At the beginning of 2010, the Indian microfinance sector was a hotspot for impact investors. The promise of impact investing could be seen in the number of investors lining up to participate in the IPO of SKS Microfinance.
SKS had ballooned from 603,000 borrowers in fiscal year 2007 to 6.8 million in fiscal year 2010. Most were women in South Indian villages. The founder of SKS, Vikram Akula, had been saluted by Time and the World Economic Forum, and his Harvard-published memoir told the story of an “unexpected quest to end poverty through profitability.”
But by 2011, the Indian microfinance sector was mired in bad press and political controversy. Newspapers accused lenders of putting poor villagers in debt and causing suicides. State-level legislation in late 2010 capped interest rates and scared away equity investors. Borrowers ceased to repay, and SKS’s share price plummeted, dipping below 200 rupees in late August 2011 (from an IPO price of 985 rupees in August 2010). As summer 2011 ended, BASIX—a pioneering competitor of SKS-- very publicly searched for funding to stay afloat.
Both the achievements and challenges in India hold lessons for impact investors.
Impact investing has been widely touted, with microfinance as a leading example. The temptation to attract capital by promising macro-impact at a micro-cost is difficult to resist—and India continues to be one of the most important and innovative microfinance markets. But getting the equation right is more complicated than most advocates admit.
Here are seven lessons on challenges, risks and realities drawn from three decades of microfinance ups and downs.