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SKS success to bring more capital in microfin sector

There should be more microfinance firms and they should all have access to capital markets

The initial public offer (IPO) of SKS Microfinance has been a success. This is an entirely new kind of business to have been 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 great profits? Doesn't that mean it is over-charging its customers? The opposing argument is that since the purpose of the business is to uplift the poor, a profitable microfinance firm means more capital will flow into this business, which in turns means 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 decades of failure 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 is operating alone in a space, which banks were unable to occupy.

Still, that doesn't hide the fact that because of this, there are potential problems in a microfinance firm getting listed on the stock market. A business such as 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 focusing 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 equity markets, but that there should be many more such firms and they should all have access to 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.