MUMBAI (Reuters) - The crackdown by Andhra Pradesh on business practices of lenders to the poor threatens to squeeze revenue, profits and asset quality at SKS Microfinance, said the country’s only listed microfinance firm, whose shares tumbled.
The fortunes of India’s microfinance industry have turned dramatically since SKS, which is backed by George Soros, raised $358 million in a heavily subscribed initial public offering in August. Other lenders looking to go public are expected to put those plans on hold until the industry uncertainty is resolved.
India’s once-thriving microfinance sector has been reeling since Andhra Pradesh, the industry’s largest market, clamped down last month on industry collection practices that were reportedly blamed for a spate of suicides by borrowers.
Critics have also complained that microlenders had failed to pass on the benefits of profits to borrowers in the form of lower interest rates. Microfinance lenders in India make loans that average roughly $150, charging interest that can top 30 percent.
“Collections are low (in Andhra Pradesh) but bankers are still lending us funds and things are improving. So we are shocked at the fact that the stock has dropped so much,” SKS Microfinance spokesman Atul Takle told Reuters.
He was speaking after the company’s shares tumbled by about 20 percent on Thursday morning after SKS issued a statement saying that collections in Andhra Pradesh were lower than normal since the ordinance took effect.
India’s finance minister said last month that he expects the industry to develop a code of conduct on interest rates and recovery practices, while the Reserve Bank of India last month set up a panel to study issues surrounding the sector.
“Once the central bank regulations are in place, I don’t think state regulations will matter much,” said Nikhil Poddar, an analyst with Alchemy Share and Stock Brokers.
“Definitely, transparency is needed, the industry should be regulated, but you cannot be so harsh ... Obviously, you can’t force people to repay, but at the same time, you can’t build a culture of non repayment. All this should be taken into consideration,” Poddar said.
In a note dated Wednesday, JPMorgan lowered its profit forecasts for SKS Microfinance by 25-35 percent for the next three financial years and cut its target price to 700 rupees a share from 1,000 rupees. It has an underweight rating on SKS.
“The microfinance business model is being challenged in public debates on multiple fronts — efficacy in poverty alleviation, impact of high interest rates on borrowers, existence of overleverage among borrowers, to name a few,” JPMorgan analysts wrote.
The note said the industry’s issues outside Andhra Pradesh were not significant for now.
“We think MFIs (microfinance institutions) could continue to exist, and profitably so, though aggressive overregulation is a risk to that assumption,” the note said.
The new Andhra Pradesh rules require microfinance companies to collect only once a month, whereas most such lenders in India typically collect on a weekly basis.
“The collections are lower than normal on account of transition from weekly to monthly collection cycle and the related change in MIS (management information systems), passbook, and member communication,” the SKS statement said.
“As said in our earlier notification, if this is not redressed satisfactorily, the resultant reduction in collections in AP (Andhra Pradesh) is likely to have a material impact on the company’s revenues, profitability and asset quality of the AP portfolio,” it said in a statement to the stock exchanges.
Takle said collections in other states were normal.
The company said it has credit lines totaling 25 billion rupees ($549 million), and seven banks have disbursed 2.92 billion rupees to it since the state ordinance took effect. SKS said it disbursed 10.48 billion rupees in October.
Shares of SKS traded on Thursday morning at 642 rupees, about 35 percent below their 985 rupee IPO price, and 54 percent below their Sept. 28 peak.
Muhammad Yunus, the Nobel Prize-winning pioneer of microfinance in Bangladesh and founder of Grameen Bank, has expressed his displeasure about microfinance’s move from its social mission to a commercial model.
Mexico’s Compartamos became the first microfinance company to go public, in 2007, bringing the debate over the industry’s dueling objectives to the fore.