As always, it pays to look further afield. There are a couple of comparable entities trading publicly in India, one of which, Bharat Financial Inclusion (NSE:BHARATFIN), provides an interesting case study within a sub-sector more commonly associated with the activities of non-governmental organisations (NGOs). The group, then operating as SKS Microfinance, had attracted significant private funding even prior to its 2010 listing on the Bombay Stock Exchange, including inflows from Sequoia Capital (India), a subsidiary of the California-based private equity heavyweight.
SKS was pitched by its founder Vikram Akula as a standard bearer for an industry that could conceivably improve the lot of some of India’s most impoverished citizens, while providing a viable return for shareholders. Plenty of investors bought into the narrative, at least judging by the heavily oversubscribed initial public offering and an early valuation equivalent to five times book value – a significant premium to many established lenders on the subcontinent. Unfortunately, it wasn’t long before SKS had to contend with several unforeseen setbacks and the share price duly went into freefall, dropping from a high of Rs1,306 shortly after admission to just Rs88.5 three months later.
SKS came under fire from certain sections of the Indian media, including the mass-circulation daily The Hindu. The underlying charge was that SKS’s principal role as a microfinance provider had given way to commercial expediency after large-scale investment began to flood in from venture capitalists ahead of the listing.
Those concerns were given added ballast in 2012, after a report by Associated Press suggested that internal documents, as well as interviews with employees of SKS, had implicated the company, or at least the overzealous attitude of some of its lending agents, in a spate of suicides among farming communities within the Indian state of Andhra Pradesh. SKS wasn’t alone; the practices of several microfinance institutions were brought into question, which resulted in the banks withdrawing support as fears spread over mounting loan delinquencies.
Admittedly, the company’s share price has retraced substantially, but the share price performance is incidental; the fact that 'microfinance' gave way to 'financial inclusion' is more instructive. The name change may have been more than cosmetic, perhaps an indication that the former term is now seen by some as incompatible with the earnings imperative of a standard corporate finance model. Even Dr Muhammad Yunus, the individual most widely associated with the development of the microcredit concept, expressed reservations about whether the listing of SKS would prove detrimental to the interests of borrowers once shareholder returns were mandated above all other interests. So, you’re left wondering whether the demands of shareholders and the needs of low-income borrowers can ever be reconciled.
All sale proceeds from the ASA admission went to the existing shareholder, Catalyst Microfinance Investors, a fund co-founded by Sequoia Amsterdam, a private equity group controlled by ASA’s chief executive, Dirk Brouwer. Private equity backing remains a contentious issue, with a lazy critique attached to instant cash, hyped-up stocks and quick exits, but the experience of SKS underlines why retail investors need to consider what the founders of ASA International were hoping to achieve via a premium listing on the London Stock Exchange.
ASA has served more than 1.6m micro-entrepreneurs across a dozen locales and maintains that it has achieved a much lower rate of non-performing loans through its 'three lines of defence' risk management model. The half-year figures recently covered by Emma gave little cause for concern, with a lowly delinquency rate and a falling cost-to-income ratio. The average loan size, however, was on the rise.
