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Customers should be able to choose in microfinance IPOs

india Updated: Aug 02, 2010 20:52 IST
Dhirendra Kumar
Dhirendra Kumar
Hindustan Times
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The initial public offering (IPO) of SKS Microfinance has been a success. This is an entirely new type of business to have listed in India. Given the numbers and the momentum that this business has, there was never any serious doubt that the IPO would find enough investors. However, predictably, there has been a good amount of debate about the appropriateness of a microfinance firm making such good profits — which is what has made it attractive to investors in the first place.

The two opposing ideas here are straightforward. One, why should a microfinance firm — whose purpose in life should be to uplift the poor — make such profits? Doesn't that mean it's over-charging its customers? The opposing argument is that this is a business whose product happens to uplift the poor. It's good that SKS' is so profitable because that means that more capital will flow into this business which will presumably mean more upliftment.

The way I see it, there is an element of truth in both arguments. SKS has stepped into a vacuum that exists because of the monumental, decades-long failure of what is supposed to be an important part of public-sector banks. The good it does is unquestionable. However, in all probability, its financial success is partly due to the fact that it's a sort of a monopoly occupier of a space that banks were unable to occupy.

Still, that doesn't hide the fact that because of this, there are potential problems in a microfinance firm being listed on the stock market. A business like this has a great deal of power over its customers, who, by definition belong to a nearly powerless section of society. If such a business ever starts focussing on nothing but the next quarter's numbers — as the logic of the financial markets dictates, then it could easily become no more than a somewhat milder but better organised version of the traditional money-lender.

But the solution to this is not that there shouldn't be an SKS or that it shouldn't have access to capital through the markets, but that there should be many more SKSs and they should all have access to the capital markets and their customers should be able choose between whichever microfinance outfit best fits their needs. But that would take some doing, I guess.