Wokai Blog: India Microfinance SKS IPO Pits Profit vs. Altruism: Wokai China Microfinance Blog

"SKS won approval from the Securities Exchange Board of India to proceed with an IPO, according to people familiar with the situation. Early expectations are that the company will raise more than $250 million from the deal, making SKS the first microlender in India to go public.

Only a handful of microlenders around the world have made it to the global stock markets, so the SKS deal could encourage other companies in the sector to follow. SKS is the largest microlender in India, with a portfolio of about $1 billion. About $5 billion in microloans were made in the country last year, and the IPO would help SKS borrow money to fuel expansion.

"The only place you can get the amount of money that is needed to help the poor is in the capital markets," Vikram Akula, founder and chairman of SKS, said in an interview. "That's why we are doing this IPO."

But as SKS's executives and investment bankers went on a roadshow to stir up interest in the shares, they stressed how little profit the company makes. The strange sales pitch reflects sensitivity to accusations that SKS is gouging borrowers even as its makes millions of tiny loans to poor families."

Mr. Akula once worked for Nobel Prize winner Muhammad Yunus at Grameen Bank in Bangladesh, and tweaked the Grameen model to reach more people.

"He took cues from McDonald's Corp. and Starbucks Corp., standardizing training and lending procedures to cut costs and accelerate growth. Employees were paid a decent wage so that Mr. Akula wouldn't have to rely on volunteers and regional managers from top, rural business schools. And he built in enough profit to make the business appealing to institutional investors.

The debate about profit's place in the microlending market exploded in 2007 when Mexican microlender Banco Compartamos SA listed its shares. Its original investors and founders took home millions, sparking accusations that they were profiteering from the poor by sometimes charging more than 80% annual interest.

Mr. Yunus contends that any microlender charging borrowers more than 15 percentage points above its cost of capital needs to cut costs or profits—and pass the savings on to the poor. SKS charges around 18 percentage points above its cost of capital.

"Vikram is a very capable young man," Mr. Yunus said. "But he took a wrong turn when he decided to use microcredit for making money."

Mr. Akula said he needs to build in around five percentage points of profit to expand, adding that Mr. Yunus's expectations are too high because his experience is in markets likes Bangladesh, where he didn't have to deal with the high costs of reaching remote villages."

SKS seems to be on the right track, displaying sensitivity to the accusations of borrower gouging by stressing its low profit. It now has 7 million borrowers, up from 200,000 five years ago. Although profit growth has averaged 200% every year, there's no denying the growth of borrowers served has been impressive, so it stands to reason if his profit model is ultimately the answer to scaling microfinance in India or if Muhammad Yunus was correct in predicting SKS's "wrong turn".