India: SKS Drops as Indian Microfinance Firms Seek Emergency Funding From Banks

Nov 2010
Mumbai, India, November, 16 2010 - SKS Microfinance Ltd. dropped to the lowest since its August trading debut after the head of an industry lobbying group said the nation’s microfinance companies are seeking emergency funding.

Shares of India’s biggest provider of small loans fell as much as 18 percent to 735 rupees before trading at 775 rupees as of 2:14 p.m. local time. The company had sold shares for 985 rupees apiece in its initial public offering in August.

The micro-lenders are seeking 10 billion rupees ($221 million) in emergency funding from banks, Vijay Mahajan, head of the Microfinance Institutions Network group, said in an interview today. Andhra Pradesh state, their largest market, last month increased scrutiny of lending practices. Loan recovery there has since come to a standstill, Mahajan said.

“There have been a lot of negative views about microfinance companies in the past few weeks” because of the state’s tightened restrictions, D.K. Aggarwal, managing director and chairman of SMC Wealth Management Services Ltd. in New Delhi, said by telephone today. “As long as microfinance companies have no strong regulation, confidence in them will remain low.”

New Ordinance

A high court in the southern state, which accounts for about 27 percent of SKS’s loans, said on Oct. 22 that the company must comply with new government rules that say lenders can’t charge interest exceeding the principal on loans and mustn’t coerce borrowers to repay debt.

SKS, based in the state’s capital of Hyderabad, said in an Oct. 23 statement its interest rates and lending practices already meet the state’s guidelines.

Still, field operations including holding village meetings have been disrupted in Andhra Pradesh following the high court ordinance due to lack of political and legal support, the lender said on Nov. 9. The company is seeking changes to the more “onerous aspects” of the ordinance, it said.

SKS has also reduced interest rates to 24.55 percent in Andhra Pradesh, and plans to lower it to 24 percent in that state and in other markets, it said last week.

“The ordinance and its implementation will have material impact on the company’s operations” in the state, SKS said in its Nov. 9 statement to the exchange.

The microfinance industry is now in talks with the Small Industries Development Bank of India and ICICI Bank Ltd. to set up an emergency “liquidity fund,” Mahajan said today.

“It will particularly help smaller” lenders, he said. “They will get saved because they don’t need big medicine.”

Source : Bloomberg

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