Investors jump on Indian micro lending IPO

The first microfinance company to sell shares to the public in India had strong support from investors on Monday, when it's shares closed up 10.5 percent in the first day of trading.

The strong presence of the company, SKS Microfinance, is expected to encourage other micro lending programs to offer Initial Public Offerings, analysts said. Supply is likely to stoke an already fierce debate about whether micro lending programs, many of which are like SKS in that they began as nonprofit organizations, should make substantial profits by making high interest rate loans to the poor.

SKS, which makes loans to women in rural India, has raised more than $350 million in its initial public offering, one of the most successful in the country this year. It sold 16.8 million shares at 985 rupees ($21) earlier this month, the stock closed Monday at 1,088.65 rupees on the National Stock Exchange of India.

"There was a lot of demand for the stock because of its novelty value," said Pankaj Agarwal, an analyst at securities firm Execution Noble. "There is no doubt about it: the success of this I.P.O. will bring more I.P.O.’s."

Analysts say that a handful of fast-growing Indian micro lending companies like Spandana Sphoorty Financial and Share Microfin may quickly follow SKS in sale of shares to the public.

Overall, SKS is one of five micro finance companies and banks to have shares publicly traded. The other four are Bank Rykat of Indonesia, BRAC Bank of Bangladesh, Compartamos Banco of Mexico and Equity Bank of Kenya.

India has been a particularly fertile ground for micro lending, because its formal banking system does not reach much of its population. A study several years ago found that only 40 percent of the countries households have a bank or postal savings account.

Moreover, the Indian banking regulations require that 40 percent of the portfolio of each bank's loans be in "priority" sectors - a requirement that banks can meet, in part, by lending money for loans and buying loads from micro lending institutions like SKS. This has made it relatively easy for Indian microfinance companies to raise the money they need to lend.

SKS, which became a for-profit company in 2003, has grown at an incredible pace since 2006. Starting in March, it had $634 million in loans outstanding, from $306 million only 12 months earlier. In addition, the company said that less than 1 percent of its loans were delinquent.

Several prominent investors like Vinod Khosla, George Soros, and Sequoia Ventures have invested in SKS over the years, attracted by its mission to eradicate poverty in India, strong growth, and enviable profit margins - 18 percent in its last fiscal year.

But the lender also has been dogged by controversy, including questions about how the two nonprofit groups that provided money to help establish the for-profit SKS would allocate the wealth that they earned from their shares sold in the initial public offering and shares they still own.

Mr. Agarwal and other analysts are also worried about how well SKS and other microfinance companies will maintain their low default rates and high growth rates. Some analysts and researchers fear that the intense competition among lenders might lead to substantially higher defaults.