Payment ruling knocks microfinance shares

Shares in SKS Microfinance, India’s largest microfinance company, fell nearly 20 per cent on the Bombay Stock Exchange on Thursday as the company warned of the possible blow to profits from new restrictions on collecting payments on outstanding debt.

The sharp fall reflects investors’ deepening anxiety over the impact of a regulatory crackdown in the southern state of Andhra Pradesh, where authorities have adopted new rules requiring changes to the way microfinance companies operate.
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That nervousness has also hit shares of some of India’s commercial banks, which have about $6bn in outstanding loans to Indian microfinance institutions, which then lend the money in tiny sums to poor rural and urban borrowers.

“We are, today, extremely worried about our exposure to the microfinance sector,” SK Mitra, a senior executive at Axis Bank, said this week. “The banking sector is heavily exposed. Eighty per cent of the risk is on the bank, not on the microfinance institutions.”

SKS, founded by Indian-American social entrepreneur Vikram Akula, has been the global face of India’s burgeoning microfinance industry since August, when the company raised $358m in an initial public offering that valued it at $1.5bn.

Many other microlenders, including Spandana and Share Microfin, were expected to follow SKS in the path to market.

But since then the industry has seen a rapid reversal of its fortunes, as policymakers began to question the large profits being made in an industry ostensibly intended to alleviate poverty.

SKS shares, which rose 42 per cent in the first five weeks of trading on the Bombay Stock Exchange, are now about 55 per cent below their late September peak, and 35 per cent off the initial offering price.

In Andhra Pradesh, where authorities have accused microlenders of charging very high interest rates and using tough debt collection tactics, weekly payment collection – the standard practice in the global microfinance industry – has been banned. The industry is now limited to monthly collection.

Mr Akula has warned that a monthly repayment cycle in Andhra Pradesh – which accounts for about 27 per cent of SKS’s total portfolio, is likely to lead to a drop in collections, and a rise in non-performing loans, as poor borrowers may find it tougher to accumulate the larger sums for once-a-month repayments.

“If this is not redressed satisfactorily, the resultant reduction in collections in Andhra Pradesh is likely to have a material impact on the company’s revenues, profitability and asset quality in AP,” the company warned in a statement to the Bombay Stock Exchange on Thursday.