Transition from non-profit to for-profit: Mistakes SKS committed

The rise and fall of SKS Microfinance is story of a mission-drift that went awry.

Started in 1997 as a non-profit organisation with an objective of poverty alleviation, it went on to scale up and expand by raising funds from investors. The company was accused of profiteering at the cost of the rural poor.

Along with a law introduced in Andhra Pradesh, its key market then, fierce infighting also contributed to the fall of the company.

After making losses for seven consecutive quarters, the company swung back into the black in the December quarter by reporting Rs 1.2 crore net profit.

In an interview in the Mint today, the company's CEO and managing director MR Rao and chief financial officer S. Dilli Raj have candidly accepted the mistakes the company committed.

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According to Raj, the Andhra Pradesh crisis-referring to the law introduced by the state government to curb the alleged coercive practices of microfinance companies-was just an external event. The bigger problem was within the company itself.

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He says the problem was the company's larger-than-life claims of empowering the poor and poverty alleviation, even as it veered towards for-profit model.

The claim of eradicating poverty and the company's numbers - portfolio size, the individual incentive system like the ESOPS and salary levels, which became public during the IPO - did not gel, he says.

Second mistake, according to Raj, was that despite the fierce competition in the sector no company brought the rates down. Instead, they diluted the processes.

Microfinance companies charged 31-32 percent interest on loans while in an ideal situation competition for market share should have brought down the interest rates.

Customers also took advantage of the situation as they also started negotiating on the process front.

Interestingly, Raj even thanks the Andhra government "for the wonderful job of inviting nationwide attention on this issue".

The story of SKS Microfinance should serve as a case study for social entrepreneurs as such. Between profiting and profiteering, where does one draw the line?

Does this mean that it is better to remain a non-profit organisation than a for-profit one? If the objective is poverty alleviation, the answer to the second question should be yes. This may put off many from social entrepreneurship, though