After SKS Microfinance, India’s largest microlender, completed its initial public offering last August, its shares quickly shot up 50 percent. Financial analysts charted rosy forecasts about the firm’s future.
That seems a dim memory now. On Tuesday, SKS shares closed at 298.60 rupees ($6.67), down about 70 percent from the price at which it went public.
SKS was once seen as a model for how microcredit firms could do very well for themselves by making loans as small as $50 to basket weavers and other poor people. Now the company, which last week reported its first loss as a public company, seems to symbolize the problems of microfinance in India.
The loss for the quarter was a result of many borrowers’ stopping payment on their loans in the company’s home state, Andhra Pradesh, where government officials have branded SKS and other microlenders as greedy loan sharks ruining the lives of the impoverished. During the first three months of this year, only 10 percent of SKS' borrowers in Andhra Pradesh, where the company has more than a third of its loans, made their payments.
SKS' financial problems are the latest in a string of bad news for the once-celebrated microfinance sector. Early this month, in Bangladesh, the Supreme Court ruled against Muhammad Yunus, the Nobel laureate who is recognized as the father of microfinance but who has come under attack by the Bangladeshi government, which argues that microlending victimizes poor people. The court rejected an appeal by Mr. Yunus to remain managing director of the institution he founded, Grameen Bank.
In India’s Andhra Pradesh state, loan repayments started falling sharply late last year after lawmakers there enacted a tough law to restrict lending by microcredit firms, which they said had lent more money than many borrowers could afford to repay. Many politicians also encouraged borrowers not to repay existing loans.
SKS, whose investors include the Silicon Valley financiers Sequoia Capital and Vinod Khosla, reported that it had lost 697 million rupees ($15.6 million) in its fourth quarter, which ended in March. That compared with a profit of 629 million rupees a year earlier. Analysts say SKS will probably have to recognize losses on a big part of its $312 million loan portfolio in Andhra Pradesh.
Vikram Akula, the American who is chairman of SKS, said it was hard to say exactly how much money the company would lose in Andhra Pradesh. Loan repayments could go up significantly if the state restricts new lending there, he said, because it would give borrowers confidence in the company’s viability in the state. “If we are able to restart lending, we think there could be a dramatic improvement,” he said. “If we can’t restart lending, we will have a painful couple of quarters.”
Other large Indian microlenders, like Basix, Share and Spandana, also face big losses in Andhra Pradesh, but those firms do not trade on the stock exchange.
Samit Ghosh, managing director of Ujjivan Financial Services, a microlender based in Bangalore, said it would take up to two years for the industry to overcome the crisis in Andhra Pradesh, which has also made it hard for lenders to raise money from banks to make loans elsewhere in India.
“In many ways, microfinance will have to reinvent itself,” Mr. Ghosh said.
Mr. Akula said SKS would not grow as aggressively as it had initially projected. Instead it will seek to make bigger loans to qualified borrowers outside Andhra Pradesh, who he said might have fewer options because of the trouble microfinance firms are facing.
He also said SKS would expand into other businesses like loans made with gold as collateral, a popular form of personal and business finance in southern India. The firm plans to open as many as 50 offices to make such loans this year.
Mr. Akula, who started SKS as a nonprofit organization, acknowledged that the company had not anticipated the crisis in Andhra Pradesh. SKS, he said, reacted too slowly to the criticism of its business by politicians and community leaders.
“I still think it’s a solid business,” Mr. Akula said in a telephone interview from Hyderabad, where SKS is based. “Clearly, we failed at working with the broader political environment.”
Officials in Andhra Pradesh did not return calls or respond to messages.
Microfinance firms are hoping to work out repayment arrangements with borrowers in Andhra Pradesh and persuade the state government to relax the tough lending law it passed in December. Those strictures require companies to seek government approval before making each loan and call for collections to take place in front of public officials. Mr. Akula said the state had approved only 1,643 of the 73,000 loan applications SKS submitted since the new rules went into effect.
Policy makers have said they want to rein in aggressive loan collection practices that drove some overextended borrowers to commit suicide. Andhra Pradesh officials also said some borrowers took multiple loans from several lenders, amassing debts of $2,000 or more.
Last week, the Reserve Bank of India, the country’s central bank, issued its own rules for microlenders that included restricting annual interest rates to 26 percent and limiting total lending to 50,000 rupees ($1,118) per borrower.
SKS says most of its loans already comply with that limit; other lenders have charged rates of 30 percent or more in some cases.
The central bank also said commercial banks could continue to meet their regulatory targets for lending to the poor by providing loans to microfinance firms, an endorsement that should help lenders raise money.
Alok Prasad, chief executive of the Microfinance Institutions Network, an industry association, said the central bank’s moves would be helpful.
“Over all,” Mr. Prasad said, “the thrust of policy, the direction of things, is very positive and very good.”