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The fracas surrounding the sacking of SKS Microfinance's CEO has turned the spotlight on to the microfinance industry, and the kinds of things that are showing up are not pretty. From Andhra, the epicentre of microfinance in the country, have come news stories about microfinance recovery agents kidnapping a borrower's daughter to force recovery and of another borrower being driven to suicide. To investigate these, raids have been conducted on the offices of the two lenders (one of them being SKS) and the state's chief minister has talked about a law to rein in microfinance outfits. Things have certainly moved rapidly for this industry -- from being hailed as the harbinger of social change just about two or three years ago to having to be 'reined in'.
There are two distinct aspects to the SKS story. One consists of issues that apply to all public companies. These relate to concealing information during the IPO and the failure of independent directors to do their jobs. These, one trusts, will be followed up by SEBI with diligence. The other is a set of issues that arise from SKS being a microfinance company.
No matter how much you repeat the catchphrases of social enterprises, a microfinance outfit has to be able to hold itself to a higher standard of corporate ethics than is the norm in India. It's certainly a great idea for microfinance to be financed through the stock markets. However, as I wrote at the time of the IPO, such companies are dealing with a particularly exploitable customer base. They have a great deal of power over their 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 financial markets dictates it should--then it could easily become no more than a better organised version of the traditional money-lender. As someone said to me while discussing SKS, you have to be a bit of a mahatma to run this business the way it should be.
This is not a view that fits into the markets' logic. However, microfinance companies have to be clearly and self-evidently run not only to the highest possible standard of corporate governance, but with more than a little bit of altruism mixed with business. Arguably, this shoe fits neither SKS Microfinance nor the Indian microfinance sector in general. And one must doubt what the business model of this industry actually is.
This article was originally published on October 18, 2010.
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