Entrepreneur Gets Banks To Back Tiny Loans describes SKS Microfinance and the growing trend of “microlending”:
Vikram Akula runs a company that doles out loans of $100 or less to desperately poor villagers so they can buy a water buffalo or a bicycle. But he’s hardly a typical do-gooder.Mr. Akula, the 37-year-old founder of SKS Microfinance Pvt. Ltd., is at the forefront of the latest trend in “microlending,” or making tiny loans that help entrepreneurs lift themselves up from the lowest rungs of poverty. Long the province of charitable institutions, microlending is starting to attract the attention of big business. Intrigued by India’s red-hot economy and potential market of more than a billion consumers, financial giants such as Citigroup Inc., ABN Amro Holding NV and HSBC Holdings PLC have already provided millions of dollars for SKS to lend out. SKS, in turn, says it has notched up healthy profits for the past three years.
“This can work driven only by greed,” says Mr. Akula, a one-time McKinsey & Co. consultant who was born in India and grew up in Schenectady, N.Y. “That’s the magic of it.”
It’s a radical idea in a field that has typically focused more on social goals such as the empowerment of rural women than on profits. Microloans can be a useful tool for alleviating poverty in developing countries where the poor — who usually don’t have access to credit — use them to start small but profitable businesses. The approach, pioneered in the 1970s by firms like Grameen Bank in Bangladesh, has since spread all over the world. As many as 10,000 microlending institutions now serve more than 100 million small borrowers. India, where more than 300 million people live on less than $1 a day, is an especially important laboratory for microlending.
The practice isn’t entirely altruistic. Default rates on microloans tend to be very low — under 3%, in many cases. By comparison, U.S. credit-card issuers typically charge off around 5% of outstanding balances. Even so, microlending overhead often gobbles up most of the profit. That’s because it can take hundreds or even thousands of loan officers to manage millions of small loans to often-illiterate farmers in remote villages. Transaction costs and paperwork can be overwhelming. Most microlenders live hand-to-mouth, relying on wealthy patrons or development agencies to keep the money flowing.
How did Mr. Akula and SKS run things differently?
The first thing they did was put a stopwatch on each step of the loan process. Waste was everywhere. Loan officers had to search for borrowers in fields. Villagers would make payments in unruly piles of sweaty, wadded-up rupees they kept wedged behind blouses and belts. Someone had to count the money and then dole out fistfuls of change.Mr. Akula made some simple rules. Borrowers have to meet at a certain time. Instead of letting borrowers decide how much to repay each week, they are told to pay the same amount each time in exact change. He set payments in multiples of five rupees to avoid coins (in India the five rupee bill, worth about 11 cents, is the smallest). The bottom line: Fast turnaround means a SKS loan officer can visit three villages a morning instead of one, as is typical, and can handle an average of 50 borrowers in each meeting instead of 20.
Behind the scenes, Mr. Akula cut the time spent on accounting from hours to minutes. He convinced some friends from McKinsey and KPMG LLP to volunteer their time to create simple loan-management software. It is mostly used by loan managers without computer experience.