SKS rises 20% after law empowering RBI to regulate micro finanace sector proposed

MUMBAI: SKS Microfinance, the only listed lender for tiny ventures, rose to the permitted 20%, after the government proposed a law that would empower the central bank to regulate the sector that has been troubled by many for its unfair lending practices.
But the proposal to have them regulated by the Reserve Bank of India does not address the problems of investors who don't favour industries where profitability is capped and activities restricted by many a legislation.

The RBI had accepted the recommendations of the YH Malegam Committee that recommended various parameters such as a ceiling on the rate of interest rates that microfinance companies charge and the quantum they could lend and various such measures.

"This is a positive development for SKS Microfinance as the Bill clearly stipulates RBI's regulation to overrule any state legislation on MFIs," said Seshadri Sen, Research Analyst, JP Morgan.

However, he continues to maintain an "underweight' on the stock owing to the fundamental flaws in the business and that loan recoveries from the state are unlikely even if the new Bill is passed. The stock fell nearly 7% in early trade but the climb was limited at 411, with volumes nearly twenty times its two-week average.

"It's hugely positive and the Bill in its present form makes the RBI the sole regulator. It adds to the regulatory clarity brought in by the Malegam Committee," said Dilli S Raj, CFO, SKS Microfinance.

Analysts say the main problem with the entire microfinance sector was the Andhra Pradesh MFI Act, the state which accounts for more than half the industry's business, which stopped all the activity in AP leading to stoppage of collections.

This led to doubts around the viability of MFIs and concerns that other states can come out with similar regulations leading to banks stopping funding for MFIs. India's once-thriving microfinance sector has been reeling since Andhra Pradesh clamped down on business practices such as high interest rates and aggressive loan recovery last October.