Microfinance firms in India are hoping to work out repayment arrangements with borrowers 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 a loan and call for collections to take place in front of public officials.
SKS Microfinance, India’s largest microlender, was once seen as a model for how microcredit firms could do very well for themselves by making small loans to poor people. Now the company seems to symbolize the problems of microfinance.
In August of 2010, its shares shot up 50 percent in its initial public offering but this May of 2011, SKS shares closed at 298.60 rupees (US$ 6.67 dollars), down about 70 percent from the price at which it went public.
The company’s first quarterly loss as a public company was a result of many borrowers stopping payment on their loans in the company’s home state, Andhra Pradesh, where government officials have branded microlenders as greedy loan sharks.
The first quarter of this year, only 10 percent of SKS’s borrowers in Andhra Pradesh made their payments.
In India’s Andhra Pradesh state, loan repayments started falling sharply late last year after lawmakers there enact a tough law to restrict lending by microcredit firms.
Policy makers have said they want to rein in aggressive loan collection that drove some overextended borrowers to commit suicide. Some borrowers took multiple loans, amassing debts of US$ 2,000 dollars or more.
In May of this year, the Reserved 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 US$ 1,118 dollars per borrower.
The Reserved Bank also said that commercial banks could provide loans to microfinance firms, an endorsement that should help lenders raise money.
Vikram Akula, the American who is chairman of the SKS Microfinance acknowledged that the company had reacted too slowly to criticism by politicians and community leaders. They failed clearly at working with the broader political environment.
“In many ways, microfinance will have to reinvent itself,” according to Samit Ghosh, managing director of Ujjivan Financial services, a microlender in Bagalore. It could take two years for the industry to overcome the crisis in Andhra Pradesh, he added.