misunderstood
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by politicians and bureaucrats and
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people hear the interest rates and they
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don't understand the context and they
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feel that something exploitative is
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going going on so we spend a lot of time
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trying to educate politicians trying to
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educate bureaucrats so they understand
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the power that micr Finance has and
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understand understand how it works to
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actually help the poor the poor
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certainly understand this our customers
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do they come back to us year after year
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it's the political Elite that doesn't
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understand it and sometimes misuses
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micro Finance for political ends that's
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been the biggest challenge how many
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customers do you have and how would you
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describe your typical borrower sure So
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currently we've got um nearly 2 million
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customers spread across 25,000 villages
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in 15 states of India um a typical
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borrower typical first loan is about
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8,000 rupees or
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$200 um a woman might take a loan to to
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buy a cow will sell the milk and then
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repay the loan on a weekly basis she
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might do a small Village Grocery she
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might do vegetable vending or another
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type of trading activities and what we
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see is there's very high Returns on
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investment and each year she's eligible
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to take a larger loan so even though
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$200 may seem relatively small
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eventually we'd like to get borrowers
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and we see many borrowers moving into,
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loans and then you begin to see huge
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impacts in terms of poverty eradication
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where do you think SKS micr finance will
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be 5 years from now so our our vision or
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give you I'll give you our two-year goal
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we're close to 2 million clients now and
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we hope to scale to 8 million clients um
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in the next two years now today we're
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the largest mfi in India if we hit that
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number of 8 million we'll become the
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largest mfi in the world so in terms of
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scale that's one thing that we'd like to
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do but we also have a vision to use micr
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finance that channel that we've created
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to distribute the full range of
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financial services now we do primarily
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credit and some insurance but we know
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poor people need savings they need
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remittances and they need other products
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as well so we want to introduce a range
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of different products we also think
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there's opportunities to leverage this
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channel to introduce non-financial
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products as well so currently we're in
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discussions with groups about doing
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Education Loans and and talking with
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education providers to provide lowcost
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schools we have a health insurance
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product and we're teaming up with low
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hospitals we are um giving loans to buy
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cell phones to buy you know consumer
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package goods and we think there's the
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whole range of non-financial products
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that poor people need that we can
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deliver through our Channel as well
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vicam thank you so much for joining us
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today thank you as
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well for more information please visit
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knowledge. won. up.edu India
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