“Our microfinance strategy borrows from Starbucks, Coke and McDonald’s”: MBAUniverse.com Interview with Vikram Akula, Founder SKS Microfinance

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MBAUniverse.com News Desk |
July 26, 2016
Vikram Akula is the CEO and founder of SKS Microfinance, one of the fastest growing microfinance institutions (MFI) in the world.

Earlier, he was a management consultant with McKinsey & Company He has over a decade of work and research experience in microfinance, and he holds a B.A. from Tufts, an M.A. from Yale, and a Ph.D. from the University of Chicago. Akula’s Ph.D. dissertation focused on the impact of microfinance, and he was named in Time Magzine's 100 people of the year in 2006.

In this exclusive interview to MBAUniverse.com, Akula goes down the memory lane to share the backdrop of this entrepreneurial journey, the challenges faced and the strategies he uses from companies like Starbucks, Coca-cola and McDonald’s.

Excerpts:

Q: The journey of SKS Finance started in 1998. What was the ‘purpose’ and the ‘inspiration’ that moved you to set this up?

As a child, I was shocked to see the vast numbers of impoverished people when visiting India. Though born in India, I grew up in the US and visited India during school holidays. I resolved to someday do something about this poverty I continuously witnessed.

Upon graduating from college in 1990, I worked with an NGO for 18 months as a community organizer. The NGO was involved in a range of development activities, from health to education to microfinance. I rotated to different programs and acquired a broad range of development experience. My key learning was that, of the development interventions, microfinance — the provision of small loans and other financial products to the poor — had the greatest impact on poverty. It was the foundation that provided the base for other development interventions like health and education. I then went to the US to complete my MA at Yale and returned to India for 18 months as a Fulbright scholar to coordinate a microfinance project with an NGO. My key learning from that experience was that, while microfinance made an impact on poverty, the way it was being practiced was incredibly inefficient and not scalable.

I returned to the US to do a Ph.D. at the University of Chicago, where I explored ideas on how to better scale microfinance and therefore provide access to financial services to poor people across the country. I identified three main constraints to growth: capital, capacity, and costs.

The lack of capital stemmed from the dependence on a limited pool of donor funds; the lack of large-scale operating capacity was the result of MFI management pursuing conventional growth models; and the high costs of delivery resulted from a manually intensive, high touch distribution model. I therefore developed a plan to scale microfinance based on three inter-linked principles that would overcome those barriers.

These three were: applying a for-profit methodology so that an MFI did not have to depend on limited donor funding, using best practices from the business world to speed growth and deploying technology to overcome high delivery costs. 

Armed with these ideas, I approached existing microfinance institutions (MFIs) to apply these new concepts. But when none were willing to try out these ideas, I started my own non-profit company, SKS or Swayam Krishi Sangam. The company later converted to a for-profit.

Today, SKS has become one of the fastest growing microfinance organizations in the world, with a growth rate of 165% and run-rate of 30 new branches and 60,000 new members per month.

Q: What is the current state of microfinance needs in India?

The present unmet need of microfinance in India according to World Bank is Rs 360,000 Crores. The current outreach by present MFI’s in terms of micro credit is Rs. 20,000 Crores. This huge gap gives MFI’s like SKS the confidence to enter rural markets and penetrate the most impoverished and remote parts of this country with microfinance.

Q: You reach out to over 5.5 lacs clients and customers. Loan repayment failure rate is a low 2%. What are the key pillars of your business strategy?

Our near-perfect recovery rates are a result of our group-lending methodology. We use a system based on trust. That is, we built our group lending system based on the trust that exists among the poor. Specifically, we adopted the joint-liability model first developed by the Grameen Bank of Bangladesh. Within each of our centers, you’ll typically find 40-60 members, divided into groups of five. These five-member groups serve as guarantors for one another, so if one member can’t pay, the others will make up the difference. If that five-person group cannot pay, the entire center comes forward to pay the remaining amount. In this way, members are held accountable for each other. This system based on trust—we take no collateral whatsoever--boasts a 98% repayment rate, a rate unheard of in the commercial banking world.

In addition, SKS has designed products and policies that make it easy for people to repay.

As far as the key pillars of our business strategy is concerned, I would have to elaborate on points I mentioned in the earlier question.

 SKS uses 3 business strategies.

First, we apply a for-profit methodology so that an MFI did not have to depend on limited donor funding

SKS believes it is not sufficient to be financially sustainable, but that an MFI needs to have a healthy profitability at or above market rates. Only then will commercial capital come in to the sector. SKS thus strives for a 20% ROE and last fiscal we had a 24% ROE.

