SKS Microfinance hopes new law to revive growth by easing loan recovery

SKS Microfinance, India's largest publicly-traded lender to the poor, says proposed legislation will spur a revival by easing loan recovery just as mounting losses force it to curtail operations.

The draft law would let microcredit companies improve debt collection and may also help raise funds, chief financial officer S Dilli Raj said in an interview. The Hyderabad-based lender's loss last quarter widened almost fivefold, prompting it to cut jobs and shut branches. The stock is down 94% from a September 2010 peak.

SKS, backed by Sequoia Capital, forecasts relief from a bill approved by Prime Minister Manmohan Singh's Cabinet last week that would enable the Reserve Bank of India to regulate the industry. SKS has reported five consecutive quarters of losses after the southern state of Andhra Pradesh curtailed debt recovery, capped interest rates and waived loans to arrest a spate of suicides by farmers unable to make payments.

"The long-term clarity on the regulatory environment will have an immediate impact on the balance sheet," Raj said. "We are confident of bridging the widening gulf between demand and supply in small loans," he said.

The bill, if approved by parliament, will override provincial rules that differ from state to state and help improve the flow of credit to the poor and farmers left out by lenders including State Bank of India and ICICI Bank, the nation's two biggest by assets. The central bank, as the sole regulator, would cap interest rates and fees levied by microfinance companies under the new law, and also stipulate rules for debt collection.

The Micro Finance Institutions (Development and Regulation) Bill will require all microlenders to register with the RBI, create a reserve fund from profits and audit their financial performance annually. In December, the RBI proposed an upper limit of 26% for annual interest rates on loans to individuals.

Prime Minister Singh, seeking to revive an economy expanding at the slowest pace in three years, is turning to microcredit companies to provide financing to the almost 43% of the nation's 1.2 billion people who don't have a bank account.

Less than 5% of the country's 6 lakh villages have banks, data provided by the RBI show.

Non-urban consumers account for almost 8% of gross domestic product in India, where the World Bank says almost 70% of the population lives on less than $2 a day.

Source: EconomicTimes