By HARSH JOSHI
It's the ecstasy and the agony of investing in India.
Eight months ago, SKS Microfinance was riding high. India's largest microlender by assets saw its $350 million initial public offering hugely oversubscribed in August and its shares soared in the following months by nearly 30%.
The lure: huge demand in underbanked India for microfinance loans, where borrowers pay higher interest rates, coupled with the premium from SKS being the only listed company in the segment. SKS borrows from banks and lends small sums to millions of Indians, mainly in the rural interiors, who don't have a bank account.
But investors overlooked the familiar problem of Indian political risk. Microfinance spreads credit to the poorer corners of society, but is also an acutely sensitive area. And India's poor have a huge political vote. So, when borrowers in the large southern state of Andhra Pradesh complained they were being charged exorbitant rates and arm-twisted into repayments, politicians saw an opening to slam an industry many viewed with suspicion.
The industry has failed to head off the threat, having sowed the seeds of its own problems through uncontrolled lending without adequate records or safeguards. So, as it became clear that the state would impose new rules, the stock turned sharply. The shares have fallen 80% from their September highs, down 39% in the last week alone.
The state, which accounts for 30% of India's microfinance market, finally imposed strict caps on lending rates and recovery practices in December. And investors saw the results Friday, with a loss of $15.6 million in the final quarter of the financial year, eating in to profit of $25 million for the 12 months through March. Once the state turned against microlenders, it seems many borrowers just refused to repay.
Credit Suisse now says 90% of the company's loans in that province could turn bad this fiscal year. And the industry's problems won't fade anytime soon. The Reserve Bank of India has proposed a few measures, like extending the categories of people these companies can lend to and allowing a higher level of indebtedness, but such steps aren't likely to improve the business's prospects by much.
J.P. Morgan on Friday predicted a net loss of $157 million in the year ending March 2012. The company's fate is a reminder for investors of the harsh realities of making it in India, no matter how promising the dream seems.
Write to Harsh Joshi at harsh.joshi@dowjones.com
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