Next, we are using best practices from the business world to speed growth

SKS believes that the MFIs can learn a great deal from scaling from Fortune 500 companies. So SKS has adapted a standardized distribution process used by companies like Coca-Cola, a factory-style training for a semi-skilled force drawn on principles of McDonald’s franchise training and a decentralized hub-and-spoke model which draws from Starbucks. By adopting such best practices, SKS has been able to achieve a run-rate of 30 new branches and 60,000 new customers every month.

Finally, SKS deploys technology to overcome high delivery costs. 

In terms of automation, we see that microfinance has very manually intensive processes, from manual passbooks and collections sheets at the field level to manual ledgers at the back office. Such manual processes were not only time consuming and inefficient but also led to scope for error and fraud. SKS planned to automate processes through the innovative use of technology, starting with an automated Management Information System.

Through the application of these 3 principles, SKS has been able to rapidly scale.

Q: According to newspaper reports your organization charges upwards of 20 per cent for the micro-loans. Isn’t it high?

Cost structure is high due to several reasons. First, high cost of funds (about 10%), where MFIs have to borrow from banks since they cannot take savings deposits and since they do not receive subsidized NABARD loans. Second, there are high operating (personnel and administrative) costs because staff travel to villages frequently to provide doorstep service—making it easy for the poor. This results in costs of about 11%. Meanwhile, 2% is for hardship cases that are written off while the remaining 2% is profit used for start-up funds for new branches. 

In spite of this, we know that SKS is the lowest cost financing available to the poor. The local loan sharks charge an interest rate of anywhere from 100% to 300% in some cases.

Q: Your organization loans only to women. What is the rationale and how did you reach to this insight?

Social development studies have demonstrated that women are much more likely to reinvest income into the household, for the benefit of the entire family. If a loan is given to a man, it is more likely that he will spend it on himself, whereas a woman will ensure there is food for her family and her children are educated.

Another reason why we lend only to women is because women are naturally better entrepreneurs. Women choose businesses where the level of risk is much lower and where returns are assured.

Q: Your organization has scaled up very rapidly. What were the challenges of scaling up so fast? What advice would you pass on to entrepreneurs who are hoping to grow?

Now that the company is in its 9th year, it will potentially reach a point where SKS will hit the innovator’s dilemma, as described by academician and author Clayton Christenson. SKS has established a business development division which has a mandate to explore innovative disruptions—ranging from new channels to new segments to new products. In so doing, SKS continues to foster innovation.

The HR challenge will be scaling from a current base of 1,000 staff to 2,500 staff by March 2007 and to about 20,000 staff by March 2011. In order to do this, SKS is again looking to Fortune 500 companies with large low-skilled work forces, such as Walmart, McDonald’s, and Starbucks to see what techniques can be leveraged. Its vision is to create a factor-style training to accelerate the velocity of our current training system by 10x.  

Q: How was your stint at McKinsey & Company? What were some key learnings as a consultant that you later applied in your work?

I served as a management consultant to companies on issues of strategy, marketing and sales, operations, and organizational structure. This experience was incredibly helpful, especially in terms of giving me exposure to cutting-edge techniques in regards to streamlining processes and training. For example, the lean manufacturing (lean processes pioneered by Toyota) was a learning I picked up at McKinsey, where we were applying lean manufacturing to retail banking. It was natural for me to apply those same concepts to microfinance. We have a team that is currently doing extensive process mapping for all our key functions and periodically examine our processes, to determine at which areas waste can be cut down within process, as well as to coordinate between processes. 

In addition, my exposure to a top-notch training program at McKinsey installed a belief that developing a standardized, streamlined, and effective training program should be a core focus at SKS. This program is currently in-the-works, and will be even more essential as we continue to hire greater numbers of staff.  

Q: What kinds of books are there on your bookshelf typically? Are they more about management or about Indian society and philosophy?

I read books that blend sound business principles and management practices with socially-driven philosophies. Clayton Christensen’s ‘The Innovater’s Dilemma: When New Technologies Cause Great Firms to Fall’ and Christensen’s and Michael E. Raynor’s ‘The Innovators Solution’ are two inspiring management books. 

Gandhi and his ideas are what most inspire me. The freedom movement was about political freedom. But while we have won political freedom, the poor still do not have economic freedom. I see the work of microfinance as expanding economic freedom to people. The book of Gandhi’s that most inspired me is Satyagraha in South Africa, in which Gandhi writes about developing his political and economic philosophy.

Q: Finally, what is your message to young business graduates and executives?

My message is simple: don't worry about making a mistake, even if means you risk losing it all.  This enabled great risk-taking for me.