Microfinance Horizon

16 November 2010 [SFGate]

India’s microfinance companies are seeking emergency funding from banks after defaults jumped amid a clampdown on lending practices, an industry group said. SKS Microfinance Ltd. shares fell by a record.

The lenders are seeking 10 billion rupees ($221 million) to set up an emergency “liquidity fund,” Vijay Mahajan, head of the Microfinance Institutions Network group, said in an interview in New Delhi today. Loan recovery in Andhra Pradesh state, their biggest market, has come to a standstill, he said.

Micro-lenders, which typically offer loans starting from $100 to the poorest, have come under pressure after the state capped interest rates they can charge and barred them from coercing borrowers to repay debt to prevent suicides. SKS, the lender backed by George Soros, fell 11 percent to the lowest level in Mumbai trading since its August trading debut.

“There have been a lot of negative views about microfinance companies in the past few weeks” because of Andhra Pradesh’s tightened norms, 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.”

Microfinance, which focuses on loans in poor areas largely shut out from traditional banking services, gained prominence globally when Muhammad Yunus won the Nobel Peace Prize in 2006 for his role in founding Bangladesh’s Grameen Bank. India, where more than 600 million people live on less than $1.50 a day, is the world’s largest market for such loans.

Debt Pileup

Yet the nation’s micro-lenders have been criticized by law- makers in recent months for offering loans without adequate documentation and allowing borrowers to pileup debt. India doesn’t have a nationwide system for tracking borrowers’ credit histories, making it hard for lenders to check whether clients have multiple loans.

Andhra Pradesh, which accounts for about 27 percent of SKS’s loans, in mid-October passed an order that micro-lenders can’t charge interest exceeding the principal on loans and can’t use coercive measures to force 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 those guidelines. Still, field operations including holding village meetings have been disrupted in Andhra Pradesh following the ordinance, the lender said on Nov. 9. The company is seeking changes to the more “onerous aspects” of the new rules, it said then.

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.

Stock Performance

Shares of SKS, which were sold for 985 rupees apiece in its initial public offering, have dropped 19 percent since its trading debut in August, compared with a 9.4 percent advance in the nation’s benchmark Sensitive Index. Spokesman Atul Takle declined to comment today.

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

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

The microfinance companies serve the nation’s poorest, ICICI Chief Executive Officer Chanda Kochhar said in an interview in New Delhi today. While the industry needs to review standards such as the amount of loans provided to each customer, the lenders shouldn’t be constrained for funding, she said.

“As responsible banks, we can’t pull the plug,” Kochhar said. “Banks are assessing the situation. However, the momentary experience of one state is not reflective of how the whole the situation is.”

Soros’s Quantum (M) Ltd. hedge fund owns a 0.4 percent stake in SKS after the IPO, data compiled by Bloomberg show.