Microfinance will have to reinvent itself in Andhra Pradesh, India

SKS; the Indian microcredit bank, has seen their stock shares drop ever since several waves of controversy began to wear on the company.

Originally created as a non-profit, SKS then changed to a for-profit bank. An initial public offering of stock created controversy as some were troubled by microcredit firms beginning to mix profit with public good. Some were saying that a publicly traded stock put too much emphasis on profit.

Soon after that, a rash of suicides in Andhra Pradesh, India amongst microcredit borrowers hit SKS and other banks by surprise. New very strict laws followed, leaving banks unable to make new loans in the region without government approval.

From the New York Times, Vikas Bajaj tells us about the troubled times for the big microlender.

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 to a profit of 629 million rupees a year earlier. Analysts say SKS will probably have to recognize losses on a big portion 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.